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Rules for liquidating an ira

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How do you decide when to pay down loans and when to invest?

It turns out it can be a pretty personal decision, and there are a lot of factors that come into play, including loan interest rates, current interest rates and inflation, expected returns on your portfolio, current tax bracket, tax-sheltered accounts available to you, attitude about debt, and personal risk profile.

You’ve got a couple hundred thousand dollars worth of student loans hanging over your head, a big mortgage, and even a little bit of credit card debt.

But you’re also looking at a huge tax bill, and besides, you don’t want to work forever, so you’ve been studying up on 401Ks and IRAs.

If your credit card debt is accumulating interest at 22%, you should pay that down as your first priority. You won’t find that anywhere, with or without a tax break.

If your marginal tax bracket is 25%, and your loan interest rate is 8% AND your interest is fully-deductible, then your after-tax rate is 6%. Part or all of your mortgage interest may also be deductible for you. For many Americans, and even many physicians, their best investment, no matter their tax bracket, is paying down high-interest rate consumer debt.Of course, 2010 dollars were only worth 66 cents of a 1993 dollar.In essence, I borrowed 00, and only paid back 00, and I got to use the money for 17 years for free. When you’re borrowing money at rates below current levels of inflation or the long-term inflation rate (around 3%), you might want to think twice before rushing to pay it back.Remember, of course, to adjust both rates for your current tax situation.Borrowing money at a non-deductible interest rate of 5% to invest at 6% (4% after-tax) isn’t exactly a winning proposition.That high tax bracket investor might also decide to invest instead of paying down the loan because he saves a higher percentage of his income by contributing to his 401K or other accounts.