Credit Card/Car Loan vs. 401k

[brian313313]

I have not made my 401k contributions yet and am trying to decide if it's better to do that or pay off my credit cards and some of my car loan. I'm not a cc/car loan type, but I just bought a condo cash and needed to do some remodeling. I'm self-employed and I could not get a mortgage so I financed my car and did renovations on the credit cards to raise the 30k required for that. Total debt today is about 9k credit cards, 13k car loan. I have 10k earmarked for 401k which is only about 7-7.5k if I pay down CC because of taxes. Due to no mortgage & low expenses, I am able to pay down about 4-5k/month on this so it should all be gone within 6 months.  Financially, I know doing the 401k makes most sense b/c it's an immediate 25%-30% return on tax savings. The CC is at 21% but for two months, it's not that much interest. Car loan is about 3%. Emotionally, I want to pay down the CC. I'm 50 and this is the first time in my life I've carried a credit card balance more than a month. Once the cards & car are paid off, I'll be back to no debt with a place to live paid for.

[robartsd]

I have not made my 401k contributions yet and am trying to decide if it's better to do that or pay off my credit cards and some of my car loan. I'm not a cc/car loan type, but I just bought a condo cash and needed to do some remodeling. I'm self-employed and I could not get a mortgage so I financed my car and did renovations on the credit cards to raise the 30k required for that. Total debt today is about 9k credit cards, 13k car loan. I have 10k earmarked for 401k which is only about 7-7.5k if I pay down CC because of taxes. Due to no mortgage & low expenses, I am able to pay down about 4-5k/month on this so it should all be gone within 6 months.  Financially, I know doing the 401k makes most sense b/c it's an immediate 25%-30% return on tax savings. The CC is at 21% but for two months, it's not that much interest. Car loan is about 3%. Emotionally, I want to pay down the CC. I'm 50 and this is the first time in my life I've carried a credit card balance more than a month. Once the cards & car are paid off, I'll be back to no debt with a place to live paid for.

I'd contribute the the 401k if it's not going to prevent credit card payoff in less than a year. I'd also look into credit card balance transfer offers to get the rate down while you pay it off over time.

[With This Herring]

If you own the condo, why did you not get a HELOC to use to pay for the remodeling?  I would think if you can get a car loan at 3% you would be able to get a HELOC with a similar rate, which would mean you wouldn't need credit cards at all.

If you are able to vary the time of your 401(k) contributions, why not pay off the CC first and put in 401(k) money later?  Or are self-employed people able to put in 401(k) PY contributions through April 15th the way that others can do for IRAs, and you are deciding whether to make a 2016 contribution?

I think, if you have a shortage of cash for getting 401(k) contributions and CC payoff done all in 2016, it might still make sense to get a HELOC, use it to pay off the CC ASAP, and then use your earmarked funds for 401(k) contributions.

Edit:  Just before I posted, I saw robartsd's post.  A transfer to a 0% card would make sense, too.

[brian313313]

If you own the condo, why did you not get a HELOC to use to pay for the remodeling?  I would think if you can get a car loan at 3% you would be able to get a HELOC with a similar rate, which would mean you wouldn't need credit cards at all.

If you are able to vary the time of your 401(k) contributions, why not pay off the CC first and put in 401(k) money later?  Or are self-employed people able to put in 401(k) PY contributions through April 15th the way that others can do for IRAs, and you are deciding whether to make a 2016 contribution?

I think, if you have a shortage of cash for getting 401(k) contributions and CC payoff done all in 2016, it might still make sense to get a HELOC, use it to pay off the CC ASAP, and then use your earmarked funds for 401(k) contributions.

Edit:  Just before I posted, I saw robartsd's post.  A transfer to a 0% card would make sense, too.

The mortgage issues/HELOC issue was that I only had 20k income the way they calculate self employment for mortgages. It's the new laws. In 2015, I was salaried for the entire year so my SE income was very low. I checked with several banks and they all said there was no way around this because it's the new law. Car loans & CC are not regulated the same way and I have excellent credit and a stable income. It just varied between SE and employed. It's silly that I can get unsecured loan but not a mortgage. I even tried a unsecured personal loan but as soon as I mentioned to buy a home, they where like "nope".

This is my 2016 contribution. Technically I have until April 15, but the paperwork is due Jan 31 and I'd have to adjust the tax paperwork so my effective limit is Jan 31.

As soon as I finish my taxes, I can count my 2016 SE income so I'll be eligible for HELOC. I still don't have a full year of SE income but 6 months would be plenty. By then though, I'll only have one more month to pay CC off though. I don't want a HELOC either though long-term.

[frugaliknowit]

"...I am able to pay down about 4-5k/month on this so it should all be gone within 6 months.."

True, if "Murphy doesn't knock at your door..."

".... it's an immediate 25%-30% return on tax savings..."

