Author Topic: Frontload IRA, then pay off loan or tackle both in parallel?  (Read 794 times)

sizzlinkola

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Frontload IRA, then pay off loan or tackle both in parallel?
« on: October 27, 2019, 07:07:46 PM »
Currently maxing out my 401k through DCA, since front-loading it will lose my company match. They don't have a true-up.

I have enough take-home pay to max out my Roth IRA, which the balance is $14k right now. However, I have $17.5k in student loans @ 3.8%.

Should I front-load my Roth IRA, then start paying off my loan? Or DCA my IRA while paying off my loan?

I'm paid ahead in my loan, such that I don't have to make min payments until 2021.
« Last Edit: October 27, 2019, 07:44:24 PM by sizzlinkola »

mistymoney

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Re: Frontload IRA, then pay off loan or tackle both in parallel?
« Reply #1 on: October 28, 2019, 06:14:04 AM »
why are you ahead on the payments? to reduce the loan more quickly, extras should go apply towards principal, not reduce future payments. Unless you fear unemployment or other income loss?

@3.8%, there isn't a great need to pay off, so I would pay minimum and funnel everything extra into investments, and maybe pay off a little extra on the loans when you're satisfied with what you've invested, or if you just want to be free of the loan.

terran

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Re: Frontload IRA, then pay off loan or tackle both in parallel?
« Reply #2 on: October 28, 2019, 09:12:29 AM »
The recommended investment order would suggest maxing the IRA before paying off a loan with that interest rate.

sizzlinkola

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Re: Frontload IRA, then pay off loan or tackle both in parallel?
« Reply #3 on: October 29, 2019, 09:24:58 PM »
why are you ahead on the payments? to reduce the loan more quickly, extras should go apply towards principal, not reduce future payments. Unless you fear unemployment or other income loss?

@3.8%, there isn't a great need to pay off, so I would pay minimum and funnel everything extra into investments, and maybe pay off a little extra on the loans when you're satisfied with what you've invested, or if you just want to be free of the loan.

I'm ahead on payments because I paid off my higher interest loans, such that I only have 3.8% interest loans left.

By investments, you mean taxable accounts as well? I already contribute max to 401k, HSA and my Roth IRA.
« Last Edit: October 29, 2019, 09:28:31 PM by sizzlinkola »

chaskavitch

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Re: Frontload IRA, then pay off loan or tackle both in parallel?
« Reply #4 on: October 30, 2019, 10:14:31 AM »
why are you ahead on the payments? to reduce the loan more quickly, extras should go apply towards principal, not reduce future payments. Unless you fear unemployment or other income loss?

@3.8%, there isn't a great need to pay off, so I would pay minimum and funnel everything extra into investments, and maybe pay off a little extra on the loans when you're satisfied with what you've invested, or if you just want to be free of the loan.

I'm ahead on payments because I paid off my higher interest loans, such that I only have 3.8% interest loans left.

By investments, you mean taxable accounts as well? I already contribute max to 401k, HSA and my Roth IRA.

I think that what @mistymoney is saying is that if you don't have any scheduled payments until 2021, there is a more efficient way you could have paid extra toward your loan.

Since you've "paid ahead" on your loans so you don't have any minimum payments until 2021, you've made additional payments of both principle and interest.  This does mean you're paying down the loan early as long as you still make monthly payments, but you've also still paid the interest that was calculated for the >12 "extra" payments you've made.

If you had specified that you wanted additional payment applied directly to the principle, you wouldn't be "ahead" on your payments (a payment would still be due every month), but your overall loan balance would have been reduced more quickly, because your interest would be calculated on significantly reduced principle amount.

For example, if you started with $17.5k at 3.8% for 20 years right now, your monthly payment of $104 would be $48.79 to principle, $55.42 to interest. 
- If you made early payments of $104, only $48 of your payment would go toward the principle of your loan. 
- If you made an extra principle only payment of $104, all $104 would go to the principle of your loan.

Both ways will obviously pay off your loan earlier (assuming you don't stop making payments until 2021 rolls around), but the principle only extra payments are more efficient.

My explanation doesn't answer your question, though.  As far as @mistymoney's comment, yes, taxable.  The Investment Order post has already been linked - your next steps would #6-9.
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.           
8. Invest in a taxable account and/or fund a 529 with any extra.     


TL,DR:
I'd say front-load the Roth, continue to make minimum payments on your loan, then invest in taxable accounts, unless you want the peace of mind of having your loan paid off, and in that case, make sure to specify that you want the extra payment applied directly to the principle.  Taxable accounts are mathematically optimal over paying down a loan qt 3.8%, but that doesn't mean a lot of people don't feel better paying down their debt instead :)