By Dr. James M. Dahle, WCI Founder
Q. Could you please explain how a resident planning for PSLF should choose between contributing to a Roth account given the resident salary versus a traditional account to reduce AGI? What formulas should I be using? If it is okay with you, please provide a couple scenarios where Roth or traditional would be better? I know this is some basic formula driven tasks, but am completely new to finances.
A. Unfortunately, this is NOT “some basic formula-driven task.” It's actually one of the most complex areas of financial planning for physicians and something I generally refer people to a student loan advice specialist for. Student loans have never been all that easy to deal with, and they are becoming more complex as the years go by. There are still a few “no-brainers” out there. For example:
- If you have private student loans, you should refinance them every time you can get a lower rate.
- If you are single (or married to a non-earner) Revised Pay As You Earn (REPAYE) should be your default program for your federal loans during training.
- Forbearance on federal loans in residency is a bad idea.
But even these probably have a few rare exceptions. If you are married to another earner, one or both of you has student loans, and one or both of you is going for Public Service Loan Forgiveness (PSLF), chances are good that you should spend some time and money with a specialist as you leave medical school. The primary questions they will help you with are:
- Which IDR program should I enroll in?
- When should I refinance, if at all?
- How should we file our taxes (MFS vs MFJ)?
- Should we contribute to Roth (tax-free) or traditional (tax-deferred) retirement accounts?
Today we're just going to talk about just one of those questions, the final one.
Roth Is for Residents?
The Roth vs traditional debate is also a very complex area of financial planning that has been discussed in numerous posts on this site. There are no hard and fast rules, but there are a couple of rules of thumb that most people find useful:
- When in your peak earnings years, you should preferentially contribute to a tax-deferred account when offered the choice.
- When NOT in your peak earnings years, you should preferentially contribute to a Roth account when offered the choice.
There are, of course, exceptions to these two rules of thumb. For example, someone that expects a $10M IRA in retirement probably ought to be considering Roth contributions even during their peak earnings years. Likewise, a potential exception to the second rule of thumb occurs in residency when going for PSLF.
Which Matters More?
So which matters more, lowering your future tax bill or increasing the amount forgiven under PSLF? It likely depends on the assumptions you use, but let's run some numbers and see if we can provide some definitive help, at least for some people.
Let's assume a single resident making $60,000 per year who has no 401(k) available at work. He wants to put $3,000 in after-tax money toward retirement. He owes $300,000 in federal student loans at 6%, enrolled in REPAYE at the start of residency, and plans to do a four-year residency followed by six years as an academic making $250,000 taxable income per year. He is trying to decide whether to contribute to a traditional IRA or a Roth IRA. His marginal tax rate now is 22%. As an attending, he expects it will be 35%. In retirement, he expects it will be 32%. He is 30 years old and expects to withdraw all money contributed during residency at age 75. If you don't like any of these assumptions, I showed my work below so feel free to swap in your own numbers. I think they're reasonable and simplified enough for this exercise.
So this resident's decision is whether to contribute $3,000 to his Roth IRA or contribute $3,000/(1-22%)= $3,846 to a traditional IRA.
The Value of a Roth IRA for a Resident
Step 1 is to determine the marginal value of the Roth IRA over the traditional IRA. This part is relatively easy.
If he contributed $3,000 to a Roth IRA and it grew at 8%/year for 45 years, it would be worth
=FV(8%,45,0,-3000) = $95,761
If he contributed $3,846 to a traditional IRA and it grew at 8%/year for 45 years, it would be worth
=FV(8%,45,0,-3846) = $122,766 before tax and $122,766*(1-32%) = $83,481
The difference, $95,761 – $83,481 = $12,280 demonstrates why my general guideline over the years has been for residents to use Roth accounts preferentially.
The Value of Lower Payments
The Salt Flats are the site of the world bike speed record at 184 mph. I don't think Katie and Afton are going to beat it.
Step 2 is to determine how much lower your payments will be during residency as a result of contributing to a traditional IRA versus a Roth IRA. Unfortunately, this is a lot more complicated than the above calculation. In Income-Driven Repayment (IDR) programs like REPAYE, your payment depends only on your income and family size, not on the size of your debt or your interest rate. In this case, his family size is one and his adjusted gross income is $60,000 if he does the Roth contribution or $60,000 – $3,846 = $56,154 if he does the traditional contribution. What is his payment under REPAYE in both scenarios?
