Student Loans vs. Retirement Accounts.

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zammy55
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Student Loans vs. Retirement Accounts.

Post by zammy55 »

I wanted to discuss the traditional wisdom of paying off moderate/high interest debt (such as student loans) before contributing to retirement accounts (beyond employer matching) as per this wiki and common flowcharts. My intuition tells me it should be the complete opposite, and I would like to know why this isn't the case. I found a post that captures my intuition fairly well - viewtopic.php?p=2804606#p2804606

If we assume student loan debt at 7% and assume an equal portfolio return of 7% in a Roth IRA, the two investments are facially equal.

However, if we factor in the tax savings on IRA earnings, investment into a retirement account (maybe just roth?) seems to be the clear winner. Therefore, the commonly given advice to prioritize debt over retirement accounts seems to be based on the fact that paying off debt is a risk free return or other non-mathematical factors. Is it possible to quantify the value of making an investment risk free?

If the above is true, wouldn't debt vs retirement account be a personal decision based on personal risk tolerance, debt aversion, etc? This would hold up to a certain interest rate on debt and we should be able to calculate the interest rate cutoff where expected returns + tax savings is outweighed by the increased interest payments.

What am I missing that makes paying off debt such a clear choice to most people?
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FiveK
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Re: Student Loans vs. Retirement Accounts.

Post by FiveK »

Some people just don't like having debt. Others don't mind it. Still others seek it. Many can't understand how anyone could feel otherwise.

Aside from liquidity concerns, most people would agree that when comparing fixed interest alternatives, investing in (or paying down) the one with the higher rate is appropriate.

It's more difficult to quantify the relative value of a guaranteed but lower return vs. a non-guaranteed but higher "expected" return, because it becomes a matter of probabilities, not mathematical identities.
jimkinny
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Re: Student Loans vs. Retirement Accounts.

Post by jimkinny »

You are not taking into account risk with your assumptions about return. You can pay off debt without risk. You can not get a 7 % return on investments without a lot more risk. A ten year Treasury has an interest rate of about 0.7%.
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firebirdparts
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Re: Student Loans vs. Retirement Accounts.

Post by firebirdparts »

Saying that you can assume 7% risk free return investing is going to make people think you are a simpleton. So just don’t go around telling people you think that. You can do it, just don’t act naive about it. Don’t ask somebody to “explain it” as though you don’t already see the difference. Debt is pretty relentless, but it’s your debt, so it’s really up to you.

It may turn out great, subjecting yourself to relentless risk. Sometimes it does. If not though, it wears people down, so this is one of those things where the voice of experience may be singing a different song from the voice of naivety.
A fool and your money are soon partners
Blue456
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Re: Student Loans vs. Retirement Accounts.

Post by Blue456 »

zammy55 wrote: Sat Oct 17, 2020 1:54 am If we assume student loan debt at 7% and assume an equal portfolio return of 7% in a Roth IRA, the two investments are facially equal.
Not at all equal. $400,000 in student debt has guaranteed loss of 7% to me. $400,000 invested may or may not return 7%. Better yet, during a prolonged recession my return from the market can be 0% or negative, while that student loan debt will have guaranteed 7%.
NS_Bane
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Re: Student Loans vs. Retirement Accounts.

Post by NS_Bane »

zammy55 wrote: Sat Oct 17, 2020 1:54 am What am I missing that makes paying off debt such a clear choice to most people?
Risk tolerance. The personal finance industry is geared toward an audience that has lower risk tolerance, which is why it emphasizes paying off debt. Debt represents a fixed monthly cost and there is always a risk you could be laid off. Paying down the debt reduces that risk. Of course, if you do not save for retirement you increase the risk that you will not be able to retire as early as you'd like, but you can adjust by working longer. When you're laid off, you can't adjust by not eating.

