Getting Personal
Roth vs Pay Down Debt
Question: I'm 26 years old, and have no credit card debt, no car loans, no student loans. I max out my 401(k), and have a six-month emergency fund. Pretty good, right? But I also have a mortgage and a $40,000 second mortgage (which is structured as a home equity line of credit).
Over the past year, I've saved up about $5,000. My question is, should I put this money into paying off the home equity line of credit, or should I start a Roth IRA? I know the Roth IRA has higher returns over the long-term, but in my gut, I REALLY want to knock off that home equity line of credit. What should I do with the $5,000. Seattle, WA
Answer: First of all, I admire your financial acumen. I know that I was nowhere near as financially savvy as you are at your age. You're saving for retirement. You have a nice emergency stash. And no debt other than your mortgage and home equity line of credit. It's great.
If I were you, I would pay attention to your instincts: Go ahead and tackle that home equity line of credit. It's a smart move.
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Comments (2)
May 7, 2008 11:16 PM PT
I would recommend the opposite. The opportunity for contributing to a Roth IRA only comes once. If you don't contribute to a Roth IRA in one year, you can't make it up in the next year. On the other hand, you can pay down the HELOC at any time. Contribute to a Roth IRA while you can. When there's more money, then pay down the HELOC.
May 8, 2008 12:32 PM PT
I agree with you on many issues but not this one. The window for the Roth is just that one year and once the opportunity for that year is gone it is gone. The debt is tax deductable and it can be paid any time. In fact with rates going down it should be more manageable. A person in their 20s will grow a Roth to an unbelievable number so it should be taken advantage of. Also, if the person's income grows they will not be able to access the Roth in the future limiting their ability to take advantage of this great tool. I say get the Roth in this case. This guy could have millions of tax free Roth earnings by the time he retires.