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Max out 401k or put it towards student loans?

Home Retirement Accounts Max out 401k or put it towards student loans?

  • Avatar DDStigers 
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    Status: Dentist
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    Joined: 05/11/2019

    I currently have $228,000 in student loans at 5.75% interest. My monthly payment is $2500. I am also planning to contribute $2000 a month to my 401k and roth IRA. Would it be smarter to put that extra $2000 to my student loans and then fund my retirement accounts after I’ve paid off my student loans completely?

    #238752 Reply
    CordMcNally CordMcNally 
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    Status: Physician
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    Joined: 01/03/2017

    I would try to refinance your loans and then I would max out my 401k, Roth, HSA (if available), then pay extra towards the loans.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #238755 Reply
    Liked by Craigy, coug16, MPMD, G, Tim
    Avatar Tim 
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    Status: Accountant
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    Joined: 09/18/2018

    Your tax savings will exceed the interest on your contributions.

    #238764 Reply
    Liked by Craigy
    Avatar highdoseamox 
    Participant
    Status: Physician
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    Joined: 05/18/2019
    Splash Refinancing Bonus

    I figure my student loans and my retirement savings come off the top before all other expenses. Have to max 401k first then throw a bunch at student loans. Even as a primary care pediatrician, putting about 17% toward retirement and 4K/month to loans + 2 kids in daycare. I considered stopping retirement savings to pay more to student loans but the tax savings made it a pretty simple choice to do both. Evaluate your other spending so you can make this work!

    #238788 Reply
    Lordosis Lordosis 
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    Joined: 02/11/2019

    Make sure you are getting 20% towards retirement then after that you can decide if you want more to loans or more to retirement.  Depending on your salary and accounts available you may or may not max out everything.

    Make sure you are getting any and all available match.

    You can argue that you might want to pay down loans before investing in a taxable account or a non governmental 457.  However with a 401k, HSA, or your RIRA it is space you will lose if you do not use it.

    If you cannot put 20% towards retirement and get loans paid off in less then 5 years look for ways to decrease spending.

     

    Good luck!

    “Never let your sense of morals prevent you from doing what is right.”

    #238808 Reply
    Avatar Peds 
    Moderator
    Status: Physician
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    Joined: 01/08/2016

    No. Retirement first. Aim for 20%. The rest then goes to loans.

    #238810 Reply
    Liked by Zaphod, Lordosis
    aelliscpacfa aelliscpacfa 
    Participant
    Status: Financial Advisor, Accountant, Small Business Owner
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    Joined: 08/13/2019
    Earnest refinancing bonus

    What a fun question!

    Let’s assume you don’t get a deduction for the Student Loan Interest that you pay each year.  With that in mind, paying down the loan is the same as a guaranteed 5.75% after tax return – correct?

    My current “best case scenario” for US Equity over the next decade is a 7% return.  (Please don’t consider that a prediction.  That is just the number I sort of hope for with my own money.)  To the extent that 7% return is in a tax-deferred account, it will eventually be taxed.  Let’s assume a 22% tax rate in retirement.  That brings the after tax return on equity to 5.46%.

    The 5.75% guaranteed return looks attractive compared to 5.46% on all equity portfolio.

    Disclosure:  I am a stock market Bull.  All personal and family money is 100% Equity and 100% in tax favored accounts (529, IRA, Solo 401K).  I stuff all of my money into the stock market as soon as I earn it.  But, I do love a guarantee.  This looks like a tough decision to me.

    Andrew B. Ellis, CPA, CFA, CFP

    #238856 Reply
    Liked by Craigy, DDStigers
    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 3073
    Joined: 01/03/2017

    What a fun question!

    Let’s assume you don’t get a deduction for the Student Loan Interest that you pay each year.  With that in mind, paying down the loan is the same as a guaranteed 5.75% after tax return – correct?

    My current “best case scenario” for US Equity over the next decade is a 7% return.  (Please don’t consider that a prediction.  That is just the number I sort of hope for with my own money.)  To the extent that 7% return is in a tax-deferred account, it will eventually be taxed.  Let’s assume a 22% tax rate in retirement.  That brings the after tax return on equity to 5.46%.

