Paying off debt or maxing Roth IRA as a resident

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scx123
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Paying off debt or maxing Roth IRA as a resident

Post by scx123 » Wed Dec 05, 2018 1:13 pm

I am a 1st year resident physician with 210K in student loan, which I consolidated it to be 5.75%. I am currently on REPAYE (which is income based repayment). My gross income is around 56K and will increase about 2K per year. My residency will be 4 years, and I will most likely pursue a fellowship which is 1 year, for a total of 5 years. I can probably start moonlighting during my 3rd year and beyond to make more money, which will probably be an additional 5k+ in income, depends on how much I can work. My projected salary once I am an attending physician will likely be 350K+. Since I started residency, I have been contributing to roth IRA, but I started listening to Dave Ramsey podcast and he is so anti-debt that it made me seriously reconsidering my financial allocation. I am wondering if I should aggressively start trying to pay down my loan right now, or should I max out my Roth IRA each year and make minimum amount of payment based on my REPAYE plan? I have no other debt beside the student loan.

Jack FFR1846
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Re: Paying off debt or maxing Roth IRA as a resident

Post by Jack FFR1846 » Wed Dec 05, 2018 1:55 pm

I would normally say that for a "normal person", that paying debt first should be a non-negotiable act. But doctors are not normal people. You doctors....once out in the wild have more money than you can imagine and not enough places to put it. So my own advice would be to max out Roth, 403b and whatever tax advantaged accounts you can now, even if you're just paying the minimum on everything. When you start making so much that you have to pay people to count the wheel barrows of cash being carted off to the bank, you'll be glad since paying off the national debt becomes an extra shift for a month.

I'll stop before the hyperbole becomes out of control. :D
Bogle: Smart Beta is stupid

JBTX
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Re: Paying off debt or maxing Roth IRA as a resident

Post by JBTX » Wed Dec 05, 2018 2:01 pm

I think you can make a case either way at 5.75%.

Below 4% for younger people I would generally say keep the mortgage. Above 6%+ I'd lean to paying it off. In between depends on the situation. There are no magic to those parameters.

Dave Ramsey is very aggressive about paying off debt. I tend to think he is too aggressive to pay off lower interest fixed obligations for some people.

Ben Mathew
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Re: Paying off debt or maxing Roth IRA as a resident

Post by Ben Mathew » Wed Dec 05, 2018 2:06 pm

I would strongly recommend prioritizing the Roth IRA as well as any other tax-shielded account (401K etc.) that you have access to. You'll likely max out tax-shielded space once you graduate. That's when you should repay the loan.

wfrobinette
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Re: Paying off debt or maxing Roth IRA as a resident

Post by wfrobinette » Wed Dec 05, 2018 2:15 pm

scx123 wrote:
Wed Dec 05, 2018 1:13 pm
I am a 1st year resident physician with 210K in student loan, which I consolidated it to be 5.75%. I am currently on REPAYE (which is income based repayment). My gross income is around 56K and will increase about 2K per year. My residency will be 4 years, and I will most likely pursue a fellowship which is 1 year, for a total of 5 years. I can probably start moonlighting during my 3rd year and beyond to make more money, which will probably be an additional 5k+ in income, depends on how much I can work. My projected salary once I am an attending physician will likely be 350K+. Since I started residency, I have been contributing to roth IRA, but I started listening to Dave Ramsey podcast and he is so anti-debt that it made me seriously reconsidering my financial allocation. I am wondering if I should aggressively start trying to pay down my loan right now, or should I max out my Roth IRA each year and make minimum amount of payment based on my REPAYE plan? I have no other debt beside the student loan.
Get your retirement accounts going particularity those roth IRA's before your income pushes you over the limit.

You might want to head over to whitecoatinvestor as it's geared to physicians.

Nate79
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Re: Paying off debt or maxing Roth IRA as a resident

Post by Nate79 » Wed Dec 05, 2018 2:20 pm

I would focus on paying off the debt - reduce risk for the future and hope that your income happens like you plan. The amount of money you would put in the Roth the next 5 years would be so pitifully small compared to your (hopefully) enormous future income that it is almost meaningless.

Nate79
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Re: Paying off debt or maxing Roth IRA as a resident

Post by Nate79 » Wed Dec 05, 2018 2:21 pm

wfrobinette wrote:
Wed Dec 05, 2018 2:15 pm
scx123 wrote:
Wed Dec 05, 2018 1:13 pm
I am a 1st year resident physician with 210K in student loan, which I consolidated it to be 5.75%. I am currently on REPAYE (which is income based repayment). My gross income is around 56K and will increase about 2K per year. My residency will be 4 years, and I will most likely pursue a fellowship which is 1 year, for a total of 5 years. I can probably start moonlighting during my 3rd year and beyond to make more money, which will probably be an additional 5k+ in income, depends on how much I can work. My projected salary once I am an attending physician will likely be 350K+. Since I started residency, I have been contributing to roth IRA, but I started listening to Dave Ramsey podcast and he is so anti-debt that it made me seriously reconsidering my financial allocation. I am wondering if I should aggressively start trying to pay down my loan right now, or should I max out my Roth IRA each year and make minimum amount of payment based on my REPAYE plan? I have no other debt beside the student loan.
Get your retirement accounts going particularity those roth IRA's before your income pushes you over the limit.

