Pay off Car or Start ROTH IRA?

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Pay off Car or Start ROTH IRA?

Postby gane » Fri Feb 01, 2013 5:47 pm

I have been paying off my car loan aggressively (approx $2k/month). I have about 12k left, which will bring me to around June/july when it's paid off. %3.9. This is a couple of months past the April cutoff to get in $5000 for a roth IRA. I planned to open my ROTH IRA after I pay off my car loan, but if I choose to do that, I will be limited to 5k for the next year and a half (instead of 10.5k if I were to squeeze in some now). I can easily afford to max my ROTH IRA next year, so that is why I've been thinking of taking advantage of this years quota as well. Should I delay payoff to take advantage of the ROTH IRA limit for 2012? Thanks!
I am so far ahead in car payments I don't actually have a car payment until next year (1/01/2014). I started a reddit thread which came out to about 65% start roth / 35% car loan. I wanted to see insight on a more serious investing forum. Link to reddit thread:
http://www.reddit.com/r/investing/comme ... _roth_ira/
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Re: Pay off Car or Start ROTH IRA?

Postby fatmike91 » Fri Feb 01, 2013 6:38 pm

Roth is the most important money. I'd fund it. 3.9% is a decent enough rate.


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Re: Pay off Car or Start ROTH IRA?

Postby robocop » Fri Feb 01, 2013 6:50 pm

I'd go for the Roth. I'd also refi my auto loan at PenFed for a 1.49% rate.
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Re: Pay off Car or Start ROTH IRA?

Postby runner9 » Fri Feb 01, 2013 7:00 pm

I'd do the Roth. As for refi to 1.49%, how much money is your time worth? I'd probably do the refi but am sure others would pass.
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Re: Pay off Car or Start ROTH IRA?

Postby WHL » Fri Feb 01, 2013 7:29 pm

I would absolutely contribute for the 2012 Roth IRA, then pay off the vehicle, then fund your 2013 Roth IRA.

Can't miss contribution years!
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Re: Pay off Car or Start ROTH IRA?

Postby gane » Fri Feb 01, 2013 11:16 pm

WHL wrote:I would absolutely contribute for the 2012 Roth IRA, then pay off the vehicle, then fund your 2013 Roth IRA.

Can't miss contribution years!


Thanks! This is the exact plan I'm thinking as well.
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Re: Pay off Car or Start ROTH IRA?

Postby wander » Sat Feb 02, 2013 5:16 am

gane wrote:I am so far ahead in car payments I don't actually have a car payment until next year (1/01/2014).

What does delay really mean? It seems the bank does not apply your extra amount to the principle.
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Re: Pay off Car or Start ROTH IRA?

Postby Niko » Sat Feb 02, 2013 8:42 am

Joining the chorus here, but contribute to the Roth first. If you're putting $2K/mo into the car, maxing a Roth with that money instead should only take about 3 months. In the long run you won't remember the extra 3 months you had a car payment, but you will notice that Roth contribution down the road.
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Re: Pay off Car or Start ROTH IRA?

Postby crowd79 » Sat Feb 02, 2013 9:08 am

How low is your income? It may be more beneficial to first open with a Traditional IRA, since contributions lower your 2012 AGI, which could qualify you for a large "Savers Credit", up to a 50% match on up to $2,000 contributed if your AGI is below $17,250, which you may not otherwise get with a Roth. Between $17,251-$18,750 gets you a 20% credit ($400). Between $18,751 and lower than $28,750 AGI gets you in range for a 10% credit ($200). Convert it to Roth then this year in 2013 or a future year. Unless your AGI is well below $28,750 threshold for instance .... let's say for instance it is $25,000 AGI, then contributing $5,000 to a Roth won't make any difference (Traditional IRA would lower AGI to $20,000, but still within range for a $200 credit either way, for example.). If your AGI is $32,000, then it makes sense to first contribute it to a Trad IRA to get your AGI below $28,750, in range for a $200 credit, and then convert it. I don't think even an initial $5,000 contribution to a Roth IRA would generate enough tax-free gains equivalent to being greater than the $200 in one year. If you are in the 15% tax bracket, your Roth IRA would have to earn over $1,334.00 in the first year to outdo the $200 credit, a 27% gain!....Just something to think about.
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Re: Pay off Car or Start ROTH IRA?

