Should the Tax Refund Be Used for Car Loans or Retirement Benefits?
Each Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at alicia.adamczyk@lifehacker.com.
This week’s question came via email from Jack McFarlane:
My tax return is due soon and I won’t waste it on any urgent repairs or anything frivolous. I also just got a significant salary increase. I want my money to work for me, improving my financial situation. Should I stick it in my 403 (b) (currently at 5%) or pay off my only debt, my car loan (currently at 3% APR).
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Always save a little for retirement
Your first instinctive urge might be to send your tax refund to retirement, which is fine – you might be tempted to think of it as “extra” money and spend it right away, but as you well know, there are other ways to make money. It works better for your long-term plan, even if it is not that great in compensation.
The advantage of 403 (b) is that it lowers your taxable income, which should be taken into account. And you want the employer to match the offer. But outside of the match, you don’t have to save on just 403 (b), which are quite notorious for their poor investment opportunities and high commissions. Before making any decision, take a close look at your plan’s options – what are the fees? What remedies are offered? Is there a deadline ? Does your employer offer a 457 plan?
“The odd comment was ‘my 403 (b) (currently five percent),’” says Joseph Sroka, chief financial officer and chief investment officer of NovaPoint Capital LLC. “If there is an investment that pays a five percent rate, it could be a bond fund with a current yield of five percent, whose asset value may decline as interest rates rise, or some type of insurance product that may have high fees. I would encourage the reader to explore all of the options in the 403 (b) plan and choose the asset allocation that best suits their risk tolerance and investment objectives. “
If you’re not happy with your options, look at the Roth IRA and remember that it doesn’t have to be all or nothing (and if your employer offers Roth 403 (b) , this may be a better option for you than a traditional account). Roths generally offers more features for a lower price. “Overall, 5% yield is solid and pre-tax, but I’m skeptical about that,” says Dan Otter, owner of 403bwise . “Another option is to [send] some to the Roth IRA with Fidelity, T. Rowe Price, TIAA or Vanguard, and some to get paid for the car.”
Do not prioritize the payment of a car loan
In general, however, don’t worry about debt. The interest rate on car loans is quite low (above four and a half percent on average ), and with the increase in rates, you can hardly get a better deal. “It’s okay to have cheap debt if the reader isn’t in personal financial difficulty, especially if the difference in monthly cash flow can be directed towards a tax-exempt plan,” such as 403 (b), says Srika.
Amanda Steinberg, founder of the Daily Worth , agrees. “Congratulations, you can save money,” she says. “Based on what you’ve shared with me, I recommend your 403 (b). While your auto loan is technically three percent per annum, it is not ‘expensive’ debt and your overall financial picture will be brighter if your retirement portfolio is replenished. ” Think about it: you were able to get a car loan at a fairly reasonable rate. You cannot finance your pension with a loan.
However, you can increase your pension contributions by raising and use the tax refund to pay off your car debt if it really bothers you.
“With a pay rise, you get an extra amount of money for every paycheck you haven’t had before, which can make it especially easy to channel at least some of that amount into your retirement plan. Since it wasn’t part of your paycheck before, you can save more for retirement and don’t miss it, ”says Jamie Ole, president of Lincoln Financial Group’s retirement services. “Then with that tax return, you can pay off your car loan, knowing that you are simultaneously reducing your debt and increasing your regular contributions to your retirement plan.”
You cannot take out a retirement loan, but you also cannot pay the price for peace of mind.