Originally Posted by gettoasty
Hypothetically if I can earn 5 to 6% on my company retirement account, would it be smart to continue my salary deferral for 2014 or pay off a loan in 1 year that has an interest rate peaking near 6%. I have been maxing out my IRS contribution limit this year while making payments to my student loan.
However, I realized that in a years time of contributing to the savings plan, I could have easily paid off my student loan.
I sort of want to take the burden off my shoulders if I can pay it off soon rather than later. The only upside to keeping the loan is a small tax deduction at year end, and hoping that my portfolio will perform well.
My plan is to pay off the student loan in 2014, open up a IRA in lieu of deferring to the company retirement plan, and start contributing again in 2015. I have not done the full math but I think this would also allow me a bit more flexibility in terms of disposable income. FWIW I claim "0" on my W-4.
What is your marginal tax bracket? You need to determine the tax-adjusted interest rate of your loan to make a good decision. Paying off the loan is a guaranteed return of X%, while you can't earn 5-6% in the market without taking on risk.
If you max out your tax-advantaged space and plan to continue doing so in the future (always a good decision), then the value of that space available to you now is greater. If you didn't max it out, you could direct cash towards the loan, then catch up later in the tax-advantaged account. That isn't possible if you're maxing it out.
Another option is to use a 401k loan to pay off the loan, if you have that available to you. You preserve the valuable tax-advantaged space and it's likely that the interest rate is lower on a 401k loan.