Using a student loan payment calculator, it looks like his REPAYE payments would be:
- Roth Contribution: $349/month
- Traditional IRA Contribution: $317/month
So the difference is $349-317 = $32/month. Multiply that out by 48 months and you get $32*48 =$1,536 in lower payments that he made. After residency in this scenario, the payments are going to be the same no matter what type of account he contributes to, and whatever is left will be forgiven via PSLF, so this $1,536 is the sum total of his savings. The question now becomes whether $1,536 NOW is worth more than $12,280 in four decades. We'll do that calculation next, but I hope if nothing else this exercise shows you how small all of these numbers are. As you can see, it just doesn't matter that much!
Making the Comparison
Step 3 is to compare how much more he ends up with using a Roth IRA to invest versus how much he saved with lower IDR payments. Naturally, we have to discount that money for the fact that he got it years earlier. It seems fair to me to discount it using the 8% number I'm assuming the investments will grow by. First, we'll account for the growth during residency:
=FV(8%,4,-32*12,0,0) = $1,730
Then we'll run that out another 41 years:
=FV(8%,41,0,-1730) = $40,590
The difference, $40,590 – 12,280 = $28,310 demonstrates that a resident going for PSLF is going to be better off contributing to a tax-deferred account than a Roth account, all else being equal. The value of the lower payments/additional forgiveness will outweigh the additional retirement savings. I think that's a fairly robust difference that will stand up to most reasonable changes to assumptions…except one, that the resident is actually going for PSLF.
What If the Resident Doesn't Go for PSLF?
Unfortunately, this calculation is going to be a lot more complicated. Obviously the difference the Roth makes will still be the same, but now the resident must pay back the loan. We'll need some new assumptions. Let's assume at the end of the four-year residency that the resident refinances the loan to 4% and pays it off over 5 years like a good little white coat investor.
What happens over the next 9 years?
These numbers aren't going to be exact due to amortization effects, but they should be close enough to give us the answers we need.
While contributing to a Roth IRA, the REPAYE payment is $349. The actual interest that accumulates is $1,500/month ($300,000*6%/12 months). ($1,500-$349)/2 = $576 is forgiven and $576 is added on to the loan. So at the end of four years, the resident has paid $349*48 = $16,752 and the loan stands at $576*48+$300,000 = $327,648. If he pays that off over 5 years, that will require a monthly payment of $6,034/month for 5 years.
While contributing to a traditional IRA, the REPAYE payment is $317. The actual interest that accumulates is $1,500/month ($300,000*6%/12 months). ($1,500-$317)/2 = $592 is forgiven and $592 is added on to the loan. So at the end of four years, the resident has paid $317*48 = $15,216 and the loan stands at $592*48+$300,000 = $328,416. If he pays that off over 5 years, that will require a monthly payment of $6,048/month for 5 years.
Not accounting for the time value of money over that 9 year period (to keep the math easy for me, trust me it won't matter much) we see that if he contributes to a Roth IRA he will pay an extra $16,752-$15,216 = $1,536 during residency and then pay $6,048-$6,032 = $12* 60 months = $720 LESS as an attending, for a total of $1,536 – $720 = $816 in additional payments. If we apply our 8%/year return to this for 36 years, we get:
=FV(8%,36,0,-816) = $13,030
As you can see, the value of using a Roth account over a traditional account is $12,280, so the total advantage of contributing to a traditional account under these assumptions is only $13,030-12,280 = $750….over 45 years. Essentially, it's a wash.
So Should the Standard Advice Change?
So is the standard advice that residents should use a Roth account preferentially wrong? No, I really don't think so for a couple of reasons.
First, if you're maxing out the Roth IRA account the Roth advantage is larger because now you're comparing $6,000 in a tax-free account to $6,000 in a tax-deferred account plus $1,692 in a taxable account, which will grow slower due to some of it being outside a tax-protected account.
Second, behaviorally speaking, I think people are more likely to save more on an after-tax basis using a Roth account.
However, there does need to be a major caveat here. If you are going for PSLF, probably going for PSLF, or even possibly going for PSLF, a tax-deferred account is likely to be the right move and if it turns out to be wrong, won't hurt you much.
What do you think? Would you use a tax-free or tax-deferred account in residency and why? Comment below!
Great post and analysis. Very original. I have not seen much written about this, anywhere. A less motivated reader can read the first couple of lines and then the last couple of lines and get some great advice. When I read the first paragraph, I intuitively concluded that you should go for the traditional IRA because I favor getting out of debt sooner. After all the analysis, the last paragraph gives a nice basic guidance. I like the picture of the bike. What kind of bike is that? My $50 Walmart bike is on its last legs after 16 years. I was amazed at how good it was. I went into the Trek store and was amazed. Unfortunately everyone is out of bikes here due to the rush to buy them with the pandemic.
