Alan wrote:
- quote -

Alan,
OK so you do a full $44k or close to it, ie you are self-employed or
control a business...missing pieces are your marginal tax bracket and
your plans for paying off the $200k HEL.

You're right that just looking at the horse race between a prime+1 loan
and investments sitting in a 401k, it's possible that your bottom-line
will net to a loss. But if you're avoiding, say, 45% in income taxes by
putting the full $44k per year into the 401k it changes the comparison,
especially with $100k of that debt being deductible. Let's say it is
45%...if you skip the 401k, you'll just end up with about $24k of the
$44k in your pocket to pay down the debt. Given that you are able to put
$44k/yr (or is it 36k?) your earned income is obviously fairly high, the
question is - how high, and what's the net tax savings?

On the $200k payoff...you may be one of those people with no intention
of paying off the debt (eg: "I'll be selling the house at $500k gain
next year," "the $200k is the only debt on the home, which I paid off in
full in 1989, and it's worth $800k now," "the 200k allowed me to fund
the 401k and I saved a bundle in taxes"). OR...opposite extreme...maybe
you've overspent your earnings by $200k over the past two years, making
it up with HE draws, and now you're underwater on home equity because
you live in one of those parts of Florida that's flooded with for-sale
signs. That was my point about there being a bigger question RE: that debt.

-Tad

I'm no expert, so I should probably just keep my mouth shut, but how
about a compromise? Loan or no loan, you're likely to need some 401k
money at some point anyway, so why not just take half the money you're
putting into the 401k and put that toward the loan?

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:aZmdnXFSu635xsrZRVn-gQ[at]comcast.com...
- quote -

My bets are a bit higher, but not much. My current calculations are
based on an 8.5% assumtion.

Alan wrote:

- quote -

With no match, and the loan rate being so high, two of the reasons to
stay with the 401 fade away.
If you are now in a high bracket (with 44K available each year, I'm
guessing you are) but you will retire to a lower bracket, 401 may still
make some sense, but it's not a slam-dunk.
Lastly, the fund choices within the 401. These aren't the 90's, the
expected return has been taken down from double digits to [my exp rate
of return over the next ten years centers on 8%. Curious to see what
others are using].
I'd say pay down the loan.
JOE

My 401 is complicated, but suffice to say 44k/yr (way more than 15k) is
"401k" money; and there is no match. Full basket of choices in the
401k. Home eq loan is a line of equity, no principal required, now I
can only affort to pay the interest. I would like to pay it down by
stop funding the ret. fund for several years. Since all income and
deferred savings will someday be taxed as regular income in the 401k,
why not use it now to pay down the onerous debt? The home eq loan is
prime plus 1. And, I believe only the intereste on 100k is tax
deductable!

Alan

Alan wrote:
- quote -

Alan,
First off if you're contributing to a 401k at a rate of $3k/month you're
about to use up your contribution limit for 2006. You can only defer
$15,000 of income in 2006. Or are you self-employed? Or over age 50? Do
you know what tax bracket you're in? Here are the brackets for 2006:
http://taxes.about.com/od/2006taxes/..._tax_rates.htm

There's a much bigger question here which is your basic plan for the
$200k debt and the associated home. Where did that money go? What's the
basic plan for paying it back?

And if you don't save in your 401k, will you have other retirement savings?

-Tad

Alan wrote:
- quote -

Now with the prime at 7.75%, you are at 8.75%.

I'd agree with you, except for one question - does your employer match
any of the contribution? If so, how much? Are you still going to put in
enough to get the match? After capturing the match, I'd pay the equity
loan off.
After tax, your loan cost is 5.775, but as you said, in the 401K the
return is taxed at ordinary income.

(Last I visited this issue, the person had a 5.25 fixed mortgage,
costing about 3.5% after tax. I advised putting the extra payments into
a low cost S&P index fund. With the lower cap gain rate, a market return
of 4.5% had him in the black)

JOE

How much of the $3k/month that you put into your 401(k) does
your employer match? Do you have a reasonable basket of
investment choices within your 401(k), e.g. stock index
funds, bond funds, etc.?

What exactly are the terms of your home loan (interest rate,
months remaining, fixed or adjustable)?

"Alan" <primatebehavior[at]yahoo.com> wrote
- quote -

Wouldn't it make sense to pay off a 200k home equity loan using the
3k/month I currently put into a 401K?
Depending on the stock market, the 401k may or may not recoup the
interest I'm paying in the home equity loan, but paying off the loan is
a guaranteed "rate of return" of prime+1 (x 2/3 since interest is
deductable).
And, the 401k will still be taxed at ordinary income someday anyway.

thanks