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Max out 401k or pay off debt first?

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  • Avatar hightower 
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    The only time I would make an exception there is if you have an unusually large amount of debt or very high interest rates. 

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    what interest rate would that be for you?  5% guaranteed return is nice.  my bond fund is yielding 3%

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    I don’t have a specific number in mind.  But, if I were someone who just graduated with say 400k of debt and some of those loans were private loans with 10% interest, I would have a hard time putting much money in a 401k.  I think those people would be better served by spending a couple of years doing nothing but getting rid of that toxic debt.  You should always contribute enough to get any match dollars available though.

    #211714 Reply
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    Avatar Budgetmaestra 
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    Max the 401k (I’m presuming this is pre-tax). Max your wife’s 401k. Contribute to your hsa (more tax savings). Create a workable budget you can stick to. See if you can refi your loans to a five year plan that has lower rates. Then aim to pay it off in half that time. Can you get a side gig? Increase income? Cut expenses?

    Then put everything on student loans for the next two years. Paying down mortgage in your shoes is a mistake right now. It is low interest (even lower after inflation), and those extra payments do nothing to improve your cashflow.

    #211943 Reply
    Liked by Hank
    Lordosis Lordosis 
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    If you cannot put 20% towards retirement and pay off the loans on 5 years you have a spending problem.

    “Never let your sense of morals prevent you from doing what is right.”

    #213735 Reply
    Dreamgiver Dreamgiver 
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    I would let the 30yr mortgage at 3.75% ride for its full length as long as you invest what you’d have put towards the mortgage instead of spending it.

    #213739 Reply
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    Avatar PedDoctor1986 
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    Follow up question. From these replies I am learning I need to increase my retirement savings, should I put those funds all into my 401k or is it better to do a Backdoor Roth IRA first due to the tax free withdrawals later on? Also for my husbands retirement contribution, would that be preferable to a 403b? He gets no matching. Thanks again!

    #214405 Reply
    Avatar MaxPower 
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    If you don’t have enough money to max out 401k and backdoor Roth, then the dogma is to contribute to 401k up to the end of your employer match, then contribute to backdoor Roth, then finish filling up the 401k.

    For your spouse, if there is no match, then I would do backdoor Roth for both of you (after you contribute the max to get all of your match), and then it’s 50/50 on if you continue contributing to your 401k or the 403b. If one plan has high fees and bad fund options, then contribute the rest to the other account until it’s full. Depending on how high the fees are, you’d probably still be better off making out tax deferred (401k or 403b) before saving additional money in a taxable account.

    #214406 Reply
    Liked by Jack_Sparrow
    Avatar Peds 
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    should I put those funds all into my 401k or is it better to do a Backdoor Roth IRA first due to the tax free withdrawals later on?

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    its not either or, its and. both.

    you said 15% would be a max 401k in a previous response, so you still need more. so do 6K backdoor rIRA.

    you said your husband is a nurse.

    what is total household income x 20%? 2x 401k + 2x rIRA = 50K for retirement.

    so i would start there.

    #214440 Reply
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    Lordosis Lordosis 
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    If you don’t have enough money to max out 401k and backdoor Roth, then the dogma is to contribute to 401k up to the end of your employer match, then contribute to backdoor Roth, then finish filling up the 401k.

     

    Normally I would agree if the OP was a resident.  If she is at her peak earning years then tax deferred is the way to go.  If she cannot afford to save more.  But there is the problem.

    I agree with Peds.  I hope your combined salary is over or around 250K.  20% would be 50K.  That is 2 maxed 401ks and roth IRAs.  Remember the 401k is tax deferred so it does not cost you the 38K to put in 38K.  For every dollar you put in you are getting back 20-30 cents depending on your state and tax bracket.   If you are not able to save the full 20% right away work on your spending to make sure you are living within your means.  Better now then later.

    “Never let your sense of morals prevent you from doing what is right.”

    #214452 Reply
    Avatar PedDoctor1986 
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    Thanks for the personal reply Dr Dahle! I read your book in residency and have been listening to your podcast and following you blog since! I have been trying to get myself and family in a good place financially since starting my career, but your right that it simple but not easy. It is difficult especially in a lower paying specialty with a large debt but we will get there! We of course have made mistakes regarding living like a resident in some ways these past 4 years. Is posting budgets something that is routinely done for help/scrutiny? Of course all family budgets are personal. This is probably a rookie question but can I add a lump sum to my 401k somehow at the end of the year when I receive a bonus, or does it have to be the same amount from each check? I believe I could do that with a Backdoor Roth, but no tax savings now there. Thanks so much for all of your help on this journey!

    #214499 Reply
    Craigy Craigy 
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    I vote for getting your full match, but otherwise not filling the 401k so that you can steamroll the student loans faster.  Once they’re gone, max your retirement accounts, and whether you pay aggressive on the mortgage is up to you, but I wouldn’t.

    Yeah like Jim said, make sure your spending is under control.  With two incomes, filling two 401ks should be painless.  Husband nurse should be making solid money.

    You typically have to fill your 401k with payroll deductions and not a lump sum.  However you’d have to check the details of your plan to be sure.  Personally I would put $6k/$12k in a backdoor roth before filling the 401k or paying debt, but that’s just me.

    LEVEL 1 WCI FORUM MEMBER.

    #214540 Reply
    Liked by GraceisOTL
    ENT Doc ENT Doc 
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    What is your family gross income and annual spending? Yes, feel free to show what you have. Never seen anyone scolded for presenting their budget, unless it included buying a house in residency or fellowship.

    #214545 Reply
    Liked by Peds

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