08 Dec Should I slow 401(k) savings to pay debt?

Q. I’m trying very hard to pay off my credit cards and I’m making good progress. It will take another two years unless I slow my 401(k) savings. How can I decide?
— Balancing

A. Congrats on trying to get a handle on your debt!

There are many strategies, and backing off of 401(k) savings is a possibility, but one that will also have an impact on your future.

You could contribute at least as much as you need to secure the maximum employer match, assuming there is one, said Marnie Aznar, a certified financial planner with Aznar Financial Advisors in Morris Plains.

She calls this a guaranteed 100 percent rate of return on your investment, which is certainly higher than the interest rate you are being charged on your credit card debt.

Once you have done this, she suggests you use any extra funds to continue to pay down your credit card debt as aggressively as possible.

Even if you do not receive a company match on your contributions, you will receive an up-front tax deduction for the contribution that you make to your 401(k) plan, assuming it is not a Roth 401(k), Aznar said.

“Given that, it is important to consider the total benefit to you from an income tax savings perspective as well as an anticipated rate of return perspective,” she said.

If the sum of these two — your tax savings and anticipated return on these savings — is greater than the interest rate you are being charged on your credit card, then you may want to continue to fund your 401(k) at the current rate and pay the credit card debt off more slowly, she said.

But if the interest rate on the card is higher than your combined tax savings and anticipated rate of return, Aznar suggests you pay your credit card down more aggressively and temporarily slow your 401(k) contributions.

“Most importantly, please be sure to increase that 401(k) contribution rate back up again as soon as you have paid off your credit card debt,” she said. “Additionally, once you pay off your credit card debt, I suggest that you divert any excess funds to a savings account in order to accumulate a liquid emergency fund of a minimum of three months of living expenses.”

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This post was first published in December 2016.