Drop 401(k) to 5% to gain 100% company match, or leave at 18k / year?

[SyZ]

I have 16.5k left in debt, that I want to get rid of asap. I am currently putting 18k a year into my 401(k). If I continue, it will take about 12-15 months to pay off the remaining debt.

If I instead drop the 18k a year to only 5% of my income (57k), I would gain about $600 every two weeks (pre-tax) that I would just put towards that debt and lessen the amount of time it would take to pay it off.

So the question is: is it worth it to go this year without maxing the 18k so that I can get rid of my debt and never have any ever again (outside a mortgage), or should I still maintain the max contribution and just be in debt a little while longer?

Job security is pretty good for another 6 months, after that I'm not sure. I have a 4 month EF set up right now.

[2Birds1Stone]

The answer to your question is the interest on this debt.

That being said at your tax bracket it would be hard to justify the debt payoff over the tax deferred growth of your investments....unless the debt had a 10%+ interest rate (maybe even higher)

[deadlymonkey]

That $600 per two weeks you are losing in your 401k, compounded over years is worth a whole lot more than 16.5k.  Keep paying off the debt but if you can afford to satisfy the debt AND max out 401k then definitely max out.

[SyZ]

Majority of the debt is actually < 3.4%, and the rest is 6.8%. I can continue to pay extra (at least $750 a month) on the debts over the minimum payments while maxing the 401(k), it's just hard. But in a year I'll free up the cash flow. It's more of a 'do I value extra risk on potentially not knowing my job situation in 6 months with a maxed 401(k) that doesn't help me for 34 years, or do I want to lose the interest for those 34 years and gain the ability to pay off this burdensome debt permanently'

[HPstache]

In almost the exact same position, two years ago ($18K student loan, 5% match, income $65K) , I chose to pay off my student loan and just defer 5% to my 401K to catch the match.  It didn't make sense mathmatically, but being debt free was an incredible feeling once I was done.  It was emotional reasoning, and I realize that, but I'm happy I did it.

[homestead neohio]

They are both worthy goals.  Instead of asking "Which do I choose?", start with "How can I do both?".  Think on this for a spell.  Don't rush into choosing.  Can you sell stuff, pick up a side hustle, forgo some planned expenses?  Some people are powerfully motivated by a psychological benefit of being debt-free, and that motivation can inspire some staggering short term improvements in overall net worth.

If you really do have to choose, it depends on the type of debt, the interest rates on the debt and what motivates you.  Low rate student loan or mortgage debt?  Keep it.  High interest credit card debt, transfer to a 0% balance transfer card and pay before 0% expires.  I'd keep maxing the 401k and celebrate that I'll be debt free in just 12-15 months.  It's not that long. 

[homestead neohio]

Majority of the debt is actually < 3.4%, and the rest is 6.8%. I can continue to pay extra (at least $750 a month) on the debts over the minimum payments while maxing the 401(k), it's just hard. But in a year I'll free up the cash flow. It's more of a 'do I value extra risk on potentially not knowing my job situation in 6 months with a maxed 401(k) that doesn't help me for 34 years, or do I want to lose the interest for those 34 years and gain the ability to pay off this burdensome debt permanently'

It may be hard, but it is seriously bad-ass.  Can you pay off the 6.8% for the emotional benefit of going down to a single low-interest loan while maxing 401k?

[tonysemail]

i assume you have looked at ways to reduce interest rate further.
I'm thinking of stuff like balance transfers and HELOCs.

I would choose to max 401k for sure.

[Catbert]

I would probably continue to max out 401k since you can still pay off debt in 12-18 months.  If you don't max out 401k for 2016 and 20417 you'll never have a chance for a do-over.  Stay the course. 

My answer would be different if it was high interest cc debt or it would take you 2+ years to pay off debt at your current rate.

[lauraah]

I say that reducing stress is an incredibly valuable goal.  The ultimate goal is improving quality of life.  If the debt stresses you out, knock it out.  Paying off debt and maximizing 401k are both GOOD financial choices.  Yes, over the long run, you'll probably make more from maximizing the 401K, but nobody would argue that paying off debt is a bad choice.

[EnjoyIt]

I would pay off the 6.8% debt ASAP, and the rest towards your 401k.  This will knock out your most expensive and  maybe free up little cash flow.  Use the extra cashflow to help pay off the rest of the debt once you maximized 401k.

I would not waste the 401k space on the 3.5% loan.

[Money Badger]

Not sure if anyone suggested a 401K loan you could use to pay off the 6.8% and other debt?    401K loans are generally NOT good loans to take (as they usually come due in full if you change jobs and are tempting to just "take the tax hit" in those situations so check the fine print).   But in this case with such a short payback horizon and the amount of interest on 401K loans in the 5% range, you would keep that entire 5% interest in your retirement pocket while still paying yourself back with after tax dollars just as you are on the other debt.  So seems you'd pocket almost $1K in interest that way if you pay it off in the next 18 months or so...    Not sure, but don't believe the loan payment goes toward the IRS annual max of $18.5K contributions either...   

[fattest_foot]

I'm going to assume you're in a decently high marginal tax bracket since you're able to max out the 401k, so financially it makes 0 sense to pay off the debt. You're losing out on both the gains by having the money in the market longer (which includes all compounding interest), as well as the tax advantage savings by dropping your taxable income.

