pay off debt or fund my retirement

Here is my situation.

I currently have 14,000 debt all credit card, and no emergency fund. At my current salary and the rate I am going, I should be done with my cc debt in about 10 months. It’s going to take me somewhere around a year and a half to get the debt paid off and have a fully funded emergency fund.

I am 29 years old, single and will be 30 in March. I make 56,200 per yr. My gross checks are 2,344 every 2 weeks. After taxes I come with about 3,000 – 3200 per month depending if I get overtime or not. Next yr this will be a little more b/c I
Will adjust my withholdings

My only bills are rent 750.00 car insurance food & dry cleaning. Cable utils, & internet are included in my rent.

I know if I don’t contribute now to my retirement I am going to miss the boat while things come back up, but I also need to pay off this debt and fund this emergency fund quickly and funding retirement would slow that down.

My employer matches 50 cents on every dollar up to 6 % in my 401k. I also have the option to contribute to my Roth ira.

I have a total of about 12,000 in current retirement savings.



I really need some advice here.

Giacona,

Why not do it all?

Start by contributing 6% to your 401k. Your contributions are tax deferred. Becasue of that, you will see little change in take home amount. And the employer match is free money to you.

Next adjust your withholding now, both Federal and State. Don't wait. Why should you give the governments a free loan? Right now California is paying it's tax refunds with an I.O. U., not a good check. Some other states may find it necessary to do this next year.

You need an emergency fund to hopefully ward off future CC debt.
This fund should be the amount of your car insurance deductable, plus your next car insurance payment. That way you can afford to have your car repaired if necessary after a collision, and you can pay for your car insurance in one payment. This will avoid those nasty fees the car insurance industry charges for monthly payments. And do not forget to replenish the emergency fund when you make that payment.

How long did it take for you to accumulate your CC debt? Keep paying your CC debt. And when that is paid off, accumulate about 6 months of living expenses in your emergency fund. Life will become much easier then.

Let us not forget an accumulation fund for future big ticket items, your next vehicle.

Also consider some room for funding your ROTH IRA. The younger you are when you start a ROTH IRA, the better the ROTH will work for you. You do not need to fully fund your ROTH IRA, but get it started with a small amount. Starting a ROTH IRA is important. There are some funny rules about ROTH IRAs, but if you have one today, you will be OK because the IRS looks at all of your ROTH IRAs as ONE BIG ROTH IRA (same applies to TIRA).

1) Start Contributing to the 401k, something - 6% would be very good, but less is OK
2) Adjust your withholding NOW.
3) Start your emergency fund, target $1,000 for now.
4) Start a ROTH IRA with some amount. Usually a bank or Credit Union has low minimums.
5) Continue to pay your CC debt. Put your extra money here.
6) Build that emergecy fund to 6 months living expenses.

After mulling it over I have decided to fund the 401k up to the 6% match. It's free money so I cant pass it up and it's not going to make or break me while I pay off this debt. The only thing is I wont be 100% vested for another 4 years but I do get 20% vested each year.

I am also going to take 1,000.00 and put it into a MMA for an emergency fund and once the cc debt is paid I will try and fully fund my emergency fund for 6 months of expenses. The good news is that I have a fixed rate of 5.9 until apirl on this credit card and it;s all one one card. This should be paid of by then.

Once The cc debt is paid off and the emergency fund is in place I will then do the max of 5000 per year into my roth and the 401K. Hopefully the market does contiune to rebound and stabliaze so I don't miss the boat.

Giacona,

One thing you should do even at a minimum, make a contribution to your ROTH IRA.
The ROTH IRA has ha 5 year clock to be qualified. That clock begins on January 1 of the year you make your very first ROTH IRA contributon (or conversion). The clock on your first ROTH IRA counts for all ROTH IRAs you will ever have.

To start the qualifying clock on January 1, 2009:
Conversions to ROTH IRA must be made in 2009 (the calendar year).
A contribution to a ROTH IRA as late as April 15, 2010 would work the same.
Start that Qualifying clock now.

what do u mean by a 5 year clock to be qualified?

I opened a roth ira last year but didn't the contribuite the max 5000 b/c i couldnt afford to. I think i invested about 800.00 or so.

So far for 2009 I didn't do anything. Once my debt is paid and have fully funded emergency fund I plan to do 401k and ira at max.

so i am confused on your statment please explain

Giacona,

Because you opened a ROTH IRA last year (2008) you are OK.

The 5 year clock for ROTH IRA qualification must take place before we can take tax free earnings from our ROTH IRA.

Distributions from a ROTH IRA are ordered:
- First to come out is our Annual contributions. We can take a distribution of our annual contributions at any time for any reason, tax and penalty free.
- Next to come out of our ROTH IRA is our Conversion amounts. Conversion money can be distributed from our ROTH IRA at any time for any reason free from income tax.
Conversion money must remain in the ROTH IRA for 5 years before it can be distributed penalty free.
- Last to be distributed from our ROTH IRA is gains. The ROTH IRA owner must be age 59.5 years of age and the ROTH IRA must be open for 5 years before gains can be distributed tax and penalty free.

Distributions from a ROTH IRA are ordered:
- First to come out is our Annual contributions. We can take a distribution of our annual contributions at any time for any reason, tax and penalty free.
- Next to come out of our ROTH IRA is our Conversion amounts. Conversion money can be distributed from our ROTH IRA at any time for any reason free from income tax.
Conversion money must remain in the ROTH IRA for 5 years before it can be distributed penalty free.
- Last to be distributed from our ROTH IRA is gains. The ROTH IRA owner must be age 59.5 years of age and the ROTH IRA must be open for 5 years before gains can be distributed tax and penalty free.[/QUOTE]
Clyde,

How are these amounts (annual contributions, rollovers, gains) calculated, say, 30 years down the road? Is it up to the taxpayer to determine this upon withdrawal, or should the account manager(s) be handling these details?

I am many years away from retirement and (hopefully) and withdrawals from my Roth IRA, but this is good information to have beforehand, IMO.

Thanks,

Dingo

Don't see it making any difference that far in the future as you'd be past all of the restrictions for withdrawals.

Distributions from a ROTH IRA are ordered:
- First to come out is our Annual contributions. We can take a distribution of our annual contributions at any time for any reason, tax and penalty free.
- Next to come out of our ROTH IRA is our Conversion amounts. Conversion money can be distributed from our ROTH IRA at any time for any reason free from income tax.
Conversion money must remain in the ROTH IRA for 5 years before it can be distributed penalty free.
- Last to be distributed from our ROTH IRA is gains. The ROTH IRA owner must be age 59.5 years of age and the ROTH IRA must be open for 5 years before gains can be distributed tax and penalty free.
Clyde,

How are these amounts (annual contributions, rollovers, gains) calculated, say, 30 years down the road? Is it up to the taxpayer to determine this upon withdrawal, or should the account manager(s) be handling these details?

I am many years away from retirement and (hopefully) and withdrawals from my Roth IRA, but this is good information to have beforehand, IMO.

Thanks,

Dingo[/QUOTE]

In the May timeframe every year you make a contribution to an IRA, the IRA custodian sends form 5498 to you and to the IRS. So yes, you keep the record and so does the IRS.

Check out Page 68 of IRS Pub 590 the chart here shows how your ROTH IRA distributions can be qualified, taxed or penalized.