Pay Off Debt or Contribute to Qualified Plan?

This tool demonstrates the financial impact of paying off existing debt vs contributing similar funds to a qualified account.

The advantage of putting money away for your financial future in a qualified account can be offset by non-deductible debt that exists in your current lifestyle today. Let's consider the following hypothetical example:

You have $6,000 available to either make a qualified plan contribution or to pay off existing non-deductible debt. If you make a qualified plan contribution, your employer will match up to $2,500 of the contribution. The plan generates a steady 5% rate of return. We will compare the results at the end of 30 years and assume the withdrawal tax bracket at that time will be 30%. We will also assume the existing debt carries an effective interest rate of 10%.

At the end of 30 years, the after-tax value of the qualified plan would be $26,716. However, the debt balance at interest would grow to $104,696. In this case, it is a better financial decision to use the money to pay off the existing debt.

The calculator uses two simple investment spreadsheets to solve for the future value of each scenario.

Growth of a single contribution to a qualified plan:

Personal Contribution: Assumed contribution (1st Year Only)

Company Match: Assumed employer match (1st Year Only)

Balance at BOY: Prior year end of year balance + any contributions

Interest Earned: Beginning of year balance * QP Investment rate of return

Balance at EOY: Beginning of year balance + interest earned

Tax Due on Withdrawal: End of year balance * withdrawal tax bracket (Last Year Only)

Net Withdrawal: End of year balance - tax due on withdrawal (Last Year Only)

Growth of Debt Liability Over Time:

Debt = QP Contribution: The assumed existing debt (1st Year Only)

Balance at BOY: Prior year end of year balance (or assumed existing debt in 1st Year Only)

Interest Due on Debt: Beginning of year balance * effective interest rate on debt

Balance at EOY: Beginning of year balance + interest due on debt

QP After Tax Balance at EOY: Calculated from QP spreadsheet values above

Debt Balance minus QP AT Balance: Balance at EOY - QP After Tax Balance at EOY