You might want to head over to whitecoatinvestor as it's geared to physicians.
There is no income max for Roth IRA if you use the backdoor Roth.

wfrobinette
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Re: Paying off debt or maxing Roth IRA as a resident

Post by wfrobinette » Wed Dec 05, 2018 4:23 pm

Nate79 wrote:
Wed Dec 05, 2018 2:21 pm
wfrobinette wrote:
Wed Dec 05, 2018 2:15 pm
scx123 wrote:
Wed Dec 05, 2018 1:13 pm
I am a 1st year resident physician with 210K in student loan, which I consolidated it to be 5.75%. I am currently on REPAYE (which is income based repayment). My gross income is around 56K and will increase about 2K per year. My residency will be 4 years, and I will most likely pursue a fellowship which is 1 year, for a total of 5 years. I can probably start moonlighting during my 3rd year and beyond to make more money, which will probably be an additional 5k+ in income, depends on how much I can work. My projected salary once I am an attending physician will likely be 350K+. Since I started residency, I have been contributing to roth IRA, but I started listening to Dave Ramsey podcast and he is so anti-debt that it made me seriously reconsidering my financial allocation. I am wondering if I should aggressively start trying to pay down my loan right now, or should I max out my Roth IRA each year and make minimum amount of payment based on my REPAYE plan? I have no other debt beside the student loan.
Get your retirement accounts going particularity those roth IRA's before your income pushes you over the limit.

You might want to head over to whitecoatinvestor as it's geared to physicians.
There is no income max for Roth IRA if you use the backdoor Roth.
That is correct assuming no tIRA exists and that the backdoor will always be available. Plus the back door usually requires a lump sum max contribution to avoid taxes that could come if youDCA throughout the year.

money_bunny
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Re: Paying off debt or maxing Roth IRA as a resident

Post by money_bunny » Wed Dec 05, 2018 4:39 pm

Can he turn the loans into "Student loan repayment" if he works for himself after he graduates?

I agree with everyone here $210K was a good investment if you are as you able to get into the Fellowship and one of the high earning specialties. Use the space you have now for the 401K, Roth, etc.

I wish I put more into the investment accounts when I was determined to knock out my RN school loans, and pay my MSN in cash.

Are you married? Something else to think about is what together you can be doing as a team depending on their income. Spousal IRA or their maxing more of her accounts also.

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gasdoc
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Re: Paying off debt or maxing Roth IRA as a resident

Post by gasdoc » Wed Dec 05, 2018 8:33 pm

Ben Mathew wrote:
Wed Dec 05, 2018 2:06 pm
I would strongly recommend prioritizing the Roth IRA as well as any other tax-shielded account (401K etc.) that you have access to. You'll likely max out tax-shielded space once you graduate. That's when you should repay the loan.
I agree that the OP will max out the "tax-shielded accounts" after he graduates. However, why is that relevant? It is not one large bucket that eventually gets filled. It is only maxed out annually. In my mind, the only question is: is the best use of the money now to pay down debt or is it to put the money in tax advantaged space? To my way of thinking, contributing to the Roth account is best because of the forever tax free growth that results with only minimal tax hit at this time as a resident. As far as standard pre-tax accounts, I would rather see the debt paid off, because the tax savings from the pre-tax account at this stage are minimal, and the debt payment, like with anyone else, is a risk-free return. Just my way of looking at things....

gasdoc

billfromct
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Re: Paying off debt or maxing Roth IRA as a resident

Post by billfromct » Wed Dec 05, 2018 9:59 pm

I agree with the others & you should fund the Roth IRA to build some tax diversity in your retirement accounts; especially while you are young & in probably the lowest tax bracket of your career.

If you have the ability to fund a Roth 403b or Roth 401k, do that as well now that you are in a low tax bracket.

Once you start making the big bucks you will fund the the tax deductible 401k or 403b because of your high marginal tax rate.

And as others have mentioned, make sure you don't open a tax deductible IRA or roll over a tax deductible 401k or 403b into a roll over IRA which will prevent (or make it very expensive) you from executing a back door Roth IRA.

bill

Ben Mathew
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Re: Paying off debt or maxing Roth IRA as a resident

Post by Ben Mathew » Wed Dec 05, 2018 11:30 pm

gasdoc wrote:
Wed Dec 05, 2018 8:33 pm
Ben Mathew wrote:
Wed Dec 05, 2018 2:06 pm
I would strongly recommend prioritizing the Roth IRA as well as any other tax-shielded account (401K etc.) that you have access to. You'll likely max out tax-shielded space once you graduate. That's when you should repay the loan.
I agree that the OP will max out the "tax-shielded accounts" after he graduates. However, why is that relevant? It is not one large bucket that eventually gets filled. It is only maxed out annually.
I'm assuming that the OP will max out tax shielded accounts in the future and be forced to save in taxable. So the funds for paying off the loan in the future would come from the taxable account. But if the loan is paid off now, it would come at the expense of a tax shielded account. Since tax shielded space is valuable, it's worth holding off on the loan payments to maximize contributions.

