Building Wealth: Should You Pay Down Debt or Save for Retirement?

Near the end of every tax year, ads from investment companies and banks will fill the radio and television airwaves. These ads explain how contributing to your IRA or 401(k) gives you a tax break and ensures that you will be yachting in the Caribbean in your golden years. They make it sound both smart and sexy to top up your retirement savings- and it can be. What they don't tell you is that tucking money away for retirement while you still have a mound of debt negates those benefits and can put you in serious financial hardship. Here are four considerations to review when deciding whether to put extra funds in your retirement account or debt repayment.

1. Get a handle on your total debt load.

The first step in deciding which route to take is to understand just how much debt you have. Write down all debt, including mortgages, car loans, and credit card balances and the rates charged. Note any restrictions on early paydown and other obstacles to eliminating your debt.

Regardless of the path you choose, the first step is to make your existing debt shrink. Call credit card companies and ask for rate reductions. Discuss your mortgage or lines of credit with your bank and look into options involving rolling them over into lower rate products. Review where your payments go now. If you are paying more than the minimum payments on your debt, make sure that the excess is going to the highest-rate debt first.

2.Top up company 401(k) plans to the matching limit.

A company matching 401(k) program is akin to getting free money and should be taken advantage of. Companies with this type of plan will match your contributions into your 401(k) up to a certain limit. This limit is the minimum you should be paying into the plan every year to take advantage of this retirement funds boost.

3.Understand the tax consequences of carrying debt.

All the tax benefits of depositing money into your traditional IRA work in reverse if you carry debt. For example, if you have $1,000 and are trying to decide whether to put it in your IRA or against your mortgage, you must look at the tax advantages or disadvantages of each. If you are in the 25% tax bracket, making an IRA contribution saves you $250 in taxes. The plan allows you to contribute to it before taxes. However, when you withdraw this money in retirement, you will pay taxes on it then. What this means is that you aren't permanently getting rid of the taxes, only delaying them.

If you put the $1,000 against a mortgage at 5% with another ten years before pay off, you are saving $637.77 in interest minus 25% of that figure due to not having interest to deduct on your taxes. However, this is a permanent savings that saves you money each and every year.

4. Have a balanced wealth management plan.

You can have your cake and eat it too, but make sure you have chosen the flavor that's right for you. Your accountant or independent investment advisor can help you find the right balance between making retirement contributions and paying down your debt. Often, detailed budgeting and expense tracking can yield additional funds that you can use to further your wealth building goals.