I'm one of those people with low risk tolerance. When I graduated law school in 2015, I had $330,000 in student loans and credit card debt. I didn't contribute to my 401(k) for 2015 and 2016. In retrospect, I could have, and I would have had a great return. But associates at law firms are not guaranteed employment, and I wanted to reduce the risk of filing for bankruptcy should I ever be laid off.
Topic Author
zammy55
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Re: Student Loans vs. Retirement Accounts.

Post by zammy55 »

Background
Thank you for the replies everyone. Please let me clarify a few points.

1. I definitely understand the difference between a guaranteed, risk free return and a "risky" return.
2. I appreciate what a phenomenally good and otherwise unheard of return 7% risk free is.
3. I am, like many people in this community, personally rather risk averse.

My question was rather to help increase my understanding of the underlying rationale for choosing to pay off debt. I specifically want to compare the expected value (EV) of paying off debt vs the EV of investing in a retirement account. I understand the concept that +1000/-1000 has the same EV as +1/-1 but obviously has a lot more variance. I guess I am asking this question because in most discussions or articles I've read, I have not yet seen the underlying math that compares paying off debt vs investing in retirement accounts. Most of the things I've read basically take the interest rates of debt (5-10%) and directly compare that to expected returns of a retirement account (5-7%?) and automatically conclude that paying debt is better because of the risk free nature.

Main Argument
I understand if that was the end of the analysis, yes, obviously paying debt would be a no brainer. What I have not seen is calculations that factor in the tax benefits of a retirement account (specifically a Roth IRA). I think my misunderstanding probably relates to this.

My intuition (which is probably incorrect) is that there is an additional ~20% return on the earnings/growth of the Roth IRA investment because of the tax free withdrawal. Could somebody help me understand why that is not the case?

I see that the "returns" on debt payments may not be subject to taxes - but doesn't this depend on what we use the returns for? If my plan is to completely redirect the cash flow from debt payments to investments in taxable accounts, then the "returns on debt" would be subject to a tax that "returns on retirement investment" are not (I understand this assumes that we are already maxing out our retirement accounts)

I know I may be completely in my own head, but I am not trying to be argumentative, really just trying to understand this.
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Nate79
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Re: Student Loans vs. Retirement Accounts.

Post by Nate79 »

The return of paying off debt is a tax free return of the interest rate of the debt. So the comparison to the interest rate of the debt should be to the after tax return of whatever investment you are comparing.
KlangFool
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Re: Student Loans vs. Retirement Accounts.

Post by KlangFool »

OP,

1) They are not "retirement account". They are tax-advantaged accounts. You can withdraw the money tax-free and penalty-free before 59 1/2 years old.


2) You need to separate the discussion of putting the money into those tax-advantaged accounts versus investing them. You do not have to invest the money. The money could be in a money market mutual fund aka CASH.


Let me throw a curveball to you. Let assume that your marginal tax rate for Federal and State is 25%.


A) What if you contribute 10K to your Trad. 401K?


i) You save 25% taxes = $2,500 in taxes


ii) You take a 10K 401K loan to get the money out and pay the student loan.


iii) You save 25% in taxes.


iv) You save 7% in student loan interest and pay the interest on the 401K loan to yourself.


v) Please note that this is assuming that you do no lose your job and have to pay off the 401K loan immediately.


B) What if you contribute 5K to your HSA


i) You save 25% in taxes = $1,250.


ii) You have enough medical expense/bill history to withdraw the $2,500


iii) You use the $2,500 to pay the student loan.


In summary, you can CONTRIBUTE to those accounts but DO NOT INVEST the money. And, you can use the the contribution plus tax savings to pay the student loan.

KlangFool
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FiveK
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Re: Student Loans vs. Retirement Accounts.

Post by FiveK »

zammy55 wrote: Sat Oct 17, 2020 3:47 pm Main Argument
I understand if that was the end of the analysis, yes, obviously paying debt would be a no brainer. What I have not seen is calculations that factor in the tax benefits of a retirement account (specifically a Roth IRA). I think my misunderstanding probably relates to this.

