Author Topic: Refinance car vs. Roth IRA  (Read 1857 times)

calivianya

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Refinance car vs. Roth IRA
« on: August 18, 2015, 02:39:06 AM »
I have a ridiculous car payment with a ridiculously long term. No, I don't plan on selling the car. I am going to be very anti-Mustachian about this and am completely inflexible. I have done some honest evaluating, and I think the level of happiness I get from having my car right now is worth having a car payment for - although, not quite as high a car payment as I've got right now.

The advice I am looking for is whether I should refinance the car loan or contribute to a Roth IRA this year. My original plan was to save up the $5500 contribution for this year and make it, save up the $5500 contribution for next year and make that, and then save up to refinance my car after that. This plan would probably have me refinancing my car in a year's time or so, but definitely next year. If I made refinancing my car my first goal, I could probably refinance by December to get the numbers I want - but I would not be making my contribution to my Roth this year.

My current Roth gets nothing, pretty much (0.99% interest, am currently shopping around for something better) and the car loan has a 4.99% interest rate. I am seeing advertised rates as low as 1.99% for loans of the size I'm looking for for people with excellent credit like mine at some lenders.

Is it worth paying a year's worth of car payments at 4.99% to be able to contribute to a Roth? Or do you guys think contributing to a Roth is for people who are out of/have minimized their debts?
« Last Edit: August 18, 2015, 02:58:14 AM by calivianya »

Khan

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Re: Refinance car vs. Roth IRA
« Reply #1 on: August 18, 2015, 04:47:05 AM »
Honestly I don't think there's enough information here to give us a point of reference for why you would choose to fill the ROTH IRA over refinancing the car.

The things I believe that should be considered in this decision....
1. Will you -not- be able to contribute to ROTH IRA's in the near future due to income limits? If so, possibly points for ROTH.
2. Refinancing/paying off the car gives a guarenteed return. Investing does not.
3. ROTH contribution limits are use it or lose it, however, with the acceptance of ROTH IRA conversion pipeline, they aren't that important to Mustachian planning.
4. ROTH is merely a carrier vehicle, not an actual investment. If your ROTH is currently receiving .99% interest, that means you're invested in a MMSA or CD or some other crappy asset class. You can fill up a ROTH with ANY investment. Read up more: http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

JLee

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Re: Refinance car vs. Roth IRA
« Reply #2 on: August 18, 2015, 08:17:19 AM »
I'd look at a Vanguard investment account for your IRA; under 1% is very low.

Why can't you refinance and also contribute to an IRA? I am guessing you're upside down, but also remember you don't have to max your IRA contribution. If you can refinance the car to 2% and invest a bit less, I would probably do that for a guaranteed 3% return on whatever's left on your loan (plus reducing your monthly overhead).

calivianya

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Re: Refinance car vs. Roth IRA
« Reply #3 on: August 18, 2015, 02:29:40 PM »
Yep - definitely upside down on the loan. That's new cars for you - immediately upside down right out the gate, for the most part. I should be even on the loan/value in a few months if I don't refinance.

Thanks. The guaranteed 3% return is definitely a plus. I am thinking about going back to school next year - a program where the median US salary is over the Roth limit, but I wasn't using that as much of a factor when I was thinking about the investing. I have just been getting the itch to put money away. I've doubled my 401k contributions, which is why there isn't the free cash to do both the refinance and the Roth.

I think I will probably go ahead and refinance.

forummm

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Re: Refinance car vs. Roth IRA
« Reply #4 on: August 18, 2015, 05:34:11 PM »
What do you have your Roth in? If it's a CD that pays 0.99% interest, you probably should move it to stocks or a balanced fund. You won't need that money until retirement.

kpd905

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Re: Refinance car vs. Roth IRA
« Reply #5 on: August 18, 2015, 06:21:21 PM »
You need to invest funds in your Roth, not put them in something getting less interest than inflation.  If you don't want to have to think too much about it, just throw it all in a target date fund with Vanguard.
« Last Edit: August 18, 2015, 06:43:35 PM by kpd905 »
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