    The 5.75% guaranteed return looks attractive compared to 5.46% on all equity portfolio.

    Disclosure:  I am a stock market Bull.  All personal and family money is 100% Equity and 100% in tax favored accounts (529, IRA, Solo 401K).  I stuff all of my money into the stock market as soon as I earn it.  But, I do love a guarantee.  This looks like a tough decision to me.

    Click to expand…

    You’re not taking into account the initial tax treatment of the scenarios. The student loan payment will be made after tax and with no favorable tax treatment (i.e. no interest deduction because income is too high). The 401k money gets the chance to come from pre-tax money which, for most professionals, will be a nice tax savings.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #238859 Reply
    Liked by Nysoz, Peds
    aelliscpacfa aelliscpacfa 
    Participant
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 9
    Joined: 08/13/2019

    I understand and I agree with you.  Great point!

    Andrew B. Ellis, CPA, CFA, CFP

    #238862 Reply
    Avatar JBME 
    Participant
    Status: Spouse
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    Joined: 03/26/2018

    the 20% includes an employer match if applicable, but you need to add that dollar amount to your nominator and denominator gross

    #238867 Reply
    Sajimone Sajimone 
    Participant
    Status: Physician, Small Business Owner
    Posts: 93
    Joined: 01/09/2016

    I would definitely strategize in a way to max out all retirement accounts first… then throw the rest at the loan.  budget well and stick to it.. build momentum.. loan gets payed off and  you no longer have to deal with that again.  listen to Dave Ramsey’s podcast daily… if people who make 30-40k annually can pay off 250k.. beans and rice and rice and beans.. sell everything you have… make the kids feel like they’re next… drive beaters and pay low rent then you feel like you have no excuse.  its so motivating!

    #239228 Reply
    Avatar Nysoz 
    Participant
    Status: Physician
    Posts: 96
    Joined: 10/23/2017

    What a fun question!

    Let’s assume you don’t get a deduction for the Student Loan Interest that you pay each year.  With that in mind, paying down the loan is the same as a guaranteed 5.75% after tax return – correct?

    My current “best case scenario” for US Equity over the next decade is a 7% return.  (Please don’t consider that a prediction.  That is just the number I sort of hope for with my own money.)  To the extent that 7% return is in a tax-deferred account, it will eventually be taxed.  Let’s assume a 22% tax rate in retirement.  That brings the after tax return on equity to 5.46%.

    The 5.75% guaranteed return looks attractive compared to 5.46% on all equity portfolio.

    Disclosure:  I am a stock market Bull.  All personal and family money is 100% Equity and 100% in tax favored accounts (529, IRA, Solo 401K).  I stuff all of my money into the stock market as soon as I earn it.  But, I do love a guarantee.  This looks like a tough decision to me.

    Click to expand…

    also, most people with a good credit score can refinance their student loans to 3-4% with minimal work

    #239322 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4637
    Joined: 05/13/2011

    Might find this helpful:

    https://www.whitecoatinvestor.com/quantifying-the-401k-vs-student-loans-decision/

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #239332 Reply
    Liked by Tim
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3380
    Joined: 09/18/2018

    “most people with a good credit score can refinance their student loans to 3-4% with minimal work”

    For most posters here, a good credit score just “happens“. Unfortunately, the three credit bureaus use different algorithms. Some of those are based upon time and how much credit has been used. It’s pretty simple to say, pay your bills on time and the balance.

    If someone with knowledge could create a roadmap for med students and residents “how to” efficiently build a high score, it might be helpful. A CPS (credit policy statement) that provides a roadmap for favorably building the data used. The weakness is that if you have a small debt history, one doesn’t fair well in the ratings.
    The goal is to build a history. For example, should one take the “no payments” loan or pay cash for a couch?
    Taking the loan but paying it off in 3 months gives a consumer loan history. What types and how long would it be advantageous in building a credit score is the question. When to request increases and how many old accounts to keep. The point is not to assume debt, but to what extent should credit be used to quickly build the data for a favorable rating.

    #239452 Reply

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