My intuition (which is probably incorrect) is that there is an additional ~20% return on the earnings/growth of the Roth IRA investment because of the tax free withdrawal. Could somebody help me understand why that is not the case?
Might be useful for you to create a small spreadsheet with the following assumptions:
Loan balance = $12,300.59, interest rate = 7%/yr, 5 year term, payment made annually at the end of each year. Excel PMT function should return $3,000/yr.

Roth investments earn 7%/yr

Available cash flow = $6,000/yr

If you pay the minimum $3,000/yr on the loan, and contribute $3,000/yr to the Roth IRA (at the end of the year, same as the loan payment), after 5 years
- the loan is paid
- the Roth balance is $17,252.21

If, instead, you pay the loan $6,000/yr for 2 years, then $1,779.35 in the third year, with no loan payments in years 4 and 5, and contribute $6,000 minus that year's loan payment to the Roth, after 5 years
- the loan is paid
- the Roth balance is $17,252.21

You get the same result for any extra loan payment amount between $0/yr and $3,000/yr inclusive.

Does that help?
Topic Author
zammy55
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Re: Student Loans vs. Retirement Accounts.

Post by zammy55 »

FiveK wrote: Sat Oct 17, 2020 4:54 pm Might be useful for you to create a small spreadsheet with the following assumptions:
Loan balance = $12,300.59, interest rate = 7%/yr, 5 year term, payment made annually at the end of each year. Excel PMT function should return $3,000/yr.

Roth investments earn 7%/yr

Available cash flow = $6,000/yr

If you pay the minimum $3,000/yr on the loan, and contribute $3,000/yr to the Roth IRA (at the end of the year, same as the loan payment), after 5 years
- the loan is paid
- the Roth balance is $17,252.21

If, instead, you pay the loan $6,000/yr for 2 years, then $1,779.35 in the third year, with no loan payments in years 4 and 5, and contribute $6,000 minus that year's loan payment to the Roth, after 5 years
- the loan is paid
- the Roth balance is $17,252.21

You get the same result for any extra loan payment amount between $0/yr and $3,000/yr inclusive.

Does that help?
Direct Response
Thank you, this is exactly the kind of information I've been looking for. I understand the comparison you have given - however, the second scenario assumes you have space in your Roth to redirect the $6,000 loan payments. What if you have no space in tax advantaged accounts and must redirect the loan payments to a taxable account? The calculations should be the same but the result would be
-the loan is paid
-the [taxable account] balance is $17,252.21

In other words, the $17,252.21 would be reduced by [tax rate=T]. If we compare that to the first scenario making minimum payments on the loan, you will have less money by paying off your loans first.

I suppose the question is whether you would pay T x $17.252.21 for the guarantee of a 7% return. I'm not familiar with how taxes should be applied to this figure (and would obviously depend on variables) but for simplicity if we assume a flat 10% for T, you are paying $1,725.22 for the guarantee, and the cost would increase with taxes.

Before making any judgments on the value of a guarantee and the assumption of a 7% return on the Roth IRA, would you agree with the above analysis?

(Additionally, if I am not planning on reinvesting the student loan payments and simply planning on spending it on other things, I understand that the return on debt is also "tax free" as per Nate79's reply.)

Value of Guarantee
If my above analysis is correct, could you help me contextualize this "cost" of guarantee if you are familiar with the topic. I assume it will have something to do with risk free rates and interest rates and some sort of comparison with available risk free returns, but I am really not familiar at all. In layman's terms, is $1,725.22 a fair price for such a guarantee? Is it a discount? Is it overpriced?

My guess is that it does work out to be a fair or discounted price, but I would love to see the underlying math if possible. I can also understand the natural risk aversion and the very real possibility that the account balance, Roth or taxable, will not be anywhere close to $17,252.21 and for that to be the driving motivation.
Topic Author
zammy55
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Re: Student Loans vs. Retirement Accounts.

