Give up 1-yr Roth Contributions to Pay Off Student Loan

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Give up 1-yr Roth Contributions to Pay Off Student Loan

Postby scubadiver » Sun Sep 01, 2013 12:06 pm

Would you give up 13 months worth of Roth contributions to pay off a student loan?

We are presently maxing out our annual Roth contributions over the course of 12 monthly deposits. I am however considering the possibility of diverting this money towards ~$16K of student loan debt (@ 2.5%). My current payment of $250 plus our diverted Roth funds would allow us to eliminate this debt in 13 months. Obviously we would resume our Roth contributions once the debt is eliminated.

We maintain a 6 month emergency fund that I do not wish to tap (except for an emergency) and our retirement savings are otherwise on track (DW and I are mid / late 30's, approx $500K saved, plus a small pension from my former employer and presumably a federal pension due to my current employment). We max out my TSP contributions and contribute a small amount towards 529 plan - I could pay off the debt in 11 - 12 months if I deferred 529 deposits as well, which probably makes sense.

Thoughts?
Last edited by scubadiver on Sun Sep 01, 2013 1:22 pm, edited 1 time in total.
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Re: Give up 1-yr Roth Contributios to Pay Off Student Loan

Postby snettles » Sun Sep 01, 2013 12:37 pm

How much will that save you in interest? It doesn't seem to me that the savings would compensate for the lost space in retirement. Also in doing the numbers, consider what you think you will earn in your Roth. The gain Is really the difference, which might even be negative. Maybe max retirement and slightly increase loan payment amount?

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Re: Give up 1-yr Roth Contributios to Pay Off Student Loan

Postby market timer » Sun Sep 01, 2013 12:39 pm

Assuming the loan is fixed at 2.5%, I'd set it up on an automatic payment schedule for the minimum payment for the life of the loan. Definitely wouldn't forego Roth contributions to pay down debt at a lower interest rate than Treasuries.
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Re: Give up 1-yr Roth Contributios to Pay Off Student Loan

Postby John3754 » Sun Sep 01, 2013 12:43 pm

At 2.5% I would definitely not pay this loan over making Roth contributions.
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Re: Give up 1-yr Roth Contributios to Pay Off Student Loan

Postby LAlearning » Sun Sep 01, 2013 12:46 pm

I don't know if I would give it up completely. Can I infer you are someone who just doesn't like the feeling of that loan staring back at you?

If so, then push a little more towards the loan, but don't stop the rIRA contributions entirely. Do half, or 3/4, or 1/3, but put something in the Roth. It also can be hard for people to start up again once going dormant for a while on retirement (although this doesn't seem like you).

Hope this helps.
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Re: Give up 1-yr Roth Contributios to Pay Off Student Loan

Postby BL » Sun Sep 01, 2013 12:50 pm

You could also put 3-4 months of your emergency fund into a Roth IRA mm at your bank (or mm at Vanguard). This would hold your Roth space but be available without tax or penalty should an emergency happen. Then move to regular Roth investments once the emergency funds are replenished.

The rate is low enough I wouldn't worry about prepaying the loan.
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Re: Give up 1-yr Roth Contributios to Pay Off Student Loan

Postby stan1 » Sun Sep 01, 2013 1:13 pm

I would continue to contribute to both Roth IRAs. Once the annual contribution deadline has passed you can never go back in time for a "do over". In a few years -- after the student loan is paid off -- I think you'll wish you had made the Roth IRA contributions. There's a chance of a 1% civil service pay raise this year. If that comes to pass apply it to your student loans.

You didn't mention whether you own a house. If you don't and are planning to buy one in the next few years I might rethink that advice and suggest you pay down the student loan.

The other option you didn't mention is to reduce your TSP contributions above the match, but in general I think the current year tax deductions are worth leaving that in place. TSP G Fund is at 2.125% for August and has been moving up steadily in recent months. There could be a time in the near future when the G Fund return will be better than 2.5% even without any equities.
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Re: Give up 1-yr Roth Contributios to Pay Off Student Loan

Postby scubadiver » Sun Sep 01, 2013 1:22 pm

LAlearning wrote:Can I infer you are someone who just doesn't like the feeling of that loan staring back at you?
You got it! I would really like to see the debt gone, but not at the expense of making an obviously bad financial decision.

@market timer: The loan is fixed at 2.5%. The effective rate is slightly less due to the interest rate tax deduction. The actual minimum payment is something like $180 per month, but I've been accelerating the payments with the hope of eliminating the debt sooner. The $250 per month doesn't include the random $100 - $500 that I've put against it when we have come into some extra money for whatever reason.
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Re: Give up 1-yr Roth Contributios to Pay Off Student Loan

Postby scubadiver » Sun Sep 01, 2013 1:34 pm

stan1 wrote:You didn't mention whether you own a house. If you don't and are planning to buy one in the next few years I might rethink that advice and suggest you pay down the student loan.

We do own a home with a 30-year fixed rate mortgage @ 3.625%. There is no PMI or escrow account required.

stan1 wrote:The other option you didn't mention is to reduce your TSP contributions above the match, but in general I think the current year tax deductions are worth leaving that in place. TSP G Fund is at 2.125% for August and has been moving up steadily in recent months. There could be a time in the near future when the G Fund return will be better than 2.5% even without any equities.

Can't say that I'm a fan of deferring the pre-tax contributions. Among other reasons, our MAGI is right up against the threshold for the child tax credit phase out. Reducing our pre-tax savings would almost certainly bump us above this threshold.....which brings up another question of whether or not we should make my wife's IRA contributions to a deductible IRA instead. But that's another thread. :)

There seems to be a pretty clear consensus towards not foregoing the Roth space. What about the 529 contributions? We're currently putting $100 - $200 per month (on average) towards the 529 account. If I deferred that, we could probably eliminate the student loan in 42 months, if not sooner.
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Re: Give up 1-yr Roth Contributios to Pay Off Student Loan

Postby grabiner » Sun Sep 01, 2013 4:56 pm

scubadiver wrote:Can't say that I'm a fan of deferring the pre-tax contributions. Among other reasons, our MAGI is right up against the threshold for the child tax credit phase out. Reducing our pre-tax savings would almost certainly bump us above this threshold.....which brings up another question of whether or not we should make my wife's IRA contributions to a deductible IRA instead. But that's another thread. :)


If you are in the phase-out range, you have a 30% marginal tax rate, not 25%, so the deductible IRA is better if you are eligible. For similar reasons, you should use the traditional TSP rather than the Roth. (You can always convert the deductible IRA to a Roth later if appropriate.)

This will also free up a bit more money for loan payments or 529 contributions, since you get a tax savings on the deductible IRA.

There seems to be a pretty clear consensus towards not foregoing the Roth space. What about the 529 contributions? We're currently putting $100 - $200 per month (on average) towards the 529 account. If I deferred that, we could probably eliminate the student loan in 42 months, if not sooner.


This makes sense unless you are losing a state tax benefit from the 529 contributions. Unlike the Roth IRA, you don't lose anything permanently; you can contribute later to catch up, and add the money which would have gone to the loan payments to your 529 contributions once the loan is gone.
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