Should I contribute to my 401k or pay down my loans?

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Quick Answer.

You should contribute to your 401k if your loans have an interest rate under 5% and your employer offers a match. Contribute, at least, to the max employer match. Otherwise, use the money to pay down your loan.

This is why.

• 401k contributions are almost always tax-deductible. This will save you some money in taxes each year. Usually, about $25 for each $1,000 in 401k contributions. Keep in mind that there is a maximum yearly amount you can contribute — for 2021 is $19,500 per employee.
• Most employers match a portion of your 401k contributions. If you don’t make contributions you are walking away from that extra money. It varies a lot between employers, but it is usually about $6 for each $1,000 contributed.
• Most 401k plans will return between 5% and 8% a year. So, with your matching and tax deductions, you are likely to generate between $80 and $160 in earnings each year for every $1,000 contributed. So, if your loans cost you less than the money you will make, it is better to contribute to your 401k. Otherwise, it’s better to pay down your loans.

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