Ask Money

Fund Roth or target debt

Chris Farrell Sep 29, 2011

Question: I’m in the middle of a debate with myself as to whether my wife and I should continue to aggressively pay off a variable 4.5% HELOC or if we should take a chunk of that payment and put it towards a Roth IRA.

We’re both in our late-twenties, have emergency funds and a few retirement accounts (IRA and 401k). Right now I’m putting 17% of our monthly income towards the HELOC but am only required to pay the interest (about 2% of our income). My reasoning is that it’s a sure 4.5% return but I’m wondering if now would be a good time to start pushing money into a Roth IRA for the tax savings. Thanks, Matt, Minneapolis, MN

Answer: One reason you’re going back and forth is that you can’t go wrong. Paying off debt is good. So is funding a Roth.

What I suggest is put some money into the Roth, say, $1,000. It could be more it could be less, but invest some sum of money in the Roth.

But I would focus on the debt. I would stay aggressive about paying off the home equity line of credit. For one thing, a 4.5% return on your money in the current environment is decent. For another, your household balance sheet will be much stronger for eliminating the debt.

So, instead of deciding whether to fund the Roth or attack the debt, I would mostly target the debt yet set aside something for the Roth.

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