Post by zammy55 »

Nate79 wrote: Sat Oct 17, 2020 4:11 pm The return of paying off debt is a tax free return of the interest rate of the debt. So the comparison to the interest rate of the debt should be to the after tax return of whatever investment you are comparing.
I understand that now, but I would like to hear your thoughts on FiveK and my comments with the concrete example if possible. Thanks!
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zammy55
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Re: Student Loans vs. Retirement Accounts.

Post by zammy55 »

KlangFool wrote: Sat Oct 17, 2020 4:33 pm 2) You need to separate the discussion of putting the money into those tax-advantaged accounts versus investing them. You do not have to invest the money. The money could be in a money market mutual fund aka CASH.
I'm starting to understand that now, thanks for the clarification. Regarding that what are your thoughts on FiveK's post and my response?

Let me throw a curveball to you. Let assume that your marginal tax rate for Federal and State is 25%.


A) What if you contribute 10K to your Trad. 401K?


i) You save 25% taxes = $2,500 in taxes


ii) You take a 10K 401K loan to get the money out and pay the student loan.


iii) You save 25% in taxes.


iv) You save 7% in student loan interest and pay the interest on the 401K loan to yourself.


v) Please note that this is assuming that you do no lose your job and have to pay off the 401K loan immediately.


B) What if you contribute 5K to your HSA


i) You save 25% in taxes = $1,250.


ii) You have enough medical expense/bill history to withdraw the $2,500


iii) You use the $2,500 to pay the student loan.


In summary, you can CONTRIBUTE to those accounts but DO NOT INVEST the money. And, you can use the the contribution plus tax savings to pay the student loan.

KlangFool
This sounds like you are providing reasons that it may be favorable to contribute to a retirement account rather than paying extra toward student loans. Am I misunderstanding you?
JBTX
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Re: Student Loans vs. Retirement Accounts.

Post by JBTX »

It is a difficult decision. I'll use Roth for simplicity (speculating on future tax rates of traditional is beyond the scope of this discussion)


- As a straight up comparison - 7 % fixed return is much better than a risky equity based Roth IRA return of a similar amount.

- However a Roth IRA could potentially be decades. If you save a lot there may only limited available Roth space over your lifetime.

I would say if you have limited Roth space, the tax advantage of Roth over decades beats the avoided interest expense over a few years. Realistically I'd probably do some of both. Or look for refinancing opportunities.
JBTX
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Re: Student Loans vs. Retirement Accounts.

Post by JBTX »

zammy55 wrote: Sat Oct 17, 2020 6:12 pm
KlangFool wrote: Sat Oct 17, 2020 4:33 pm 2) You need to separate the discussion of putting the money into those tax-advantaged accounts versus investing them. You do not have to invest the money. The money could be in a money market mutual fund aka CASH.
I'm starting to understand that now, thanks for the clarification. Regarding that what are your thoughts on FiveK's post and my response?

Let me throw a curveball to you. Let assume that your marginal tax rate for Federal and State is 25%.


A) What if you contribute 10K to your Trad. 401K?


i) You save 25% taxes = $2,500 in taxes


ii) You take a 10K 401K loan to get the money out and pay the student loan.


iii) You save 25% in taxes.


iv) You save 7% in student loan interest and pay the interest on the 401K loan to yourself.


v) Please note that this is assuming that you do no lose your job and have to pay off the 401K loan immediately.


B) What if you contribute 5K to your HSA


i) You save 25% in taxes = $1,250.


ii) You have enough medical expense/bill history to withdraw the $2,500


iii) You use the $2,500 to pay the student loan.


In summary, you can CONTRIBUTE to those accounts but DO NOT INVEST the money. And, you can use the the contribution plus tax savings to pay the student loan.

KlangFool
This sounds like you are providing reasons that it may be favorable to contribute to a retirement account rather than paying extra toward student loans. Am I misunderstanding you?
I think he is saying you use tax savings of traditional IRA to partially pay off loan. This only really works if your tax rate is high enough to get significant tax savings.
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cchrissyy
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Re: Student Loans vs. Retirement Accounts.