My wife rides a Yeti.
Thank you for the great post as always! It is super helpful to see the math worked out on this. You have always been an advocate, and I agree wholeheartedly, that WCIs should work to pay off debt expeditiously. That is an assumption that you make in this illustration, that the debt is paid off in 5 years after refinancing to 4% interest. Some people may wonder what happens if they are not good little white coat investors.
If my numbers are right, if someone opted to refinance over 10 years at 5.5%, they would only pay $336 more in total using Roth versus traditional IRA contributions. Taken over 31 years at 8%, this has a future value of $3,651. Since the value of using a Roth account over a traditional account is stable at $12,280, the total advantage of contributing to a traditional account under these new assumptions is negated and Roth contributions are better ( $12,280 – 3,651= $8,629) by a higher magnitude over 45 years. This magnitude only gets greater if the assumptions are changed to a loan refinance over 20 years at 6%. In that case, someone would outright pay more using traditional IRA contributions and Roth would be the preferred choice.
So, should we actually be extending our loan payments and making Roth contributions? No! This would be a classic case of the tax tail waving the financial dog. By extending the loans in my examples above, the total interest actually becomes greater than the principal of the loan. At least $300,000 in extra interest payments are made and this includes the REPAYE interest subsidy! In comparison to this, any difference between Roth and traditional IRA contributions are so minimal, despite appearing greater at first.
I only make this illustration in case anyone is tempted to deviate from the WCI’s advice to pay off debt (especially high or moderate interest rate debt) early. Don’t get caught up in the weeds and instead stick to your plan to get debt-free!
Very great post with great in depth analysis that puts a lot of unknown factors into a great comparative conclusion. During residency, my residency employer offered a 401K, so I decided to contribute to my Roth IRA ($5500 the 1st year and $6000 the other 2 years), and 7% to my 401K. I was also enrolled in PSLF at which I paid $300/month to the loan. Now I started contributing to my Roth my 4th year of medical school, so I kept the contributions going. So this article makes alot of sense in terms of contributing to a Roth IRA vs Traditional IRA throughout residency, at a lower income bracket of a resident, your past articles even made note of contributing to a Roth IRA.
Yeah I have ran the same analyses myself and found them very insightful. There are also many calculators online that allow you to factor in other variables (such as whether you invest the tax savings from tax-deferred contributions). In my 401K I can actually divide up between Roth vs traditional contributions, so this question was an even bigger deal for me. I ended up splitting the difference with half Roth, half tax-deferred contributions in my 401K. At the end of the day, the flexibility of having good amounts of Roth and tax-deferred money appealed to me as much as the possible extra future value given all the uncertainties in the calculations (e.g. what future tax brackets may be).
Thank you so much for this post!!!!
Really really helpful!
I have 2 basic questions: how do traditional IRA accounts work? I looked at the Vanguard site, and it says I can transfer from my bank account, but wouldn’t that be post-tax since they’re in my account already?
Also, does contributing to an HSA qualify for the Saver’s Credit?
Thank you Doctor Dahle!
In regard to your first question, while yes you are putting post-tax money in there, you take that as a tax deduction the year you contribute(assuming traditional). It also doesn’t appear and HSA qualifies for the Saver’s Credit (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit).
So if not above the 12400 standard deduction, I wouldn’t be able to deduct my traditional IRA contribution?
I’m confused. So both Roth and traditional IRA are after taxes, but traditional you can have a tax deduction? Is this the same for 401k/403b?
No, it’s a totally separate deduction from the standard deduction. You can take both.
Traditional IRAs aren’t “after-tax” because you can take a tax deduction. That’s by definition pre-tax. But since some people can’t take that deduction because they make too much money, they can make “after-tax traditional IRA contributions,” usually in order to then do a Roth conversion tax-free, i.e. a Backdoor Roth IRA. Hope that helps.
Yes, you can transfer from your bank account and take a deduction for the transfer when you do your taxes, assuming your income is below the limit where you can take the deduction or you don’t have a retirement account offered by your employer. (Remember only some people can deduct traditional IRA contributions.)
You can take a saver’s credit for retirement account contributions and ABLE account contributions, but not HSA contributions.
Muy bien. Great insight!