You can actually figure out just how much you're losing out on by subtracting what your 5% match would be from $18,000, and applying your top marginal tax rate to it (or if you're at a break point, figuring out what percentage is in each bracket). More than likely this number is between $2000-4000.

[prognastat]

I agree with paying off any debts over 5% and then prioritizing your maxing out 401k.

[NoStacheOhio]

You could also choose a number between $2,850 and $18,000 for your 401k that would allow you to accelerate debt payments on the higher-interest loan while maintaining high retirement contributions.

[SyZ]

Thanks all, decided to leave the 18k maximum plan going, and will just wait a little longer to have the debt removed. Here is the actual breakdown, as of today:

1.7k at 6.8% through Navient (student loan)
4k at 3.4% through MyFedLoan (student loan)
4k at 2.32% through Navient
1.75k at 2.32% through Navient
2k at 2.32% through Navient
3.65k at 1.9% through Toyota (car)

So, in 1-2 months, I'll have to make the decision: do I want the emotional relief that comes from having no debt, or do I want to continue to carry that debt for another 7 years (when the student loans are set to mature) to make marginal gains on interest elsewhere?

The next logical step, either way, is to save for a home (how hard can that be? It's not like they cost hundreds of thousands)

[couponvan]

I would borrow $6k from the 401(k) at 4.25% current rates and pay off the first two loans ASAP. Make sure your investment mix reflects the loan to yourself after the loan is taken. Pay the interest back to yourself instead of Navient/my fed. You probably make enough that your SL interest isn't deductible. Max out the 401(k) still. That pretax deferral is worth 30-40%...

[Sibley]

You say you can pay $700ish above minimum while maxing your 401k. Do a debt snowball, the 6.8% loan first. If you need the emotional fix, then do some of the smaller amounts after that rather than sticking to the next highest rate. Otherwise, stick to highest rate first.

It doesn't make sense to me to borrow from the 401k at 4.25% to pay off a loan that's less than 4% interest, and you can have the 6.8% paid off in a few months. It's not really worth it to do a 401k loan in my view. Add in the increased taxes if you don't max your 401k, and it just doesn't work for taxes.

Realistically, this isn't a huge hole, not compared to what it could be. Yes, it's a weight. But that weight will help you keep your spending down while you build the habits.

[nereo]

Thanks all, decided to leave the 18k maximum plan going, and will just wait a little longer to have the debt removed. Here is the actual breakdown, as of today:

1.7k at 6.8% through Navient (student loan)
4k at 3.4% through MyFedLoan (student loan)
4k at 2.32% through Navient
1.75k at 2.32% through Navient
2k at 2.32% through Navient
3.65k at 1.9% through Toyota (car)

This makes the decision a no-brainer for me.  In 18 months the interest you will accrue on that $1.7k note is about $88.  That's it. You'll save far more in taxes if you just continue to contribute $18k to your 401(k) and let that debt die at its current pace in ~18 months.

The rest... meh... I also wouldn't pay it off any faster than normal.  You get a slight bonus in taxes from deducting the SL interest, and the rates are so low.  Maybe kill the $4k/3.4% next year if debt is really bugging you, but allow the others to be gobbled up by inflation.

[tonysemail]

allow the others to be gobbled up by inflation.

+1
I plan to carry a 2.875% mortgage into FIRE for that very reason

[doggyfizzle]

Don't know how good your credit is, but you could also look into opening a credit card with a 0% intro APR (it's easy to find 12-15 month intro periods), consolidate that debt, pay off as much as possible once you've maxed your 401k, and then look to balance transfer once the 0% APR period ends.  Of course, you run the risk of not finding a a new 0% balance transfer offer, but based on my observation, these are pretty easy to find among all the major CC issuers.

[couponvan]

Don't know how good your credit is, but you could also look into opening a credit card with a 0% intro APR (it's easy to find 12-15 month intro periods), consolidate that debt, pay off as much as possible once you've maxed your 401k, and then look to balance transfer once the 0% APR period ends.  Of course, you run the risk of not finding a a new 0% balance transfer offer, but based on my observation, these are pretty easy to find among all the major CC issuers.

Except they usually come with a 3% balance transfer fee, which isn't tax deductible.

[nereo]

Don't know how good your credit is, but you could also look into opening a credit card with a 0% intro APR (it's easy to find 12-15 month intro periods), consolidate that debt, pay off as much as possible once you've maxed your 401k, and then look to balance transfer once the 0% APR period ends.  Of course, you run the risk of not finding a a new 0% balance transfer offer, but based on my observation, these are pretty easy to find among all the major CC issuers.

Except they usually come with a 3% balance transfer fee, which isn't tax deductible.

There are many cards out there that have 0% introductory APR and $0 transfer fees.
That said the interest amounts SyZ and timeframe that SyZ are talking about are relatively minor - it's up to him/her/it whether its worth it to play the bouncing credit card game.

[CmFtns]

Definitely max out your 401k... All your loans except the one very small loan are very low interest rates. Max your 401k and pay down the loans with any extra in descending order of interest rates.