Continue to invest and pay down debt at the same time, says Klayman
By Alan Klayman
Maturing Loans
Alan Klayman is CEO of Klayman Financial LLC. He served as a vice president at Fidelity Investments, worked as a financial planner for American Express, and built fixed income strategies on Wall Street at The First Boston Corporation. At CreditCards.com, he writes Maturing Loans, a weekly feature in which he answers readers' questions about retirement and debt issues.
Dear Maturing Loans,
I
read your column about
401(k)s and CDs, and I was wondering two things. First, is this a good time to
put money into a 401(k) plan? Second, should I be putting money into a 401(k)
or paying down my credit card debt? -- Stu
Dear Stu,
Thanks
for reading the column. Things are a bit confusing out there, so let's get to
your questions and start to sort some of this out.
Is
this a good time to put money into a 401(k) plan? The answer is yes. It is
always a good time to put money away for the future. Where you invest the money
is a secondary question.
You
didn't exactly ask this, but I think you are inquiring as to whether this a
good time to put money into stock mutual funds or the stock market, given the
current market volatility and the dramatic drop we just saw. This really
depends on your time frame. You have to expect that the market will go up and
down, but the question you need to ask yourself is what is the time frame for
when you will need to use the money?
If
you need to use this money in less than five years, then you should have little
to no exposure in the stock market. This goes for everyone who is taking minimum
required distributions or who is living off of your retirement savings. Short-term
money should not be in the stock market.
If
you won't need the money until five or 10 years from now, then you can look at
having some money in stocks or stock mutual funds. If you won't need the money
until 10 years from now, then you can look at more of a stock-weighted
portfolio. However, you must invest where you are comfortable, and now more
than ever, you should seek the help of a financial professional.
Should
you be putting money into a 401(k) or paying down your credit card debt? The
answer is both. Let me explain: If you max out your 401(k) contributions, then
you will be eligible for a tax deduction. You can then take the value of your
tax deduction and use that money to pay down your debt!
How? I'll give you an example. Let's assume the following:
You are eligible to put $10,000 away into your
401(k) plan.
You have $2,000 in credit card debt.
You are investing $3,000 in your 401(k) right
now. You could put in more, but you are unsure of how the market will perform.
Using those assumptions, you can pay
off some of your card balance while still investing in your 401(k) -- depending on exactly how much more you'd be willing to put in your 401(k).
If you can afford to contribute
$6,000 a year toward your 401(k) and card debt, here's a solution:
Put
$5,000 into the 401(k). At a 20 percent tax rate, you will save $1,000 in taxes by
making your 401(k) contribution. Take that $1,000 and pay down your credit card
debt. To do this, you can either wait for your tax refund and apply it toward your credit card debt or take that amount of savings, divide it by the number of paychecks you get each year and apply that amount toward the debt.
Now
take the other $1,000 and pay down the rest of the debt.
Next
year, take the interest savings that you would have paid toward your credit
card balance and add it to your 401(k)!
Thanks for the
question. See you back here next week.
Alan Klayman is creator of MyIncomeStrategy.com and CEO of Klayman Financial LLC. Klayman specializes in retirement income planning, business management and planning, estate planning, tax-advantaged investing, trust investment management, professional money management, insurance and annuities, mutual funds, fixed income securities, and institutional and personal retirement plan administration.
Published: October 15, 2008
Three most recent Maturing Loans stories:
When family members use 'secret' credit cards – Just who is responsible for the debt racked up by a spouse's secret credit card cache? 'Maturing Loans' columnist Klayman says it depends on several factors ...
Sold the house, have some cash, now what? – Seniors who are downsizing need to pay off debt, create fixed-income investment income and have an emergency fund to cover financial surprises ...
Know the rules before you tap your 401(k) – Transferring funds from a taxable retirement account into a "safer" investment vehicle can cost you if not done the right way ...
Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!
