Roth IRA or pay down student loan debt?

[ranmyaku]

In the long run, which of these options would be a better idea. I am a 1st year resident living as frugally as possible. I have extra money each month to invest in a Roth IRA or I can pay down student loan debt. Right now I am doing a little of both; however, I am not sure if I should just be maxing out on one or the other.

Med school loans are approximately (in forbearance):
~ 50k @ 4.75%
~ 150k @ 6.8%

Any advice?

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[dotdash]

In the long run, which of these options would be a better idea. I am a 1st year resident living as frugally as possible. I have extra money each month to invest in a Roth IRA or I can pay down student loan debt. Right now I am doing a little of both; however, I am not sure if I should just be maxing out on one or the other.

Med school loans are approximately (in forbearance):
~ 50k @ 4.75%
~ 150k @ 6.8%

Any advice?

I'd probably pay down the debt. As well as being the equivalent of a guaranteed 6.8% ROI, there are benefits to having low debt (like being able to get a larger mortgage later) that aren't compensated for by having a large IRA.

Probably Suze Ormann has answered this one somewhere and has the numbers to back it up....

 

[IDforMe]

I'd probably pay down the debt. As well as being the equivalent of a guaranteed 6.8% ROI, there are benefits to having low debt (like being able to get a larger mortgage later) that aren't compensated for by having a large IRA.

Probably Suze Ormann has answered this one somewhere and has the numbers to back it up....

What about if you're planning on doing IBR and then having your loans forgiven through the Public Service Loan Forgivement Program at the end of 10 years? Wouldn't the key in this case be to pay as little as possible on your loans while putting as much as possible into a Roth IRA, investments and retirement funds?

 

[odieoh]

I would pay down the debt as well. If you know you are going to do the public service repayment route, it sounds like a good idea to invest. I would worry about them changing the law or something at the last minute. If too many docs take advantage of it like that and they end up writing off hundreds of thousands per doc, I can see them capping how much can be forgiven. That and make darn sure if there is a spouse involved that they will be ok living in whatever area you need to go to to qualify for it. Would suck to end up moving 5-7 years in after making an effort to pay as little as possible.

 

[VCOM2008]

Hey guys,

I'm new to SDN, but I also had a similar question posted back in March. I am a 3rd year IM resident, and I too have medical school loans as follows:

Principal is: $172k
Interest is: $22k
Total owed: $194k

My loans were in deferment for first 2 years after graduation, and they just went into forbearance starting this June.

My question is that I have about $10k in IRA money saved up. Is it worthwile to pay down my interest or just let it sit in IRA? I'll be doing a fellowship in cardiology, so I won't officially be out making decent salary until 2014.

I calculated that if I did nothing to my loans right now, then my final balance owed would be $234k! And if I paid down $10k this year, then final balance would be $224k! In the grand scheme, this makes a difference of $100/month payment to paid over 10 years....

Any help is appreciated!

 

[avatarftw]

Roth IRA hands down.

You won't (God willing!) be able to contribute to your ROTH IRA in the future as you will be making more than the maximum. (It phases out completely at ~90,000 or so)

As long as your yield is more than your loan interest, its worth it to invest the money. I.E, if your yield is 10% and your loan interest is 6.8%. You won't be able to take advantage of this tax-advantaged situation in the future; contribute as much as you can now.

Hey guys,

I'm new to SDN, but I also had a similar question posted back in March. I am a 3rd year IM resident, and I too have medical school loans as follows:

Principal is: $172k
Interest is: $22k
Total owed: $194k

My loans were in deferment for first 2 years after graduation, and they just went into forbearance starting this June.

My question is that I have about $10k in IRA money saved up. Is it worthwile to pay down my interest or just let it sit in IRA? I'll be doing a fellowship in cardiology, so I won't officially be out making decent salary until 2014.

I calculated that if I did nothing to my loans right now, then my final balance owed would be $234k! And if I paid down $10k this year, then final balance would be $224k! In the grand scheme, this makes a difference of $100/month payment to paid over 10 years....

Any help is appreciated!

 

[VCOM2008]

Thanks! Yeah, my student loan interest is average of 5.3%. I have half my loans consolidated during in school consolidation at around 3.5%, and the other half is at 6.8%.

I do get about 8-10% annual return, except this past year...but I see what you are saying....

 

[avatarftw]

It always frustrates me how a lot of people look at debt from TOO emotional of a stance. Objective analysis almost always wins out. The Standard and Poor's 500 average annual return has been ~10% over its history, which includes the great depression.

If you're thinking about paying off debt that accrues at 5 or 6% or investing long-term in stocks, then its an easy decision. I've seen a lot of smart people do dumb things, like put all of their money in gold (one of the most risky investments) or all of their money in Apple stock. Furthermore, they try to time the market.

