Tax advantaged accounts vs moderate debt

[PharmD2021]

I can’t really find good analysis on this topic. Doesn’t it make sense in the long term to max tax advantages accounts before paying moderate debt (5-7%)? Of course credit card debt is completely different.

To me it seems to make sense for 401k to take the taxes off the top. For Roth if you take even a full year off to pay down moderate debt you’re losing so much in tax free growth vs putting 7k on moderate debt.

Can anyone share some insight?

[Hyperchicken]

Tons of threads on debt payoff vs investing so it's hard to add anything that's not already been said.

I'll add this much though - traditional vs Roth is a separate orthogonal choice. Best to address it separately.

As always, Bogleheads wiki is of great help.

https://www.bogleheads.org/wiki/Paying_ ... _investing
https://www.bogleheads.org/wiki/Traditional_versus_Roth

[PharmD2021]

Tons of threads on debt payoff vs investing so it's hard to add anything that's not already been said.

I'll add this much though - traditional vs Roth is a separate orthogonal choice. Best to address it separately.

As always, Bogleheads wiki is of great help.

https://www.bogleheads.org/wiki/Paying_ ... _investing
https://www.bogleheads.org/wiki/Traditional_versus_Roth

Thanks, may just not know how to search for it. Appreciate it

[Hyperchicken]

Thanks, may just not know how to search for it. Appreciate it

These are usually topics about mortgages and car loans simply because they fall into this range of interest rates. The advice can be generalized for any loan type, for the most part. You may get more pointed responses by specifying the type of debt that you have. Up to you and good luck.

P.S. Be prepared for there not being a singular correct answer, and the answer being "it depends on the totality of your financial circumstances".

[PharmD2021]

Thanks, may just not know how to search for it. Appreciate it

These are usually topics about mortgages and car loans simply because they fall into this range of interest rates. The advice can be generalized for any loan type, for the most part. You may get more pointed responses by specifying the type of debt that you have. Up to you and good luck.

P.S. Be prepared for there not being a singular correct answer, and the answer being "it depends on the totality of your financial circumstances".

Yeah I get that, I guess I was looking for a math answer $7,000 invested for 35 years vs putting that $7,000 on a 6% student loan and missing 35 years of compounding growth.

[gotoparks]

I don't have the math answer but student loan debt is good debt because it enables people to get better jobs than otherwise. You are almost always better off making payments and keeping your money in the stock market for the long term. Lots of people on this forum are debt adverse and will recommend paying off debt even at low interest rates. Take someone like Warren Buffet who advises on taking out 30 year mortgages. He took out one or two and paid off over time even though he could have just paid outright.

[retiredjg]

Here is what the Wiki has to say about it.

https://www.bogleheads.org/wiki/Priorit ... nvestments

[Yarlonkol12]

These are usually topics about mortgages and car loans simply because they fall into this range of interest rates. The advice can be generalized for any loan type, for the most part. You may get more pointed responses by specifying the type of debt that you have. Up to you and good luck.

P.S. Be prepared for there not being a singular correct answer, and the answer being "it depends on the totality of your financial circumstances".

Yeah I get that, I guess I was looking for a math answer $7,000 invested for 35 years vs putting that $7,000 on a 6% student loan and missing 35 years of compounding growth.

Math would give you the answer for paying off a 6% debt, but math can't predict investment returns

[JBTX]

I can’t really find good analysis on this topic. Doesn’t it make sense in the long term to max tax advantages accounts before paying moderate debt (5-7%)? Of course credit card debt is completely different.

To me it seems to make sense for 401k to take the taxes off the top. For Roth if you take even a full year off to pay down moderate debt you’re losing so much in tax free growth vs putting 7k on moderate debt.

Can anyone share some insight?

I would agree. I would generally fund any tax advantaged account over paying down a 5-7% debt. But it is somewhat dependent on the situation.

[trueblue63]

When you do the math, make sure you calculate everything in todays dollars, it's really easy to make it look like the investment is a slam dunk by not considering long term inflation.

Check on what the amount is if you invest the free cash flow created by eliminating debt vs paying the debt over time and investing the smaller amount. That make sense?

[PharmD2021]

When you do the math, make sure you calculate everything in todays dollars, it's really easy to make it look like the investment is a slam dunk by not considering long term inflation.

Check on what the amount is if you invest the free cash flow created by eliminating debt vs paying the debt over time and investing the smaller amount. That make sense?

Right, so for example if I were to aggressively pay off debt over 2 years then invest all those payments for the remaining 28 years vs investing for 30 years and paying debt for 10 years

[Hyperchicken]

If your investments will yield > 6% in the next 30 years, you're better off investing and paying minimum on the loan.
No one can tell what stock market returns will be in the next 30 years.
Up to you if you prefer 6% guaranteed returns vs. whatever stock market returns will be in the coming decades.
Math is simple; the answer to your question is not.

[Big Dog]

These are usually topics about mortgages and car loans simply because they fall into this range of interest rates. The advice can be generalized for any loan type, for the most part. You may get more pointed responses by specifying the type of debt that you have. Up to you and good luck.

P.S. Be prepared for there not being a singular correct answer, and the answer being "it depends on the totality of your financial circumstances".

Yeah I get that, I guess I was looking for a math answer $7,000 invested for 35 years vs putting that $7,000 on a 6% student loan and missing 35 years of compounding growth.

and don't; forget, paying down 6% of anything is a guaranteed return but not so for any investment.

[trueblue63]

When you do the math, make sure you calculate everything in todays dollars, it's really easy to make it look like the investment is a slam dunk by not considering long term inflation.

Check on what the amount is if you invest the free cash flow created by eliminating debt vs paying the debt over time and investing the smaller amount. That make sense?

Right, so for example if I were to aggressively pay off debt over 2 years then invest all those payments for the remaining 28 years vs investing for 30 years and paying debt for 10 years

Yes, you want to get as close to an apples to apples as you can, leaning into the scenarios most likely to happen.

[firebirdparts]

Doesn’t it make sense in the long term to max tax advantages accounts before paying moderate debt (5-7%)?

Fair enough. Both are better than spending your money on bubble gum and Barry Manilow records. Whether it's "best" could be modeled if you cared to guess the returns of what you're planning to invest in and how you see risk. If you are going to max your 401k and then buy bonds paying 4%, then obviously it takes time to figure out who wins. Whether or not you can deduct the debt interest would also be an immediate consequence, but not much hope there. Difference of itemizing is small for a regular person these days, with the standard deduction being so large.

[jj45]

Yeah I get that, I guess I was looking for a math answer $7,000 invested for 35 years vs putting that $7,000 on a 6% student loan and missing 35 years of compounding growth.

One math answer is to imagine investing the funds and then take withdrawals from the portfolio to make the debt payments. Now you are in the 4% rule scenario and can use the various safe withdrawal calculations. If your loan is a fixed rate, you have to adjust the usual calculations to make a fixed withdrawal rather than the usual inflation adjusted withdrawal. Then the safe withdrawal rate rises above 4%. You also can't just withdraw at the interest rate on the loan, you have to withdraw enough to cover both principal and interest.

In your example, a fixed rate $7k, 6%, 30 year loan, has payments of $42/mo or $504/yr, so you need a 7.2% withdrawal. Using cfiresim with a 100% stock portfolio and no inflation adjustment for the withdrawal, I find a 7.2% withdrawal is successful 68.8% of the time. So lot's of times you lose, but the median is you end up ahead by $11.7K.