Student Loan and Roth Advice

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newbinvestor
Posts: 8
Joined: Mon Nov 18, 2013 8:21 pm

Student Loan and Roth Advice

Post by newbinvestor »

Hey guys, I have been reading the site for a couple of months now and have really got a lot out of everyone's advice/tips I have come across. I have a random question relating to my student loans that I figured I'd see if anyone had any input on.

Situation: I graduated college last year and lived at home for a year to save up and knock down some student loans. I began contributing to a roth IRA right when I started my career and this has grown from approximately $6k (of contributions) to $10k over the past year and a half. I have been able to pay my student loans down from about $50k to $30k, and I would really like to pay these off as fast as possible to free up cash flow. My question is, does anyone know if contributions that are taken out of a Roth IRA are either taxed or are subject to the 10% penalty? I have about 6 months of expenses saved up, and I'd like to knock out this debt (6.55% interest) as fast as possible. My thought is that all the while knocking out debt quicker, I am not expecting much more than 6.55% return in the near future on my Roth and I still have earnings left in my Roth to invest that could be used in an extreme emergency. I'd appreciate any advice you guys may have.

Income: $53k
Age: 24
Student Loans: $30k (6.55%)
Other Debt (car died): $20k (1.9%)
Savings: 6 months expenses
Mill
Posts: 245
Joined: Tue Dec 22, 2009 7:04 pm
Location: Arkansas

Re: Student Loan and Roth Advice

Post by Mill »

Welcome to Bogleheads.

Roth contributions can be withdrawn at any time without being subjected to any taxes or penalties. I don't have a link, but Im sure a google search can confirm that. Before you consider this, I would recommend that you wait for a genuine emergency before withdrawing Roth IRA contributions. You only get so much space per year to contribute to tax-sheltered accounts. If you pull that money out, you'll never be able to regain that space for the year.

That being said, start attacking that 6.55% debt with savings from your 53K earned income. The Roth contributions you have already made are too important to withdraw even on a high interest loan.
Bob's not my name
Posts: 7417
Joined: Sun Nov 15, 2009 8:24 am

Re: Student Loan and Roth Advice

Post by Bob's not my name »

$53,000 of gross income with no pre-tax retirement savings (traditional 401k or IRA) puts you in the 25% federal bracket. Roth contributions are more attractive after you've made enough pre-tax contributions to get under the 25% bracket -- only a few thousand may be necessary to do that, depending on what other deductions to your paycheck you have (maybe none, if you're riding on your parents' health insurance). So it's not clear to me you should be making Roth contributions at all. Do you have an employer retirement plan? It's possible you're nowhere near maxing your available tax-advantaged space, so withdrawing your Roth contributions to pay down the loans might be fine. More info needed.
Topic Author
newbinvestor
Posts: 8
Joined: Mon Nov 18, 2013 8:21 pm

Re: Student Loan and Roth Advice

Post by newbinvestor »

Sorry, left that off.

I also withhold 7% of my income to my 401k, with a 2.5% match and $5k accumulated. Decided to put a little to the Roth for an easier outlet to emergency savings. I am on my own health insurance through the company.
Bob's not my name
Posts: 7417
Joined: Sun Nov 15, 2009 8:24 am

Re: Student Loan and Roth Advice

Post by Bob's not my name »

So then you look something like this:

$53,000 gross income (make sure you include any bonuses, ESPP, bank interest, etc.)
- $2,290 pre-tax health, dental, and disability insurance premiums (convenient guess)
- $3,710 401k contributions
----------
$47,000 AGI --> eligible for the student loan interest deduction
- $3,900 personal exemption
- $6,100 standard deduction
----------
$37,000 taxable income --> just into the 25% bracket for 2013

If you look like this, and especially if you have a state tax on top of the 25% federal tax, I would contribute another $1,000 to the 401k to avoid giving up a third of it to taxes. I'd even withdraw from my Roth to do it. I call this the time machine approach -- your Roth contribution was taxed at only 15% last year, but you can withdraw it this year to make a deductible contribution when you're in the 25% bracket. Ignoring state tax, you have to withdraw only $750 to make a $1,000 contribution, because your tax bill is reduced $250.

Put another way, and still ignoring state tax: last year you used $1,000 of gross income to make an $850 Roth contribution and pay $150 in taxes. This year you use $750 of the Roth contribution to make a $1,000 401k contribution. You get $1,000 in your 401k and a bonus $100 still in the Roth. To the DeLorean!
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Toons
Posts: 14467
Joined: Fri Nov 21, 2008 9:20 am
Location: Hills of Tennessee

Re: Student Loan and Roth Advice

Post by Toons »

"It's important to know that distributions or withdrawals from Roth IRA contributions (that is, the dollar amount that you originally invested) are tax and penalty free;" :shock:

http://money.howstuffworks.com/personal ... -rules.htm

I suggest leaving the Roth money alone and pay down loans with new earned money,budget,budget,tight budget. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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jskorup
Posts: 22
Joined: Thu Oct 31, 2013 1:04 pm
Location: Michigan

Re: Student Loan and Roth Advice

Post by jskorup »

newbinvestor wrote:Situation: I graduated college last year and lived at home for a year to save up and knock down some student loans. I began contributing to a roth IRA right when I started my career and this has grown from approximately $6k (of contributions) to $10k over the past year and a half. I have been able to pay my student loans down from about $50k to $30k, and I would really like to pay these off as fast as possible to free up cash flow. My question is, does anyone know if contributions that are taken out of a Roth IRA are either taxed or are subject to the 10% penalty? I have about 6 months of expenses saved up, and I'd like to knock out this debt (6.55% interest) as fast as possible. My thought is that all the while knocking out debt quicker, I am not expecting much more than 6.55% return in the near future on my Roth and I still have earnings left in my Roth to invest that could be used in an extreme emergency. I'd appreciate any advice you guys may have.

Income: $53k
Age: 24
Student Loans: $30k (6.55%)
Other Debt (car died): $20k (1.9%)
Savings: 6 months expenses
Depends on your other expenses of course, but I would use that income to pay down the student loans. When you don't have kids, there is a lot more flexibility in your budget (where you live - area and type of dwelling, what you spend on the weekends, type of vehicle). Tighten up in other areas and pay it down, if you can.

I'm pretty much in the same boat as you (2 yrs older, little less income, little less students loans, mortgage but no other debt).
"There are no solutions; only trade-offs." - Thomas Sowell
MooseandBear
Posts: 109
Joined: Sat Aug 17, 2013 12:54 pm

Re: Student Loan and Roth Advice

Post by MooseandBear »

Newbinvestor,

While I know that your goal is to pay the loans off as quick as possible, you may want to consider doing a no-cost refinance of the loans. This would allow your monthly payment plus the extra you're throwing at the loans to go farther (ie have more of it go towards principal not interest). You might even be a good candidate for a variable interest loan.

This website lists a few options for refinancing banks/lenders:
http://studentloanhero.com/featured/5-b ... ent-loans/
I’m a little familiar with SoFi and DRB, both limit who can refinance with them (SoFi to particular schools, DRB to folks with a graduate degree).
DRB is currently offering a variable interest rate on refinanced loans of up to 15 year term at 2.5%+3 month average LIBOR interest rate. Or a five year fixed rate of 5%.

Pay attention to how your loan terms will change as a result of consolidating and/or refinancing (note: these changes may vary by potential lender). For instance if you refinance, you may lose access to income based repayment, loan forgiveness for public service, loan forgiveness after X number of years, forbearance, your loans being wiped upon your death rather than having to be paid by your estate etc.

MooseandBear
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