Pay Off Car Loan or Open Roth IRA?
For years, you had struggled to save up enough money to make a significant difference in your financial situation, and now you have that available. However, you’re torn as to whether you should pay off the rest of your car loan or open up a Roth IRA, and you have only enough money for one.
Your Financial Qualifications
Before you can even consider paying off the rest of your car loan or opening up a Roth IRA, you need to determine if you are eligible to do so. Many assume that they can just pay off their car loans whenever they want to, but this isn’t always the case. Some dealerships actually impose a penalty if you pay off the loan before the agreed-upon ending date. For the Roth IRA, you need to have under a certain amount of income to qualify. If you qualify for only one of these programs, then the decision has been made for you.
Consider Your Car Loan Amount
In the early stages of decision-making, you should evaluate how much is left on your car loan as opposed to how much you would put in the Roth IRA. Let’s say that you have just a few thousand dollars left on your car loan. Paying off the total amount and then opening up a Roth IRA in the next few months might be a real possibility. On the other hand, if you have four figures left on that car loan, you might end up depleting your savings account entirely.
How Many Years Are Left
On top of how much money you have left to pay on your car loan, you should also consider how many years are left in the current payment plan. For example, if you have only 12 months left, then you might want to stick with the plan and open up a Roth IRA at the end of the year. On the other hand, if it looks like you’re going to be paying this loan off monthly for the better part of the next decade, you may wish to reevaluate your financial situation.
What Will Remain in Your Account
No matter how much of your debt you are able to pay off or how much you are able to put away for retirement, you do not want to be left with absolutely no money now. Sit down and go through your finances. Figure out how much money you will have left in your savings account if you pay off your car loan and how much will remain if you open a Roth IRA. If the figure is zero for either of these options, that’s not the right one for you.
The Loan Interest Rate
Take all elements of your car loan into consideration when deciding if you want to pay it off. As long as no penalty exists for doing so, paying off a loan with an excessively high interest rate is a smart idea. This means that you will essentially save more money than you would have if you kept making those monthly payments. Not only will you save all of that money in interest, but you can also probably put that money toward a Roth IRA and still open one in the near future. Another alternative here would be refinancing your current auto loan to reduce your interest rate.
Your Proximity to Retirement
A Roth IRA plan is generally designed to help you in your retirement years. Although many people look into these programs when they are younger, you can certainly still consider one as you move on in years. The length of years you have before retirement can help you to decide if opening a Roth IRA is for you. Figuring out how much money you will have when you rewrite with a Roth IRA as opposed to the total sum if you did not get one now will tell you if this is the right choice for you.
Your Current Debt Situation
Many people worry about the amount of debt that they have. The good news is that a car loan does not qualify as revolving debt. Once you have paid off that particular loan, then you are not going to amass more debt onto the bill. Generally, revolving debt is worse for your credit score, so you don’t have to worry as much about that component. Still, paying off as much debt as possible is useful. If you are looking to wipe the slate clean and start your financial life over again, then paying off the car loan would be wise for you.
Your Current Retirement Plans
Assessing the situation involves not only looking at how much debt you currently have, but also what your current retirement plans are. Even if you feel that you are still far away from retirement, these years can sneak up on you before you even know it. If you do not have a retirement plan in place, then you should seriously consider a Roth IRA. You might decide to pay off the car loan now, and that is fine; however, do not just push the Roth IRA to the side. Revisit it in a short while.
Backtracking on Your Plans
Making these intense financial situations is often stifling because you really do not get an opportunity to change your mind. However, you can consider which plan is more flexible. With a Roth IRA, you can withdraw your contributions if you need to do so. For those who are not good with money, this might actually be a problem and lead to you spend most of your retirement money before you even reach that age. On the other hand, once you have paid off your car loan, you cannot ask for that money back from the dealership.
Your Future Financial Goals
You should also evaluate what your future financial goals are. For example, individuals who want to retire as soon as the door is open to do so will likely want to seriously consider the Roth IRA. On the other hand, you might be looking to purchase a home in the next couple of years and know that the amount of debt you currently have could be a problem with that endeavor. If you have plans to take out some other sort of loan in the near future, paying off the one you currently have will likely prove helpful.
Speak with a Financial Planner
Ultimately, no one right answer exists that fits with every person. In fact, you may have some clear benefits for both options here. Financial situations can often be overwhelming because there tend to be a lot of new terms and jargon associated with the situations. Instead of letting this decision overtake you, speak with a financial planner or an accountant. These individuals are trained to help you handle financial decisions, to review your accounts and current financial status and to make wiser choices for the future when it comes to your all of your money.
The decision to pay off a car loan or to open a Roth IRA is one that many people need to make. They can see both the short-term and long-term benefits of these plans, and considering the specific elements of your personal situation can help you to make the right decision.
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