Hi,
Have a question about Blackdoor Roth. We started contributing to backdoor after reading about it in WIC. Thank you. I have a regular tax deferred individual 401k account and would like to roll funds out of it into a Roth 401k buy paying taxes on it now. Will that mess up my backdoor Roth account?
Please advise.
Thank you
I’m assuming this calculation changes some if you are maxing out a Roth IRA+403b vs. maxing out a trad. IRA+403b in residency. The time value of the Roth goes up quite a bit. If I’m doing the math correctly, that would mean future value of Roth would be FV(8%,45,0,-25500)=$813,971.46 and future value of trad. would be same number*(1-0.32)=$553,500.59. That’s a pretty stark difference. Obviously most residents can’t do that but for those who may have someone helping them with expenses this I would think changes the choice a bit. I’m not exactly sure how to adjust for the taxes paid up front on the Roth money though.
“After residency in this scenario, the payments are going to be the same no matter what type of account he contributes to, and whatever is left will be forgiven via PSLF, so this $1,536 is the sum total of his savings.”
I am on the PAYE plan, but I think REPAYE is very similar. In my plan, you pay (essentially) 10% of every dollar you earn above the poverty line per month, up to a ceiling equal to the what the standard 10 year repayment plan’s monthly rate would be.
I think his payments as an attending could well be less if he contributed to a tax protected account, especially with a large debt-to-income ratio as you have described (300k debt, 250k salary). I have very roughly those numbers, and the standard repayment plan is something like 4k/mo.
You’re right that the account you use after residency can affect your payment size and thus how much is left to be forgiven. Perhaps what I should have said was something like “since most attending should be using tax-deferred accounts anyway, there is no reason to continue the calculation at this point.”
Somewhat of a naive question. I keep hearing about having x percentage of traditional, and x Roth when we retire to help fill up the lower brackets and supplement our retirement.
If we go the traditional route for PSLF, when would we be able to contribute to Roth accounts? I am also in a program that does not offer 401k/403b options, so only IRAs…
I’ve thought about this some to try to figure it out before asking, and here are some considerations/assumptions.
Going PSLF, so Roth conversions would not be too advantageous.
Have years worth IRAs, but those can’t be rolled into 403b (assume employer is nonprofit)
Have years worth IRAs, so much higher tax burden to do backdoor Roth
Also read the post on moonlighting with PSLF, and its pros and cons – but I guess this is a possibility with a solo 401k, and then backdoor Roth
So yeah, not really sure how to get some Roth action if doing traditional IRA…
Thanks for this post, this blog, and your time.
DS
You’re missing an important point. After you become an attending (and sometimes before), you generally can’t deduct traditional IRA contributions. So your only option for an IRA contribution is a Backdoor Roth IRA. So you might as well do that. That’ll give you some Roth space, especially if you continue it throughout your career.
Second, PSLF should occur within 7 years of residency completion, no? That’s only the very beginning of your career. After that you don’t have to worry about Roth contributions and conversions affecting the amount forgiven under PSLF.
Third, you absolutely can roll IRAs into 403bs later.
Thank you for this post. I’ve already been in residency and enrolled in PSLF, and now starting to try and gain some speed on personal finance. Now, better than later!
My salary will be 60K this year. Here is my plan: contribute the maximum amount to a traditional 403b. Then open up a traditional IRA and contribute the max to that.
My questions include: even though I have a employer plan at work, I should still be able to deduct the IRA since my MAGI falls below the limit right? Really trying to lower my student loan burden here.
Also, I already put a bit of money into my Roth 403b; is there a disadvantage to having both a Roth and a traditional 403b account?
Thank you again
You don’t mention your MAGI (you might be married to a dentist for instance), but yes, if it is below the limit, you can take the full IRA deduction despite having an employer plan available to you.
Nothing wrong with Roth money, especially as a resident, but if you are trying to maximize PSLF, you are likely to come out ahead using tax-deferred investments.
If Wes is maxing out these accounts though, isn’t the future value calculation on the Roth contributions a large enough difference to make Roth the better choice (i.e. getting the same 19.5k+6k, but in an after-tax rather than before tax fashion)? Especially if it may limit ability to do backdoor Roths for a few years.
Did you read the post above where I did the calculations? Do you see something wrong with them?
Remember that saving $6K in a Roth is more money than saving $6K in a traditional IRA. So to equalize the two scenarios, you need to compare $6K in a traditional IRA plus some money in a taxable account against $6K in a Roth IRA.