If the OP didn't max out tax shielded accounts in the future, this would not be true. The choice would then be between paying off the loan and putting more in tax-shielded, both now and in the future.
In my mind, the only question is: is the best use of the money now to pay down debt or is it to put the money in tax advantaged space? To my way of thinking, contributing to the Roth account is best because of the forever tax free growth that results with only minimal tax hit at this time as a resident. As far as standard pre-tax accounts, I would rather see the debt paid off, because the tax savings from the pre-tax account at this stage are minimal, and the debt payment, like with anyone else, is a risk-free return.
This focuses on the tax arbitrage aspect. But even if the marginal tax rates were the same now and in the future, so that there is no tax arbitrage benefit to be had, there would still be a substantial benefit in the shielding provided by both Roth and traditional accounts. This is especially true in this case since the OP is young and the shielding would last many decades. So incurring a cost to maximize shielding could be worth it, as long as it's not too expensive. In this instance, the cost is not paying down a high interest loan for a few years and investing that money instead in lower interest bonds in a tax shielded account. That doesn't seem too bad. I haven't run the numbers, but my guess is it will be worth it to sock more money away in shielded accounts.

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gasdoc
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Re: Paying off debt or maxing Roth IRA as a resident

Post by gasdoc » Thu Dec 06, 2018 6:38 am

Ben Mathew wrote:
Wed Dec 05, 2018 11:30 pm
gasdoc wrote:
Wed Dec 05, 2018 8:33 pm
Ben Mathew wrote:
Wed Dec 05, 2018 2:06 pm
I would strongly recommend prioritizing the Roth IRA as well as any other tax-shielded account (401K etc.) that you have access to. You'll likely max out tax-shielded space once you graduate. That's when you should repay the loan.
I agree that the OP will max out the "tax-shielded accounts" after he graduates. However, why is that relevant? It is not one large bucket that eventually gets filled. It is only maxed out annually.
I'm assuming that the OP will max out tax shielded accounts in the future and be forced to save in taxable. So the funds for paying off the loan in the future would come from the taxable account. But if the loan is paid off now, it would come at the expense of a tax shielded account. Since tax shielded space is valuable, it's worth holding off on the loan payments to maximize contributions.

If the OP didn't max out tax shielded accounts in the future, this would not be true. The choice would then be between paying off the loan and putting more in tax-shielded, both now and in the future.
In my mind, the only question is: is the best use of the money now to pay down debt or is it to put the money in tax advantaged space? To my way of thinking, contributing to the Roth account is best because of the forever tax free growth that results with only minimal tax hit at this time as a resident. As far as standard pre-tax accounts, I would rather see the debt paid off, because the tax savings from the pre-tax account at this stage are minimal, and the debt payment, like with anyone else, is a risk-free return.
This focuses on the tax arbitrage aspect. But even if the marginal tax rates were the same now and in the future, so that there is no tax arbitrage benefit to be had, there would still be a substantial benefit in the shielding provided by both Roth and traditional accounts. This is especially true in this case since the OP is young and the shielding would last many decades. So incurring a cost to maximize shielding could be worth it, as long as it's not too expensive. In this instance, the cost is not paying down a high interest loan for a few years and investing that money instead in lower interest bonds in a tax shielded account. That doesn't seem too bad. I haven't run the numbers, but my guess is it will be worth it to sock more money away in shielded accounts.
My only follow-up comment is that the tax rate that the OP is being "shielded from" during his residency is low; therefore, in my mind, it would be better to get the guaranteed return of the paid off debt. Just a guess. It is a guaranteed return versus deferring a known low tax rate to a potentially higher tax rate.

gasdoc

scx123
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Re: Paying off debt or maxing Roth IRA as a resident

Post by scx123 » Thu Dec 06, 2018 11:35 am

Thank you everyone for all the advice. I will stay my course and continue to contribute to my Roth IRA to max it out each year, and then putting the rest toward my loan. I am not married, but I am in a very serious relationship with my girlfriend and we are currently living together. She makes about 110K right now as a consultant and she has no debt. If things stay on the current course then we will probably be married 2-3 years down the road so I will have an extra hand to help with the debt problem :D

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gasdoc
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Re: Paying off debt or maxing Roth IRA as a resident

Post by gasdoc » Thu Dec 06, 2018 12:26 pm

scx123 wrote:
Thu Dec 06, 2018 11:35 am
Thank you everyone for all the advice. I will stay my course and continue to contribute to my Roth IRA to max it out each year, and then putting the rest toward my loan. I am not married, but I am in a very serious relationship with my girlfriend and we are currently living together. She makes about 110K right now as a consultant and she has no debt. If things stay on the current course then we will probably be married 2-3 years down the road so I will have an extra hand to help with the debt problem :D
Well played!

gasdoc

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