<p>We have some extra $ (let’s say $10,000 - it’s probably somewhat less, but $10,000 is a nice round number). </p>
<p>We also have about the same amount outstanding in student loans from H’s professional school. The interest rate is fixed at 3% and for many years we have been paying the minimum monthly payment.</p>
<p>We also have not maxed out either of our 401(k) contributions, and income our tax rate is about 28%.</p>
<p>Suggestions? It seems like we should put the money in the 401(k) accounts, if for no other reason than the tax implications. But for emotional reasons, H wants to pay off the student loan.</p>
<p>Pay off debts. You may defer 28% in taxes but a least that percentage of your retirement gets eaten up in fees. The only thing that is guaranteed is your debts, so get rid of them.</p>
<p>May I introduce you to, ‘no-load’ or ‘low-load’… Vanguard and Fidelity are two biggies in this area.</p>
<p>P.S. If you really want to get creative, max out your 401k for the tax savings, then borrow against it to pay off the school loans. Pay yourself interest. (It has a risk should you leave/be terminated, but another idea.)</p>
<p>With a low, fixed interest rate like that, I think first choice should always be a Roth (after
employer match on the 401K). Are you eligible to fund a Roth? And I’d put it in low load index funds, based on small, mid or large cap, or S and P. This seems like a no brainer if you’re eligible for a Roth. No taxes on the gains, ever.</p>
<p>While it is by no means clear in today’s low rate environment, I think that so long as your employment situations are secure, you should put the money in the 401(k). Hopefully, you can do better than 3% over the intermediate to long term.</p>
<p>Absolutely do not pay off that debt. In fact if any fool wants to loan you money at 3% interest, then borrow more. I would use any extra money to allow added 401k contributions. You will always encounter some up and down years, but even with a very conservative strategy you should average returns of 7% or more.</p>
<p>Assuming that you have 6 to 9 months of living expenses in a liquid investment for your emergency fund, and that you have a couple K in regular every-day life-happens savings, then there is nothing wrong with splitting the windfall. Pay down part of that debt which will make your husband feel good. Put some into a Roth IRA or a regular IRA or add it to your 401(k).</p>
<p>Now if you don’t have anything in an emergency fund (or what you currently consider to be emergency money isn’t very liquid), or you don’t have anything in that every-day life-happens savings fund, then maybe some of this windfall ought to go there instead of into retirement money.</p>
<p>Lastly, there is nothing wrong with paying down that student debt. Your husband is tired of having it hang around, which is why he’s saying he’d like to kill it with this windfall. Paying off the loan and being debt free can be a very liberating experience. If he’s going to be happier to be rid of it, and the windfall isn’t technically your own money (for example a gift or inheritance from your side of the family) so you feel that you should be the one deciding how it gets used, let him pay off the debt. What he’s been paying on that loan can start going into retirement funds in 2014.</p>
<p>Have you been paying the minimum monthly payment because that’s all you can afford to pay? Or are you paying the minimum because it’s low-interest debt, and you’ve chosen to pay as little as possible to use your money elsewhere?</p>
<p>My bias is towards putting the money in retirement funds. If you do pay off the debt, I agree with the idea of taking your current payments and directing them towards your retirement fund, or your emergency fund if it’s underfunded.</p>
<p>If you really will pay $2,800 in taxes on this thing if you put it towards the student debt, then my vote is to put most (like 80-90%) or all towards retirement, and then a token sum towards the student loan. </p>
<p>There is a value in debt-free living, and it can be important to spend your money in ways that relieve stress and make you feel productive, but almost three grand for the warm fuzzies is too much, IMHO.</p>
<p>Is an inheritance of <$10k really going to trigger estate and income taxes?
I’d pay off the loan and put the loan payments into the 401(k). </p>
<p>Note: if you want to put the $10k into the 401(k) as a pre-tax contribution, that amount needs to come from income earned by your employer. You may need to make a special allocation ASAP to get it in by year-end payroll. Contact your HR department.</p>
<p>Unless you live in a state with a tax, invest it. If you do, you have more math to do.</p>
<p>Put it in a Roth if you are eligible, or use that it as living expenses to up your work 401k to the max. As long as you have sufficient savings, like others have posted, do not use it to pay off a 3% student loan.
Look at a fund like Vanguard Wellington. Very low expenses. There are hundreds of good funds out there with very very low fees.</p>
<p>A financial adviser gave me a hard time last year for having more in 401K than in Roth IRAs. He was an advocate for funding Roths first, as long as you are putting enough into a 401K for the employer match. Depending, of course, on income in retirement. The tax deferred is nice for now, but may be more useful in future. He said the tax free growth and eventual income is worth a great deal. Would be interested in varying opinions. It seems comparing tax brackets now and in retirement would be needed. We are in a rather low tax situation right now, and depending on what you think of the future, we could have higher taxes at a later point, making the tax free Roth worth more. </p>
<p>Happy mom of 1 is right regarding emergency funds. Also, is your next car purchase funded? Rather than car payments with interest, having a fund for the next car, might be worth some peace of mind.</p>
<p>We assumed that we would be in a lower tax bracket in retirement and tried to proceed according to that belief. I turned out that our federal taxes are not much lower and may be higher for a bit, so we are glad we funded H’s ROTH IRA as much as we could too.</p>
<p>The best thing for us about the ROTH IRA is that we don’t HAVE to take distributions if we don’t need the funds for living expenses and can let it accumulate for future needs or to leave for kids or grandkids. We like that for now, there will be no taxes when funds are ultimately withdrawn from it.</p>
<p>It really requires a look at what your current finances are–if you are in the 28% federal tax bracket, that is something to consider, as well as state tax liability. The 3% loan interest is amazingly low, which was the same rate I had decades ago when I was a student. I was also advised NOT to pay it off but to pay the minimum every quarter until it was fully paid off.</p>
<p>I’d look at whether you have adequate emergency funds and where you would most like to put retirement funds–401K, regular IRA or ROTH IRA. We tried to fund all of them, depending on what seemed best at the time (we didn’t hire an advisor–many others have).</p>
<p>Unless you put your money in very low fee/low commission 401k funds such as Vanguard, your average growth will 7%-4% (average fees)=3% then subtract inflation. And then you pay taxes on withdrawal. You see it doesn’t amount to much. But pay off the loans and you are paying yourself the interest you would have been paying your creditors over the life of the loan.</p>