Retirement saving should wait until credit cards are paid off

Q: I have $4,000 to put either toward my credit-card debt ($3,600 at 8.9 percent APR) or open a Roth IRA before the end of the year. If I put the money in the Roth, I would have the credit-card debt paid within 10 months. If I put it on the credit card, I will open the Roth with my tax refund in March. My thought is that the $4,000 with compounded interest would be worth more over time than the $500 I might end up paying by taking my time paying off the credit cards. What should I do?
S.W., via e-mail

A: "Pay off your credit card," says Rita Cheng, a certified financial planner in Bethesda, Md. This is the best investment you can make for your financial future. Once your credit-card debt is paid off, she challenges you to then use some of your "found money" – the cash that no longer goes to the credit-card company every month – to build up some savings.

Q: Everywhere I look, I see people updating and expanding their homes. Obviously, it's important not to just let your house go to seed. But if you had adequate space in your home and everything was functional and not completely hideous and you had, say, $50,000 to invest, what makes more sense: investing in updating the house or investing in stocks, bonds, CDs, etc?
D.M., Needham, Mass.

A: If this money is to be used because your home is in dire need of repair, you may have little choice. If it's simply to keep pace with the neighbors, it's another story altogether, says Charles Gray, a certified financial planner in Atlanta.

If you have $50,000 in a qualified retirement account earning an average of 7 percent per year, in 30 years it would grow to about $380,000. This amount could make a significant difference in your retirement years, he says.

But if you already have a solid financial plan in place and feel comfortable with your projected retirement income, spending $50,000 on improvements that will increase the value of your home could most likely provide a larger profit once you sell.

For most Americans, their home is their single largest asset. Keeping it in good condition is a lot like taking care of one's health. You can neglect it for a while, but if you let it go for very long, the results can be detrimental. General maintenance is very important, but before tackling a project of this magnitude check to see if you are on track for your long-term financial goals.

Q: I am thinking of investing in a savings plan that would eventually allow me to use the money for a down payment on a house. Are Roth IRAs better than traditional IRAs for this effort?
B.M.R., Brookline, Mass.

A: Neither of these options work best for you in this case, says Brian Jones, a financial planner and author of the just-published "Getting Started: The Financial Guide for A Younger Generation."

While both IRAs offer the ability to make a qualified distribution for a first-time home purchase (up to $10,000), Mr. Jones says that there are a number of issues you need to be aware of in order to satisfy government regulators that you haven't improperly dipped into the account.

If you use a Roth IRA, you're subject to income limitations and the need for the money to remain inside the Roth for at least five years. With a traditional IRA, you're also subject to income limitations (which inconveniently are different from those of the Roth IRA).

The complications with IRAs don't end there. But there's also a better idea, suggests Jones. Set up a bank savings account. Their interest rates are extremely competitive (some are now in excess of 5 percent), the money is liquid (meaning you can get at it any time you need and are not limited to touching it only after five years) and, most important, the money is not subject to stock market risk.

Investing money in an IRA typically assumes using an investment other than cash. And since all investments come with a degree of risk, you want to make sure your down payment is as safe and liquid as possible.

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