| Priority: Pay off Debt vs Start an IRA? |
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bosstimer
First Time Poster
Cash: $ 0.25
Posts: 1
Joined: 04 Jan 2006
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| Priority: Pay off Debt vs Start an IRA? |
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I am a little over $40K in school/IRS debt. I am 27, my wife and I are on a fixed income and are living on a consistant budget. The total minimum monthly payment for our load bills are ~$800. After all of our other expenses we have about $200 extra every month.
Would it be better to apply that extra $200 to the debt to pay it down more quickly (would take roughly 4 years) and then when debt is gone, contribute the max amount to an IRA?
OR
Should we apply that $200 to an IRA and just take longer to pay off the debt?
Is there some formula that I can run to find out which will be better?
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Wed Jan 04, 2006 5:41 pm |
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Jaszbo
Preferred Member
Cash: $ 35.90
Posts: 177
Joined: 03 Jan 2006
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What is your intrest rate on your debt? Do you have a 401k plan at your place of work with an employer matching?
The advice depends on who you talk to, I can tell you that some people like Dave Ramsey and the followers will tell you that you need to get rid of 100% of debt before your retirement. I personally don't agree 100%.
I would do the 401k plan up to the matching. Even when paying off any debt, you don't want to give up that free money. If you have already been doing this and you are talking about 200 dollars after a 401k plan matching contribution, it depends on your intrest rate and your preference. What's important to you more money now or more money when you retire?
Personally if I was in your situation I would first do the matching contribution and after that I would not go with a tradtional ira, but a Roth IRA.
I would personally split it probably half and half. The reason I say this is that unlike your debt you have right now a limit of 4k that you can contribute to a Roth IRA each year and once the year is gone it's gone. You can pull out your contributions anytime, but you can't say the same about how much you put in. Say 10 years from now you needed money for an emergency and your emergency fund disapeared quicker than you thought, now you need money, so you can pull out your contributions without any penalty (which you can't with a 401k or traditional IRA), therefore I would suggest at a young age always putting some money into a Roth IRA. If you think the debt is more important than do that, but I would suggest doing both. The limit for the Roth IRA right now is 4k and it will change to 5k in 2008.
So my personal advice would be to split it up 50/50 or at least do not neglect your retirement. Make sure you are doing at least the matching in your 401k plan if you have one, then go to your roth IRA and try to max that out after that go back to your 401k plan and increase that contribution if you can. If you don't have a 401k plan it's a good idea to have both pretaxed and after tax dollars invested for your retirement, so look at both the tradtional ira and the roth ira. Good luck
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Wed Jan 04, 2006 6:29 pm |
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Dus10
Member
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Joined: 30 Dec 2005
Location: Indianapolis
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Paying down your debt is obviously a priority, but, you do not want to become discouraged. I would suggest focusing solely on your debt for six to twelve months to get started, then I would split your efforts evenly. This will allow for you to get started on your IRA, and see the light... so to speak. However, if your ability increases beyond $200/month, definately leverage the increased portion to paying off your debt. When you pay your debt off, you will have a much better ability to focus on your retirement.
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Wed Jan 04, 2006 6:47 pm |
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cccfree
Full Member
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Joined: 08 Mar 2011
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You're 27 and you're already on fixed income?
Please expand on this, from my experience fixed income is like social security or a senior citizen living off their IRA distributions or something.
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Tue May 10, 2011 11:02 pm |
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dapirus
New Member
Cash: $ 1.00
Posts: 5
Joined: 23 May 2011
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It's always a good idea to pay off your debt first. Are you working with an accountant concerning your irs problems. You should look for ways in which you can increase your income, perhaps some type of sidework.
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Mon May 23, 2011 9:15 am |
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