Post by cchrissyy »

I suppose the question is whether you would pay T x $17.252.21 for the guarantee of a 7% return. I'm not familiar with how taxes should be applied to this figure (and would obviously depend on variables) but for simplicity if we assume a flat 10% for T, you are paying $1,725.22 for the guarantee, and the cost would increase with taxes.
you are misunderstanding how taxes work on long-term capital gains. it isn't a percent of the account balance, it's a percent of the gains. the rate will depend on your other income and the timing of the tax is within your control because you are the one deciding if and when to sell.

rates here
https://www.forbes.com/advisor/investin ... gains-tax/
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Nate79
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Re: Student Loans vs. Retirement Accounts.

Post by Nate79 »

zammy55 wrote: Sat Oct 17, 2020 6:03 pm
Nate79 wrote: Sat Oct 17, 2020 4:11 pm The return of paying off debt is a tax free return of the interest rate of the debt. So the comparison to the interest rate of the debt should be to the after tax return of whatever investment you are comparing.
I understand that now, but I would like to hear your thoughts on FiveK and my comments with the concrete example if possible. Thanks!
If you have a loan and an investment in a Roth with the same interest rate/return they are equivalent in return. The same amount of money earning the same interest rate in a traditional 401k/IRA is worth less than Roth/loan because its return/value is reduced by your tax rate. It is of course more complicated because no investment is earning the same on a risk adjusted basis as paying off the loan. But even more complicated because you can tax rate arbitrage between the tax rate savings now vs the tax rate during withdrawal.

Don't be naive and think that the tax savings now is a real savings (or return) - you will pay a tax rate when you pull the money out. Whether that tax rate is high or lower will only be known at the time of withdrawal.
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FiveK
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Re: Student Loans vs. Retirement Accounts.

Post by FiveK »

zammy55 wrote: Sat Oct 17, 2020 6:02 pm Direct Response
Thank you, this is exactly the kind of information I've been looking for. I understand the comparison you have given - however, the second scenario assumes you have space in your Roth to redirect the $6,000 loan payments. What if you have no space in tax advantaged accounts and must redirect the loan payments to a taxable account? The calculations should be the same but the result would be
-the loan is paid
-the [taxable account] balance is $17,252.21

In other words, the $17,252.21 would be reduced by [tax rate=T]. If we compare that to the first scenario making minimum payments on the loan, you will have less money by paying off your loans first.
All of loan payments, Roth contributions, and taxable contributions are made with after-tax money.

There is no annual or withdrawal tax drag for Roth accounts.

The amount of annual and withdrawal tax drag for taxable accounts will depend on one's specific tax situation.

If there is any tax drag, the nominal 7% return will be reduced and you may have more money in the taxable account at the end of the five years if you pay the loans first. That's because the money will have been in the taxable account for a shorter time.
I suppose the question is whether you would pay T x $17.252.21 for the guarantee of a 7% return. I'm not familiar with how taxes should be applied to this figure (and would obviously depend on variables) but for simplicity if we assume a flat 10% for T, you are paying $1,725.22 for the guarantee, and the cost would increase with taxes.

Before making any judgments on the value of a guarantee and the assumption of a 7% return on the Roth IRA, would you agree with the above analysis?
No, based on the explanation above.
Value of Guarantee
If my above analysis is correct, could you help me contextualize this "cost" of guarantee if you are familiar with the topic. I assume it will have something to do with risk free rates and interest rates and some sort of comparison with available risk free returns, but I am really not familiar at all. In layman's terms, is $1,725.22 a fair price for such a guarantee? Is it a discount? Is it overpriced?

My guess is that it does work out to be a fair or discounted price, but I would love to see the underlying math if possible. I can also understand the natural risk aversion and the very real possibility that the account balance, Roth or taxable, will not be anywhere close to $17,252.21 and for that to be the driving motivation.
There is no equation that unambiguously provides the trade-off between risk and return.

