Should I allocate bonus to 401k or pay off debt?

[Daisyedwards800]

I have about $2400 in credit card debt (around 13%) and $3000 in student loans (6.7%).  My bonus will be $7500-8000.  I make about $112,000 per year including this bonus, and I have been claiming 1 on my taxes.  I think I will need to pay a little bit this year but not sure how much.  I was going to allocate most of the bonus to my 401k to bring up my contributions to $18,000 for the year.  If I do not contribute the bonus to my 401k, I will have contributed about $12000 for the year. 

If I take the bonus in cash, I will only receive about $4000-5000 (due to state and local taxes) and I doubt I'd get much back at tax time because I have been claiming 1.  I can use that to pay the cc and student loan.  I will have remaining debt at 0% ($7,500), at 2.5% ($13,000) and at 3.5% ($16,000).  I expect to receive an inheritance of about $18,000 in February or March, to be use to pay the rest of my student loan or invest.

Thanks for your input.

[honeybbq]

This is probably not what you want to hear, but I think you need to make all three things happen : pay off SL, pay off CC debt, and maximize your deductions.

At that salary, maxing your 401 should have been an automatic first thing to do when you were hired. You are also probably eligible to also contribute to a roth once your AGI gets down after the 18k contributions to your 401. That should be in your plans, also. You can contribute to the 2016 roth until april 2017.

Unless you are fresh out of school, that cc debt and SL should have been gone months ago, honestly.

[Dezrah]

I would say yes, you should pay off those higher interest debts.  The 6.7% SL is a toss up and you can go either way.  The other low interest debts are not a big deal if they're at a fixed long term rate.

I'm more worried about the fact that you have credit card debt at all with $112k income.  In that an old balance?  Are you new to that level of income?  Ideally you should be paying off your card every single month. 

If you HAVE to rely on bonuses and inheritances to pay off the balances, then you have a spending problem you need to address.  Consider filling out a Case Study to get some REALLY useful feedback.  If this was simply a blip due to special circumstances, just disregard and carry on.

[Vertical Mode]

Second what Dezrah said.

In order of priority, I would:

1. Kill the CC debt
2. Max the 401(k) to pay yourself first/lower your tax liability
3. Attack the 6.7% Student Loans with anything else you can save
4. Even if you're claiming 1, lowering your tax liability with the 401(k) contributions may mean a slightly larger refund coming your way. You can direct this surplus to kill the remainder of your 6.7% SL debt, and anything above that could go toward a Roth. Moving into next year, maxing the 401(k) will enable you to contribute to a Roth in addition to your 401(k), may as well shield a little from taxes on the back end before going to straight taxable investments.

With respect to the debt at 0%, 2.5%, and 3.5% - these interest rates are reasonable, and basically you've borrowed money very cheaply here. It is therefore a defensible strategy to pay it back as slowly as possible. This one will be a matter of preference; if you really hate the concept of being shackled with debt, go after the 3.5% one first, but you will likely come out ahead if you invest the money in low-cost index funds instead of paying more than your standard payments on any of these. Your move here.

Good luck!

[boarder42]

how do you have CC debt on that salary.  pay down the CC debt worry about the SLs next year by putting the rest in 401k.

[Mother Fussbudget]

As others have said, pay off the 13% CC first.  Then start to max your 401k.

Look at the "investing order" tab on the  Case-Study Spreadsheet for more information on what to pay down, and WHY.

[Daisyedwards800]

Yes I am new to this level of income.  I was making $57k in 2014.  My loans started at 75k so not bad.

[MoonLiteNite]

Peace of mind - paying off debt first
Hybrid - max employer match and then pay off debt
Be greedy! - pay min payments to debt and use it like a loan in the markets.

I personally did the hybrid mix for 10 years (house debt) now that house is nearly paid off i am going for all greedy mode for the final 25k