Not quite.  It's tax DEFERRAL (assuming no employer match, which seems to be the case...).

Get rid of the CC debt!

[robartsd]

Not quite.  It's tax DEFERRAL (assuming no employer match, which seems to be the case...).

Good point about tax deferral, however, effective tax rate in retirement is quite often less than marginal tax rate in accumulation - especially for people who frequent these forums. At withdraw, the effective tax rate is likely to be 0-15%, so the tax savings return is likely greater than 10-15%. Claiming this tax savings compares favorably to avoiding a few months of 20% APR credit card interest.

[yachi]

Not quite.  It's tax DEFERRAL (assuming no employer match, which seems to be the case...).

Good point about tax deferral, however, effective tax rate in retirement is quite often less than marginal tax rate in accumulation - especially for people who frequent these forums. At withdraw, the effective tax rate is likely to be 0-15%, so the tax savings return is likely greater than 10-15%. Claiming this tax savings compares favorably to avoiding a few months of 20% APR credit card interest.

Pay off the credit card with the crippling interest rate.  A 20% interest rate is enough to turn excellent stock market returns into poop.  Keep in mind you only get the tax savings 1 time, but the credit card interest compounds every month. 

EDIT:  Can't you just build up your 401(k) later in 2017?  It seems to me you could pay your credit card now, then build up the 401(k) using the 5k+ extra monthly cash flow.  If you do this, can't you decrease your withholding so you're still getting the 401(k) benefit now? 

[robartsd]

Pay off the credit card with the crippling interest rate.  A 20% interest rate is enough to turn excellent stock market returns into poop.  Keep in mind you only get the tax savings 1 time, but the credit card interest compounds every month. 

EDIT:  Can't you just build up your 401(k) later in 2017?  It seems to me you could pay your credit card now, then build up the 401(k) using the 5k+ extra monthly cash flow.  If you do this, can't you decrease your withholding so you're still getting the 401(k) benefit now?

We're discussing the 2016 contribution. Paperwork for this is due by 31 Jan (payment by 15 Apr). I agree with you that delaying 2017 contributions until after the CC is paid off makes sense. Since the projected payoff is <6 months, only half a year's interest (really less since some will be paid off each month) will be paid. A one time 15% tax savings is greater than half a year of 20% credit card interest. Add the possibility of applying balance transfer offers to reduce the effective rate of credit card debt and 401(k) contribution looks even better. Only a near term loss of income or large unexpected obligation would make paying of the credit card preferred over making the 401(k) contribution.

[brian313313]

Thanks for the replies. Some more info... I'll already be maxing the 401k for 2017 so I won't be able to contribute more there. I will also be saving 3-4k/month on average in non-401k accounts after the loans are paid. Since about 1/3 to one half my savings will be in non-401k accounts when I retire, I will be able to take smaller 401k withdraws in retirement and hopefully minimize taxes. My current marginal rate is 31% fed + state. There's definitely some savings, but the actual amount is unknown since the tax rates could change by then. I can't touch that for another 10 years. The CC should be paid off by the end of March without using the 401k funds. Now if I do.

I did not think about filling out the paperwork with the contribution and then paying it later. That's a good idea. Doubly so because I'm committed to making it then unless I want to redo the paperwork.

I don't think I can get another credit card for a balance transfer at this point. My CreditKarma score has dropped by about 140 points with all the new credit and 99% credit card utilization. I just paid off 4500 today and knocked one card out plus a little on the other but the report may not get updated for as long as 30 days. Money was tight & stressful during the renovations but all the big stuff is done now. We have a mirror frame to build this weekend. It'll cost about 30 bucks :). We still have one more bathroom to remodel but that will be next year.

Here's my plan:
- Pay CC
- Pay 401k
- Pay car

I still get to the same point around the 5-6 month mark or so.

Thanks again everyone for the suggestions.

[robartsd]

I did not think about filling out the paperwork with the contribution and then paying it later. That's a good idea. Doubly so because I'm committed to making it then unless I want to redo the paperwork.

I don't think I can get another credit card for a balance transfer at this point. My CreditKarma score has dropped by about 140 points with all the new credit and 99% credit card utilization. I just paid off 4500 today and knocked one card out plus a little on the other but the report may not get updated for as long as 30 days. Money was tight & stressful during the renovations but all the big stuff is done now. We have a mirror frame to build this weekend. It'll cost about 30 bucks :). We still have one more bathroom to remodel but that will be next year.

I see no reason not to manage your cash flow such that you use the funds to pay down credit card now and make your 2016 401(k) contribution in April.

You're probably right that your credit card payoff timeline is short enough that a balance transfer wouldn't be worth the hassle. I didn't realize that your credit cards were basically maxed out.

Good luck.

[brian313313]

... I didn't realize that your credit cards were basically maxed out.

Thanks. Two of three credit cards were brand new. I got them when planning for the renovations. Of course, they were rewards cards from MMM.