Author Topic: Higher tax bracket - 401ks/457 before debt?  (Read 1373 times)

Shade00

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Higher tax bracket - 401ks/457 before debt?
« on: March 09, 2017, 10:43:27 AM »
Hey guys, my wife and I have pretty good salaries but also have a good bit of student loan debt. We are aggressively paying off the student loan debt, which has interest rates between 4-5%. I'm sure this has been covered before, but I was thinking the other day that maybe we should slow down the loan payments to max out our 401ks and her 457. The primary reason is that most of the dollars going to pay the student loans are being taxed at 25% and 28%. Obviously I don't know what the future will hold as far as taxation, but if I intend to retire in say, 10 years, and live off 30-40k per year, and assuming hypothetically that those dollars are taxed in the 10-15% range, wouldn't it make sense mathematically to defer all dollars I can from the 25-28% range, even at the expense of slower loan repayment? I know I can't guarantee that the investments won't lose value, so there's that, but even if I stuck the money into bond funds or something, I'd be saving 13-18% on taxes. Thoughts?

Mother Fussbudget

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Re: Higher tax bracket - 401ks/457 before debt?
« Reply #1 on: March 09, 2017, 12:00:52 PM »
Have you read the "Investment Order" sticky post from the Investing forum?

Lucky Girl

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Re: Higher tax bracket - 401ks/457 before debt?
« Reply #2 on: March 09, 2017, 01:42:49 PM »
The investment order is a good standard.  It will tell you to max out your 401Ks up to match before repaying any loans, and then repay loans only with high interest rates before hitting the full max.

So, in short, you probably should be maxing your 401ks and maybe even 457 (if you can--the upper limits on these are often something like $52K right?) and only make minimum payments on your loans. 

I will note that my DH and I did max our 401Ks, but after that threw more than minimum payments to my loans from family, which were at rates of 3%.  Loans from the government at 1.8% I still have, and it looks like I will retire with about 9K outstanding still on that loan. 

seattlecyclone

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Re: Higher tax bracket - 401ks/457 before debt?
« Reply #3 on: March 09, 2017, 01:54:18 PM »
Those student loans have relatively low rates. Consider that you may be able to deduct the interest and the effective rate is even lower.

If you can still pay off your loans in a reasonable amount of time even with higher retirement account contributions, increasing those contributions can be a great idea. If you do pay off the loans as quickly as possible at the expense of your retirement contributions, you won't be able to go back and make up for your 2017 401(k) contributions in a few years when the loans are gone and you have a bunch of extra cash. You'll pay a bit of extra interest by paying off the loans slower, but the tax benefits of making retirement account contributions could easily outweigh this interest expense. Run the numbers for your own situation, but it's very likely that your idea is a good one.