I have a decision to make and I'm not sure what the best course of action is for me at this point. I would like to get your thoughts on how you would approach my scenario. Thank you in advance!
Here is the short version of my situation, some assumptions, and the choices. I have an extra $1200 a month in my budget that I would like to allocate to my 401k. Which course of action do you feel makes the most sense?
- Pay down my 401k loan with the extra funds
- Contribute after-tax to the 401k and later convert to roth
- Something else??
- I'm currently maxing the pre-tax portion of my 401k
- I'm currently maxing my roth and a spousal roth
- I currently have a large loan with my 401k
- My plan allows after-tax contributions
- I don't have an HSA available or any other pre-tax vehicle that I'm aware of
- I have an emergency fund in place in case of unexpected job loss
- Only other debt is mortgage
I took out a 50k 401k loan about 1 1/2 years ago to generate a slightly higher return for some of my bond allocation. After taking out the loan I rebalanced out of bonds to account for the loan. I put the money in Ally earning 1% and the loan has a 4.25% interest rate with a $24 a year fee. The original plan was to pay the minimum I could for five years to maximize the amount of interest I pay. I still have all of the cash and can pay it off at any time.
As my 401k plan allows post-tax contributions and in-service distributions I am very inclined to contribute the $300 a week as an after tax contribution. Then in December convert whatever the balance is over to my Roth 401k. However, there is a part of me that is, for some reason, uncomfortable with the idea of maintaining a big loan balance while contributing post-tax with funds that could be used to reduce the balance. It just feels a bit wrong. And yet mathematically I don't think it is. So, what would you do?
Thank you again for your time!