Pay off Debt or Contribute to IRA?

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Our situation. 28 years old. 35k in student loan debt, with rates between 4-7%. 15k left on a car note at 2%. My wife contributes to her 401k the minimum required to get employer match. I work for the government so I contribute towards the pension plan. I struggle trying to decide what to do with the excess money after the CC are paid off in a few months.

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Since you are already contributing to a 401k and a pension plan, I would use the extra money coming in to get rid of the debt. Once the debt is clear then I would open up a ROTH and max that sucker out along with my 401k contributions.

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35k in student loan debt, with rates between 4-7%

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Pay off the high interest ones as quick as possible. Then, although it may not make the most math sense, I'd split the extra between the 4% loans and retirement. That would be more your personal preference for extinguishing the debt than running all the numbers.

pay off your debt, while it's easy to do so.
you never know what may come next

The best financial choice is invest but the safe and lower stress option is to eliminate the debt.

There is a value on true financial freedom with no debt. You have to figure out what that is worth to you before making the best decision for yourself.

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Should we hammer away the student loans and get that paid off ASAP? It would be nice to then quickly pay off the car note and only have a mortgage left. On the other hand, I think the most sound financial plan long-term would be max out both our IRA’s and then throw the rest at the student loans/auto debt.

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I think a combination would be best, because will IRA contribution limits increasing to $12,000 next year, you could max out your contributions and still have $12,000 per year to pay off the extra loans.

And due to the decompounding nature of amortized debt, if you put all $2000 per month towards the loans, your total payment won’t be considerably more than if you applied half of that. In addition, because the interest is deductible, up to $2,500 per year, the true costs of extra interest up to the limit is less than that amount, and it lowers as you get into higher marginal tax rates, as long as your MAGI is less than $165,000. And by my quick research, assuming you live in LA, it looks like state income taxes are also deductible

Here is a quick analysis, with the assumptions that given your extra $2,000 a month in disposable income, your MAGI would put you in the 22% federal income bracket and 6% state income bracket, which results in 28% for ever deductible dollar of interest. I'm also using the midpoint of the rates at 5.5% and since you're 28, I used 6 years as the time remaining (from January) on the loan.

$0 extra towards loans after 72 months
Total Months of Payment--72
Total Payment Amount--$41,172
Total Interest Payment Amount--$6,172
Total Tax Savings--$1728
Total Payment minus Tax Savings--$39,443
Total amount contributed to IRA--$0
Total IRA Amount with 10% annual gains--$0
Loan Costs minus IRA Amount--negative $39,443

$1000 extra towards loans after 72 months
Total Months of Payment--24
Total Payment Amount--$37,002
Total Interest Payment Amount--$2002
Total Tax Savings--$561
Total Payment minus Tax Savings--$36,441
Total amount contributed to IRA--$72,000
Total IRA Amount with 10% annual gains--$97,529
Total Net IRA minutes Loans--$66,088

$2000 extra towards loans after 72 months
Total Months of Payment--15
Total Payment Amount--$36,222
Total Interest Payment Amount--$1,222
Total Tax Savings--$342
Total Payment minus Tax Savings--$35,880
Total amount contributed to IRA--$60,000
Total IRA Amount with 10% annual gains--$76,950
Total Net IRA minutes Loans--positive $41,070

So as you can see being able to max out your IRA for an extra year, and putting half towards the loans and half towards the IRA, will only cost you $780 dollars in more interest and $561 dollars after deducting taxes than if you put all $2000 towards your IRA.

However, due losing a year's worth of the $12,000 contribution, and 15 months of gains, you'll have $20,579 less in your retirement after 72 months (original loan timeline) if you put it all towards the loans at once.

And after 30 more years of compounding gains, the $20,579 difference becomes a $359,091 difference. And you could probably maximize the gains further, if put the extra amount towards the highest interest debt first and/or pay more towards that proportionately.

But personally, I think the benefits of paying the loans 9 months earlier and saving $580 are not worth the opportunity costs of not paying able to contribute the $12,000 towards your IRA for a year, plus the 15 extra months of compounding gains that will be missed, especially when the net difference will continue to have costs as they compound for decades more.

What you may also want to do is something like putting the $2000 during the first 9 or 10 months towards the loan, then put the $2,000 during the last few months of the year, and the months that you can still contribute to an IRA before filing taxes at the beginning of the following year towards the IRA. Or maybe some combination, where you put more towards the loan upfront, where you can make the biggest dent into the interest costs, then gradually put less towards the loans and more towards the IRA. That way you can maximize the cost savings, maximize your IRA, and minimize the opportunity costs of missing gains.

Your analysis also requires that income doesn't decrease.

This is my personal issue with not tackling debt first. It means your are locked in to a minimum income requirement situation and leaves less room to handle life changes. You reduce the flexibility in your life choices.

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Your analysis also requires that income doesn't decrease.

This is my personal issue with not tackling debt first. It means your are locked in to a minimum income requirement situation and leaves less room to handle life changes. You reduce the flexibility in your life choices.

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In my industry it would be completely my fault if my income decreases, as in I get fired. I think that's a very reasonable assumption if they're professionals in a stable industry.

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What if a great career opportunity comes along but it takes a short term income reduction for long term gain?

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like say...open your own business?
personal debt is a killer

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You're caveating your arguement because you are against personal debt as a principle. All of those things are valid, but not part of the OP so why are you considering them in the advice given in this situation.

I don't have a spouse so why would I use that when calculating my finances?

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The OP said up front he is married.

I am not against debt and made that clear.

Nothing about my post is about principle.

The only point I am making is there is costs to keeping debt that is very hard to quantify and too often people don't consider it.