Everyone can agree that, for the same risk, a higher return is better. Similarly, for the same return a lower risk is better.

But how to equate delta-X% expected return to delta-Y% risk (even to define and measure "risk")? That's what is missing and thus feeds unending "feels better" debates.
KlangFool
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Re: Student Loans vs. Retirement Accounts.

Post by KlangFool »

zammy55 wrote: Sat Oct 17, 2020 6:12 pm

This sounds like you are providing reasons that it may be favorable to contribute to a retirement account rather than paying extra toward student loans. Am I misunderstanding you?

zammy55,


1) It is not a "retirement" account. It is a tax-advantaged account. The label matters.


2) The answer is "maybe". It depends on a lot of circumstances.


A) Your marginal tax rate


B) What are your tax-advantaged account options?


C) Is there a 401K loan option for your 401K? If yes, what are the limitations?


You may want to explore the options. Start a new topic. Collect all the relevant information and ask in this forum.


KlangFool
KlangFool
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Re: Student Loans vs. Retirement Accounts.

Post by KlangFool »

JBTX wrote: Sat Oct 17, 2020 6:29 pm
zammy55 wrote: Sat Oct 17, 2020 6:12 pm
KlangFool wrote: Sat Oct 17, 2020 4:33 pm 2) You need to separate the discussion of putting the money into those tax-advantaged accounts versus investing them. You do not have to invest the money. The money could be in a money market mutual fund aka CASH.
I'm starting to understand that now, thanks for the clarification. Regarding that what are your thoughts on FiveK's post and my response?

Let me throw a curveball to you. Let assume that your marginal tax rate for Federal and State is 25%.


A) What if you contribute 10K to your Trad. 401K?


i) You save 25% taxes = $2,500 in taxes


ii) You take a 10K 401K loan to get the money out and pay the student loan.


iii) You save 25% in taxes.


iv) You save 7% in student loan interest and pay the interest on the 401K loan to yourself.


v) Please note that this is assuming that you do no lose your job and have to pay off the 401K loan immediately.


B) What if you contribute 5K to your HSA


i) You save 25% in taxes = $1,250.


ii) You have enough medical expense/bill history to withdraw the $2,500


iii) You use the $2,500 to pay the student loan.


In summary, you can CONTRIBUTE to those accounts but DO NOT INVEST the money. And, you can use the the contribution plus tax savings to pay the student loan.

KlangFool
This sounds like you are providing reasons that it may be favorable to contribute to a retirement account rather than paying extra toward student loans. Am I misunderstanding you?
I think he is saying you use tax savings of traditional IRA to partially pay off loan. This only really works if your tax rate is high enough to get significant tax savings.

Correct. But, to be precise, we are talking about Trad. 410K not IRA. There is no loan option with IRA.

KlangFool
KlangFool
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Re: Student Loans vs. Retirement Accounts.

Post by KlangFool »

OP,

So, they are two separate questions:

A) Whether you should contribute to your tax-advantaged accounts.


B) Whether you should invest the money versus paying off the student loan.


Those two questions are somewhat independent of each other.


KlangFool
Topic Author
zammy55
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Re: Student Loans vs. Retirement Accounts.

Post by zammy55 »

JBTX wrote: Sat Oct 17, 2020 6:20 pm I would say if you have limited Roth space, the tax advantage of Roth over decades beats the avoided interest expense over a few years. Realistically I'd probably do some of both. Or look for refinancing opportunities.
This is my intuition, but this goes against the commonly given advice to fully prioritize debt so trying to understand why.
Topic Author
zammy55
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Re: Student Loans vs. Retirement Accounts.

Post by zammy55 »

Allright, thank you for the advice everyone, I don't understand fully yet but I will continue to think about it and come back with more details.
JBTX
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Re: Student Loans vs. Retirement Accounts.