Postby grabiner » Sat Feb 02, 2013 9:35 pm

wander wrote:
gane wrote:I am so far ahead in car payments I don't actually have a car payment until next year (1/01/2014).

What does delay really mean? It seems the bank does not apply your extra amount to the principle.


My credit union did the same thing when I made a large advance payment. The payment was applied to principal (and thus the interest decreased), but the credit union also allowed me to treat the advance payment as covering my payment for the next few months; it thus listed a new "next payment due date" for the date that I could start paying again and still pay off the loan on the original schedule. I had no intention of doing this, so I had the regular monthly payment withdrawn from my checking account every month until I could make another large advance payment, and then a third one which paid off the whole loan.
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Re: Pay off Car or Start ROTH IRA?

Postby happymob » Sun Feb 03, 2013 5:03 am

I vote Roth as well. Ease of pulling out the contributions combined with limited space each year... fund it for 2012 if you can.
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Re: Pay off Car or Start ROTH IRA?

Postby ofcmetz » Sun Feb 03, 2013 9:10 am

I've was in your shoes with a similar decision and chose the ROTH. It's easier to make than in the old days when car loans were around 10%. :D
Showing up at the donut shop at 5 am to get them hot out of the oil is an example of successful market timing.
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Re: Pay off Car or Start ROTH IRA?

Postby midareff » Sun Feb 03, 2013 9:25 am

WHL wrote:I would absolutely contribute for the 2012 Roth IRA, then pay off the vehicle, then fund your 2013 Roth IRA.

Can't miss contribution years!


+1
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Re: Pay off Car or Start ROTH IRA?

Postby zebrafish » Sun Feb 03, 2013 1:10 pm

I would agree about funding a Roth this year as a priority.
I would then get rid of the car loan by paying it off
I would not refinance the loan if you really intend to pay it off
The savings in interest by refinancing your loan if you pay it off in the next 12 months is less than $200
I don't think this is worth the time/hassle factor
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Re: Pay off Car or Start ROTH IRA?

Postby gane » Mon Feb 04, 2013 10:05 am

crowd79 wrote:How low is your income? It may be more beneficial to first open with a Traditional IRA, since contributions lower your 2012 AGI, which could qualify you for a large "Savers Credit", up to a 50% match on up to $2,000 contributed if your AGI is below $17,250, which you may not otherwise get with a Roth. Between $17,251-$18,750 gets you a 20% credit ($400). Between $18,751 and lower than $28,750 AGI gets you in range for a 10% credit ($200). Convert it to Roth then this year in 2013 or a future year. Unless your AGI is well below $28,750 threshold for instance .... let's say for instance it is $25,000 AGI, then contributing $5,000 to a Roth won't make any difference (Traditional IRA would lower AGI to $20,000, but still within range for a $200 credit either way, for example.). If your AGI is $32,000, then it makes sense to first contribute it to a Trad IRA to get your AGI below $28,750, in range for a $200 credit, and then convert it. I don't think even an initial $5,000 contribution to a Roth IRA would generate enough tax-free gains equivalent to being greater than the $200 in one year. If you are in the 15% tax bracket, your Roth IRA would have to earn over $1,334.00 in the first year to outdo the $200 credit, a 27% gain!....Just something to think about.


60k+

runner9 wrote:I'd do the Roth. As for refi to 1.49%, how much money is your time worth? I'd probably do the refi but am sure others would pass.


Refinance does not seem worth my time.

happymob wrote:I vote Roth as well. Ease of pulling out the contributions combined with limited space each year... fund it for 2012 if you can.


I agree!
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