Most docs have a 401(k) they can roll IRAs into, so it generally would not impede the ability to do Backdoor Roth IRAs once you make too much to deduct a traditional IRA.
I had a chance to go through and do some of my own calculations to illustrate what I was trying to get at. Assumptions were similar to yours but I adjusted some to match my situation more (I may go through and do same with your assumptions).
Assumptions: age 30 starting residency, single during residency, completing 5 year residency, will work as academic attending making 300k afterwards and will follow through with PSLF
-170k in debt at 5.75% (I know probably less than most people considering PSLF)
-8% annualized growth in tax protected accounts
-6.5% annualized growth in non tax protected accounts (I’m not exactly sure best way to alter this, although I do think it should be lower than the tax protected. Mainly accounting for dividends taxed as ordinary income along the way as well as capital gains along the way, etc. although hopefully people are just leaving it in market index)
-maxing out tax protected accounts (403b and IRA) every year of residency ($25,500 total)
-will be taking out the money 45 years after it was invested as in your example (to clarify, each contribution year gets the whole 45 years)
-PSLF payments are based on the following incomes: 1st year (AGI=$0), 2nd year (AGI=$30,000, half of intern year), 3rd-6th year (AGI=$60,000, I realize this tend to go up year to year but you can only make so many adjustments. also, note 6th year because in reality the first year was based on med school income). AGI is decreased with the pretax account contributions if applicable
Calculations:
Roth value for all 6 years on a resident/student income:
FV(8%,45,0,-25500)=813,971.46*6=$4,883,828.76 (holy cow! that’s a lot of money)
Trad. value for all 6 years:
813,971.46*(1-0.32)*6=$3,321,003.56 (also a ton of money!)
Value of extra taxable contributions to account for the money saved on taxes in residency:
25,500/(1-0.22)=32,692.31-25,500=7192.31
FV(6.5%,45,0,-7192.31)=122,349.09*(1-0.32)=83,197.38*6=$499,184.29
Amount saved per month on PSLF payments:
Year 1: Roth-$0; Trad-$0 — no difference
Year 2: Roth-$94; Trad-$0 — 94*12=$1,128
Year 3-6: Roth-$344; Trad-$131 — $213/mo – now time to calculate that value at end of residency
=FV(6.5%,5,-213*12,-1128)=$16,098.40
And the value at age 75 like all the other stuff…
=FV(6.5%,39,0,-16098.40)=$187,679.75
Now the comparison:
Roth value = $4,883,828.76
Trad. value = $3,321,003.56 + $499,184.29 + $187,679.75 = $4,007,867.60
Both considerable sums of money showing how valuable investing as much as you can early on is. Roth gets it by almost 900k though. Clearly lots of personal factors go into this and I didn’t account for any state taxes, behavioral factors with the taxable contributions, if someone decided they didn’t wanna do PSLF (although I would assume that would push benefit even more toward Roth), or the sheer fact that these massive savings amounts are probably going to push that tax bracket up in retirement for the traditional contributions above the 32%.
The more of a supersaver you are, the more you can come out ahead with a Roth. However, I suspect a math error if your conclusion is that someone going for PSLF will be better off with tax-deferred contributions during the time period before PSLF is received. I don’t have time to go through your calculations to find the problem, but I showed mine above. I suspect your error is that you’re comparing apples to oranges. $6K in a Roth IRA is not the same amount of money after tax as $6K in a traditional IRA.
SO glad you wrote this article. Thank you!
My question is after maximizing out a traditional IRA, should I contribute to a Roth or traditional 403b, or maybe not contribute at all – have a $5 quarterly maintenance fee.
And if I do traditional throughout residency and PSLF, would any Roth contribution essentially be at an attending tax bracket, through the backdoor?
If a traditional IRA is right for you for PSLF reasons, a traditional 403(b) likely is too.
As an attending, you’ll need to roll that IRA into a 401(k) and then start doing Backdoor Roth IRAs.
Great write up!
I am in my first year of attending-hood, and my wife is a resident (two years to go) who is pursuing PSLF under PAYE.
Due to our marital status, there is no available deduction for her for traditional IRA contributions.
Since that’s the case, we are maxing her 403b, and doing a backdoor roth.