Post by JBTX »

zammy55 wrote: Sat Oct 17, 2020 9:31 pm
JBTX wrote: Sat Oct 17, 2020 6:20 pm I would say if you have limited Roth space, the tax advantage of Roth over decades beats the avoided interest expense over a few years. Realistically I'd probably do some of both. Or look for refinancing opportunities.
This is my intuition, but this goes against the commonly given advice to fully prioritize debt so trying to understand why.
the reason that many prioritize debt is

1. Just head to head, paying of 7% fixed debt with no tax deduction is better than a 7% risky variable return that will be taxed.
2. Just a visceral and emotional aversion to any type of debt.

The problem with #1 is it isn't apples to apples. You are comparing different time durations, favoring filling the tax advantaged space for decades vs paying off the debt over a few years. As to #2, many people feel an emotional high paying odd even 2.5% debt.

I would see the options as follows

1. Fill Roth first.
2. Fill traditional (401k, presumably) and use the tax savings to pay a little bit of the debt down (Klang fool option)
3. To the extent you have emergency fund, fill Roth and use that as emergency fund, even if you fill the Roth space with cash, and pay off as much debt as you can
4. Split the difference. Talk half to pay down debt, the other half to fill ira / 401k space.

Don't over think it. There is no absolutely correct answer. Any of the above is defensible.
Nate7out
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Re: Student Loans vs. Retirement Accounts.

Post by Nate7out »

Read this Vanguard paper at the link.

https://institutional.vanguard.com/VGAp ... NextDollar
Topic Author
zammy55
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Re: Student Loans vs. Retirement Accounts.

Post by zammy55 »

JBTX wrote: Sat Oct 17, 2020 11:23 pm
zammy55 wrote: Sat Oct 17, 2020 9:31 pm
JBTX wrote: Sat Oct 17, 2020 6:20 pm I would say if you have limited Roth space, the tax advantage of Roth over decades beats the avoided interest expense over a few years. Realistically I'd probably do some of both. Or look for refinancing opportunities.
This is my intuition, but this goes against the commonly given advice to fully prioritize debt so trying to understand why.
the reason that many prioritize debt is

1. Just head to head, paying of 7% fixed debt with no tax deduction is better than a 7% risky variable return that will be taxed.
2. Just a visceral and emotional aversion to any type of debt.

The problem with #1 is it isn't apples to apples. You are comparing different time durations, favoring filling the tax advantaged space for decades vs paying off the debt over a few years. As to #2, many people feel an emotional high paying odd even 2.5% debt.

I would see the options as follows

1. Fill Roth first.
2. Fill traditional (401k, presumably) and use the tax savings to pay a little bit of the debt down (Klang fool option)
3. To the extent you have emergency fund, fill Roth and use that as emergency fund, even if you fill the Roth space with cash, and pay off as much debt as you can
4. Split the difference. Talk half to pay down debt, the other half to fill ira / 401k space.

Don't over think it. There is no absolutely correct answer. Any of the above is defensible.
Thank you for the further clarification, that is good to know.
Topic Author
zammy55
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Joined: Fri Oct 16, 2020 11:33 pm

Re: Student Loans vs. Retirement Accounts.

Post by zammy55 »

Nate7out wrote: Sun Oct 18, 2020 7:25 am Read this Vanguard paper at the link.

https://institutional.vanguard.com/VGAp ... NextDollar
Thank you, that was a helpful article. It does seem to confirm that paying down debt should not automatically come before investing in tax advantaged accounts and is a decision based on rates and personal risk tolerance.
tashnewbie
Posts: 801
Joined: Thu Apr 23, 2020 12:44 pm

Re: Student Loans vs. Retirement Accounts.

Post by tashnewbie »

Welcome to the forum!

It might be helpful to you to post a full portfolio review per the format set forth in the Asking Portfolio Questions sticky post in the personal investment forum. People could give more informed advice about your specific situation, which would probably be more actionable for you.
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