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tdavenport2522
Level 1

Paying down debt vs 403b investing

I am 63 and will retire at 66-2/3. I have significant credit card debt ($20,000), student loan debts ($40,000), mortgage and car loan. I have only $50,000 in a 403b. I will retire with two pensions and social security, about $4000/month income. Current annual income is $82,000. Is it better to pay down my debt to retire with little or none, or put as much money as possible into my 403b

1 Best answer

Accepted Solutions
DOlli_EA
Employee Tax Expert

Paying down debt vs 403b investing

You could look at this question from a straight math point of view, but for some people, there is another big factor that may impact the choices, and that is what is more important to your sense of security as retirement approaches.  Example: What will financial security look like for you- having your mortgage paid off, or more funds in your retirement account?

 

From a math standpoint, these are some of the questions that may impact your decision:
Will your employer contribute matching funds into your retirement account while you are still employed?

(If so, at least contribute to receive the full matching funds.)

 

Will you be taking the standard deduction or itemizing when you file your tax returns? (If you are using the standard deduction, there is no tax benefit to paying mortgage interest.)

 

What is the interest rate on your mortgage? 

If it is very low, (as most rates are these days), then you may want to take advantage of that, and focus on paying off higher-interest-rate credit card debt, auto loan and student loans, and also keep adding to your 403b.

 

Until your credit card debt is paid off, you may consider applying for a zero percent credit card. These are readily available for many borrowers, and the interest rate is locked in for as long as 18 months.  One can use the "Balance Transfer" to take advantage of the lower interest rates, and pay off the balance much faster.

 

Paying off an auto loan could also be made easier by refinancing to a lower interest rate while one is still employed.

 

On the other hand, taking out a new mortage or refinancing a home mortgage to pay off personal debt is quite risky.

Keep is mind, if something dreadful happens and you can no longer work or pay all your bills, the only critical bill will be your home mortgage.

 

While credit card debt can be negotiated down, and a car can be repossesed in the worst case, one doesn't want to lose the roof over their head.  

 

Another factor:

What other taxable and non-taxable income will you have during retirement, and how much will you need each year to maintain your lifestyle lifestyle? Have you considered a Roth retirement account, where the distributions could be tax-free?

 

Both contributions and earnings in a 403(b) plan grow tax-deferred, meaning you do not have to pay any tax at all if your accounts rise in value, regardless of any transactions you make within the plan.

For example, if your plan consists of a series of mutual funds, you will not have to pay tax on the account even if you sell some mutual fund shares at a gain.

However, upon distribution from the account, all of your 403(b) funds become taxable. You must report every withdrawal to the IRS and pay ordinary income tax on the amount of the distribution.

 

Source: https://turbotax.intuit.com/tax-tips/retirement/are-403b-contributions-tax-deductible/L8AshU5Nb

 

I hope this help with your decisions.

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

View solution in original post

2 Replies
Bsch4477
Level 15

Paying down debt vs 403b investing

This forum is better suited to answer tax questions. Financial planning should be done with full knowledge of your entire financial situation. 

DOlli_EA
Employee Tax Expert

Paying down debt vs 403b investing

You could look at this question from a straight math point of view, but for some people, there is another big factor that may impact the choices, and that is what is more important to your sense of security as retirement approaches.  Example: What will financial security look like for you- having your mortgage paid off, or more funds in your retirement account?

 

From a math standpoint, these are some of the questions that may impact your decision:
Will your employer contribute matching funds into your retirement account while you are still employed?

(If so, at least contribute to receive the full matching funds.)

 

Will you be taking the standard deduction or itemizing when you file your tax returns? (If you are using the standard deduction, there is no tax benefit to paying mortgage interest.)

 

What is the interest rate on your mortgage? 

If it is very low, (as most rates are these days), then you may want to take advantage of that, and focus on paying off higher-interest-rate credit card debt, auto loan and student loans, and also keep adding to your 403b.

 

Until your credit card debt is paid off, you may consider applying for a zero percent credit card. These are readily available for many borrowers, and the interest rate is locked in for as long as 18 months.  One can use the "Balance Transfer" to take advantage of the lower interest rates, and pay off the balance much faster.

 

Paying off an auto loan could also be made easier by refinancing to a lower interest rate while one is still employed.

 

On the other hand, taking out a new mortage or refinancing a home mortgage to pay off personal debt is quite risky.

Keep is mind, if something dreadful happens and you can no longer work or pay all your bills, the only critical bill will be your home mortgage.

 

While credit card debt can be negotiated down, and a car can be repossesed in the worst case, one doesn't want to lose the roof over their head.  

 

Another factor:

What other taxable and non-taxable income will you have during retirement, and how much will you need each year to maintain your lifestyle lifestyle? Have you considered a Roth retirement account, where the distributions could be tax-free?

 

Both contributions and earnings in a 403(b) plan grow tax-deferred, meaning you do not have to pay any tax at all if your accounts rise in value, regardless of any transactions you make within the plan.

For example, if your plan consists of a series of mutual funds, you will not have to pay tax on the account even if you sell some mutual fund shares at a gain.

However, upon distribution from the account, all of your 403(b) funds become taxable. You must report every withdrawal to the IRS and pay ordinary income tax on the amount of the distribution.

 

Source: https://turbotax.intuit.com/tax-tips/retirement/are-403b-contributions-tax-deductible/L8AshU5Nb

 

I hope this help with your decisions.

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
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