When contributing to the Roth, we’re using marginal after-tax dollars, so using the 22% rate to come up with the $3,846 number makes sense to me, but if I’m expecting not to work through retirement then most of our taxable income should be from the traditional IRA, right? In that case, should I calculate the cost of taxes using the effective tax rate at retirement rather than the marginal tax rate (since some dollars will not be taxed at the full 32%)? Assuming then that the effective tax rate on $123k is closer to 17%, that leaves us with a number closer to $100k after tax from the traditional IRA in retirement. That’s much better than $88k and even beats out the Roth in this example. If I’m not planning on receiving any other supplemental income, then the traditional IRA beats out the Roth for me right? Is there some other taxable income I’m forgetting that I’ll likely receive that shifts the scales back? Also I’m planning on taking advantage of government PSLF, so any reduction to IBR goes in my pocket as well, if it changes anything.
Ideally, you take every dollar and apply the appropriate tax rate to it. Putting in at 37% and taking out at 22% is a good deal for instance. Putting in at 35% and taking out at 37% is not.
Because even if your effective tax rate in retirement is 32%, if there are some dollars you’re taking out at 37% and you only got a 35% tax break when that money went in, you’re still losing on some of those dollars even if you’re winning overall.
It’s obviously pretty complex since many of the variables are unknown and unknowable, so most of us just do the best we can. It gets even more complex once you throw in the possibility of additional PSLF or lower IDR payments.
Remember there are other sources of taxable income in retirement-SS, real estate rents, dividends and capital gains from taxable accounts etc.
Hello White Coat Investor,
I hear that the Backdoor Roth will not longer be available. How will this impact the calcuations?
I am a resident right now going for PSLF. Should I make traditional or Roth contributions?
Thank you for your time.
That bill is not a done deal yet, but if it passes, then it just makes Roth IRA contributions in residency when you can make them more attractive than they were. But if you’re going for PSLF, tax-deferred contributions will increase the amount forgiven. Whether that is worth more than the Roth benefits in the long term is hard to say. Might be an interesting calculation to make some time though.
Agreed, I think it just tips the weight toward Roth a bit more. Esp for ppl in a career where you expect to never make Roth 401k contributions again. Bc essentially without backdoor or mega backdoor Roth residency may be the only appropriate time you ever get to build up the Roth bucket for tax diversification down the road. I feel like the calculations are close enough even before the issues with potential upcoming legislature that unless one is 100% going PSLF (who knows where your career will take you) I would go with the Roth route. That’s been my current strategy as a resident. I suppose if one had tons of debt where she is willing to take a paycut to ensure PSLF-eligible employer or on a career academic/research track that it may be worth the gamble to miss out on the only reasonable Roth accumulation years for many physicians. I could also see someone who plans to retire particularly early consider sticking to traditional as she would have opportunity to pull the traditional money out at a potentially favorable tax bracket over many years.
That’s how I felt about Roth IRAs as a resident back in 2003-2006. I thought I’d never get them again. Then my income was low enough to do them during my military time and as soon as I got out in 2010, the Backdoor Roth IRA became available. If this bill passes, 2022 will be the first year since I started making real money that we didn’t contribute to Roth IRAs.
How does NHSC loan repayment affect this? It can be used for payments and lump sums can count for future payments for PSLF…Would a ROTH be more beneficial?
It would factor toward the Roth side, but there are lots of other factors too.
What might be the other factors to consider?
Lots of them, but the main one is your tax bracket now versus in retirement. More info here:
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
Great write-up, thank you!
As a military doc with relatively low taxable income, I was under the impression that maxing out all Roth/tax advantaged options was ideal even with pursuing PSLF.
Would it make sense for a military doc who is going for PSLF to make ‘traditional’ TSP investments ($20.5k) as well as ‘traditional’ IRA contributions ($12k w/spouse). Would that reduce adjusted gross income by $32.5k and subsequently reduce payments even prior to PSLF?
Thank you!!
If those IRA contributions are fully deductible, then yes, you might come out ahead. Always hard to tell which will be worth more, more PSLF soon or more tax-free income later.
How does this change with the upcoming changes to REPAYE and for residents contributing more to a 403b?
By my calculations, a resident, not planning PSLF, with 180k in loans at 5.3% interest who contributes 15k/year to a traditional 403b (with the current REPAYE) would net around an additional 30k by retirement via the decreased IBR payments. However, with the upcoming changes to REPAYE (decreased discretionary income, increased loan subsidy), this changes to nearly an additional 120k by retirement by getting a higher interest subsidy through traditional 403b investments.
Am I crazy? Or does this change the roth vs traditional discussion?
Dunno, can’t see your calculations. But certainly you can get more forgiven by contributing to traditional. You just may end up withdrawing at a higher rate later than you contributed at. Lots of unknown and unknowable variables in the equation.