You could very well lose your shirt in stocks, but that's really only if you sell your shares short term. If you're holding your stocks for 10+ years, you're winning percentage is pretty darn high. Stocks are not a good choice if you need money within the next few years.

There are other considerations, like Capital gains taxes. I believe that the short term capital gains tax is about 15% and the long term capital gains tax is like 20% right now. I'm not apprised of the current numbers since I'm only invested in a ROTH right now and won't have the money to invest for a while. (perhaps in residency) That will reduce your 10% yield a bit.

Even Warren Buffet (oracle of Omaha) says that for the vast majority of lay people, low-expense ratio index funds are the way to go. You'll never match or beat the index that its tracking, but you'll be pretty darn close and won't have to spend as much time researching. Motley Fool and Buffett highly advocate individual stock picking, which requires some work, however.

Thanks! Yeah, my student loan interest is average of 5.3%. I have half my loans consolidated during in school consolidation at around 3.5%, and the other half is at 6.8%.

I do get about 8-10% annual return, except this past year...but I see what you are saying....

 

[avatarftw]

Another consideration, inflation averages about 3% a year. Thus, if you after-tax yield is 3% (CD's, certain bonds) then your money is going nowhere.

If your yield is 10,11,12%, then your money will grow at 7-9% a year. Then it will compound.
If memory serves, Albert Einstein said that "compound interest is the most powerful force in the universe."

Thanks! Yeah, my student loan interest is average of 5.3%. I have half my loans consolidated during in school consolidation at around 3.5%, and the other half is at 6.8%.

I do get about 8-10% annual return, except this past year...but I see what you are saying....

 

[TMP-SMX]

...or all of their money in Apple stock.

I agree it isn't a good idea, but you must have some rich friends if they've had it a few years.

 

[penguin24]

The plus about the Roth IRA is that there are no capital gain tax to pay. Residency is the only time many of us can take advantage of the Roth & it would be a waste of you pulled out your 10K of Roth to pay your loans. Keep the Roth.

 

[VCOM2008]

Thanks guys for the help! Some very useful info to consider!....

 

[plauto]

Hey guys,

I'm new to SDN, but I also had a similar question posted back in March. I am a 3rd year IM resident, and I too have medical school loans as follows:

Principal is: $172k
Interest is: $22k
Total owed: $194k

My loans were in deferment for first 2 years after graduation, and they just went into forbearance starting this June.

My question is that I have about $10k in IRA money saved up. Is it worthwile to pay down my interest or just let it sit in IRA? I'll be doing a fellowship in cardiology, so I won't officially be out making decent salary until 2014.

I calculated that if I did nothing to my loans right now, then my final balance owed would be $234k! And if I paid down $10k this year, then final balance would be $224k! In the grand scheme, this makes a difference of $100/month payment to paid over 10 years....

Any help is appreciated!

Do not, again, do not take money out of any IRA to pay down debt. If you're concerned about the interest growing, try to make some payments that apply to the principle of your loans (not the interest), but use your current income, not the IRA.

 

[igottaquestion]

what about taking money out of a roth ira in order to avoid taking out a non-Stafford loan (e.g. a PLUS loan at 7.9% (?))?

 

[avatarftw]

Still no. Just crunch the numbers. Also, with exception, you have to pay a pretty steep penalty for taking out money from your ROTH IRA/IRA before 59.5 years of age.

http://www.rothirawithdrawal.net/

So when money is withdrawn from a Roth IRA, it is charged income tax and an additional 10% early withdrawal fee if it does not meet these requirements.

what about taking money out of a roth ira in order to avoid taking out a non-Stafford loan (e.g. a PLUS loan at 7.9% (?))?

 

[igottaquestion]

it was my understanding that there is no early withdrawal penalty if the money is used to pay for education expenses. no?

 

[avatarftw]

I believe that its subject to the 5 year rule. Since it doesn't apply to me, I don't know the exact rules. You can't know them all.



http://www.rothirawithdrawal.net/



8 ) The withdrawal must be used to pay for qualified higher education expenses for either the Roth IRA owner or his or her eligible dependents.
When a Roth IRA withdrawal is made, it is also important to understand that the withdrawal is subject to the five year rule. A withdrawal of any monies contributed to a Roth IRA can be made at any time the owner chooses, regardless of the five year rule; however, any earnings withdrawn from a Roth IRA are subject to meeting one of the eight qualifying statements above and the five year rule. The five year rule is simply that any earnings withdrawn from a Roth IRA must be made at least five tax years after the original contribution. The trick here is that tax years are not calendar years and last longer than 12 months.

it was my understanding that there is no early withdrawal penalty if the money is used to pay for education expenses. no?