Under what circumstances might you receive some “found” money? You could get a year-end bonus from your employer, or a sizable tax refund, or even an inheritance. However the money comes to you, don’t let it “slip through your fingers.” Instead, consider these two moves: investing the money or using it to pay off debts.
Distinguish between “good” and “bad” debt. Not all types of debt are created equal. Your mortgage, for example, is probably a “good” form of debt. You’re using the loan for a valid purpose — i.e., living in your house — and you likely get a hefty tax deduction for the interest you pay. On the other hand, nondeductible consumer debt that carries a high interest rate might be considered “bad” debt — and this is the debt you might want to reduce or eliminate when you receive some extra money. By doing so, you can free up money to save and invest for retirement or other goals.
Consider tax advantages of investing. Apart from your mortgage, your other debts likely won’t provide you with any tax benefits. But you can get tax advantages by putting money into certain types of investment vehicles, such as a traditional or Roth IRA. When you invest in a traditional IRA, your contributions may be deductible, depending on your income, and your money grows on a tax-deferred basis. (Keep in mind that taxes will be due upon withdrawals, and any withdrawals you make before you reach 59½ may be subject to a 10% IRS penalty.) Roth IRA contributions are not deductible, but your earnings are distributed tax-free, provided you don’t take withdrawals until you reach 59½ and you’ve had your account at least five years.
Clearly, you’ve got some things to ponder when choosing whether to use “extra” money to pay off debts or invest. Of course, it’s not always an “either-or” situation; you may be able to tackle some debts and still invest for the future. In any case, use this money wisely – you weren’t necessarily counting on it, but you can make it count for you.
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Courtesy Edward Jones Investments-Cheryl Rebottaro, AAMS®, CRPC® Financial Advisor- Angie Schieffer, Branch Office Administrator-221 Mt Hermon Rd Ste F Scotts Valley. Tel # 831-461-9311 Email: angela.schieffer@edwardjones.com