Author Topic: debt vs taxes  (Read 1840 times)

lavagirl

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debt vs taxes
« on: February 08, 2015, 01:18:32 PM »
We're in a situation where we are paying down debt aggressively and contributing enough into employers 401k to get a match. Next year I am sure that we will owe on our taxes. Our income will be over 180k. My question is would it make sense to contribute more to our 401k to avoid owing taxes next year? Thanks!

nanu

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Re: debt vs taxes
« Reply #1 on: February 08, 2015, 02:01:26 PM »
Yes! Contributing more to 401k is a great way to pay less taxes, as is contributing to other tax-advantaged accounts (IRA, HSA, 403, 457 if available).
However, if the interest on your debt is high enough (according to most people here, 5-6% or more), it might be better to pay it off first.

msilenus

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Re: debt vs taxes
« Reply #2 on: February 08, 2015, 02:27:22 PM »
I don't think most people appreciate how much your savings rate matters for figuring out what's optimal here.

If maxing your 401(k) would cause you to pay off your debt in 5 years, then it's very likely a bad call.  You'd wind up paying 5 years' of interest on the 18k you didn't pay off this year.

However, if you can pay that debt off in two years while you're maxing your 401(k), then even if it's fairly high interest, it might make sense to make the 401(k) contribution.  Why?  Because if you're planning on paying low or no taxes in retirement, the tax benefit could be worth way more than 2 years of interest, esp. at your current marginal rate.

Interest rate obviously matters a lot, too.

Davids

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Re: debt vs taxes
« Reply #3 on: February 08, 2015, 02:33:08 PM »
Need details on your debt before fully answering.

MDM

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Re: debt vs taxes
« Reply #4 on: February 08, 2015, 05:18:52 PM »
We're in a situation where we are paying down debt aggressively and contributing enough into employers 401k to get a match. Next year I am sure that we will owe on our taxes. Our income will be over 180k. My question is would it make sense to contribute more to our 401k to avoid owing taxes next year? Thanks!
I'll make a side wager that you owed taxes this year, too.

It appears you are talking about the amount you pay or have refunded when you file taxes in April (or whenever)...is that correct?  Most likely you have been paying taxes via withholding all year.  Changing your W-4 is a direct way to affect your April pay/refund scenario.

But to your overall question: at $180K/yr, you should be looking for every tax-advantaged saving opportunity you can (assuming your debt doesn't have a ridiculously high interest rate).