HomeRetirementI'm gonna do it.

I’m gonna do it.

After a great deal of thought and a little bit of fear and insecurity, I decided I’m going to do it. I am going to intentionally not complete one of my 2009 goals. It’s actually much more serious than a one-year-goal. This was a lifetime goal. My first year out of college (2007) I committed to fully contributing to my Roth IRA for the rest of my life. After only two short years, I will have failed at meeting that obligation.

For 2009, a single person, can contribute up to $5,000 in a Roth IRA. To date, I have contributed $3,500, meaning I have another $1,500 that could be contributed. I own three different mutual funds: a large blend, small blend, and international fund. This year, I contributed $2,000 to the large blend, $1,500 to the small blend, and the remaining $1,500 was to be allocated to the international funds.

I have decided against contributing to the international fund this year for two primary reasons. The first being that the international markets scare me right now, although they have been steadily increasing over the last six months I am freaked out by the global recession and how it has affected the world. I also fear that the market will drop again shortly. It has shot up a decent chunk over the last couple months and I feel like I might be buying at the top of an artificial high. Is it stupid that I am basing investment decisions off of fear? Absolutely! No one can predict the future and I would never not invest simply because of what “might” happen.

The second, and primary, reason I am holding off on the contribution this year is because I want to throw the $1,500 at my student loan instead. My student loan interest rate is at 7%, so by using that $1,500 there I am locking in a 7% rate of return on that payment, which isn’t too shabby. Not only does it guarantee a 7% rate of return, but it also reduces my total debt and reducing my total debt makes me smile 🙂 I am really focusing on paying my student loan off in the next year, so this is one method to make that happen a little quicker.

Some will argue that I should not be contributing to my Roth IRA at all while I still have debt, while others will say that I am crazy for not sticking to my Roth IRA goals. But I don’t think that anyone will argue that locking in a 7% interest rate is crazy. What would you do in my situation?

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  1. Roth IRA is a tax shelter. If you are really concerned about the markets, open a Roth IRA savings account or CD and put the $1500 in there. When you're more comfortable with the markets, you can move the money into your Roth mutual funds.

    Max out your Roth while you're young and you can. At some point, you may end up with the "problem" of making too much to contribute to a Roth. If you're lucky, that could be sooner than expected.

  2. I would suggested finding balance. Perhaps put $1000 towards your student loan and $500 in that IRA savings deal that Elliott mentions above…

    I'm not to savy with the US of A's retirement verbage so I can't be more help specifically – but I can reiterate that balance is key.

  3. I'd probably do the same as you. Sure, in the long term it may not be the best, but sometimes its worth more to have a little peace of mind. 7% is on the high side for a student loan, so I don't think you're making a bad decision by paying that off before completely maxing your Roth IRA.

    Oh, and just because you make a goal doesn't mean you HAVE to check it off your list. Priorities change, situations change. Its ok to shift goals! (As long as you're not doing it every week, or something like that.)

  4. I graduated in 2006 and was able to lock in an IR of 4.75% on my loans, suckaaaa!!

    But seriously, 7% sounds crazy a lot.

  5. You know, I did the same thing, constantly deciding between Sallie and investing, and it's hard. It takes too much emotional energy.

    The thing is, Sallie will never go away unless she is your OBSESSION. I say give it a year, focus your energy on her. Then that witch will be almost out of your life, and you can invest all you want.

  6. Hmmm… if I were you, I'd put in the Roth IRA, because chances, tax-free compounding! But then again, I don't think it'll hurt you that much if you just concentrate on paying off your loan and delay your Roth IRA contributions for a few years. Mathematically, which options come out on top… who knows. But both seems like sound financial practice to me.

  7. We are talking a difference in IRR of maybe 2%, and something along the lines of $5,000 over 35 years. Pretty sure it is a waste of time analyzing the decision this much. Do whatever will make you feel better tomorrow.

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