Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

Hi all,

I'm an appreciative long-time lurker, and was hoping y'all could help with my question. I'm not sure whether I should use my excess cash flow to aggressively pay down my student loans or if I should instead invest that excess in the market (likely through a megabackdoor roth, which my employer offers).

Some stats:
-salary: 190,000
-student loan debt: 180,000 (refinanced at 3.25%; no prepayment penalty & can easily refinance again)
-50k emergency fund in a checking account (for now)
-plan to max out pre-tax 401(k) and HSA by end of 2020
-26 y/o and first year working, so no other assets/debt to speak of
-no plan to buy a home or other major purchases any time soon
-can easily move in w/ parents if prolonged unemployment, etc

Is the obvious answer to invest in the market? It feels silly to prepay a 3% loan. I could likely beat that even in a taxable account, but can *extra* beat it with all gains growing tax-free in a Roth IRA forever, especially if I contribute so young.

With that said, it hurts psychologically to carry that much debt. I enjoy thinking about the Roth IRA as a secondary emergency fund: though I'm certainly not planning on pulling from it any time soon, it is something that I could pull principal from at any point if there were to be a prolonged period of unemployment. That perspective adds a lot of peace of mind to ease the sting of the debt.

Also, I'm a bit concerned regarding job security. I don't expect to be fired/laid off, but would estimate it at about a 20% chance, especially if the economy heads south. The common wisdom seems to be that you should aggressively pay off your loans such that you are able to pivot to a better career at your leisure, avoid burnout, etc. But my sense is that, since I'm so far from nearing a lower balance regardless, I may as well build up a fund of savings that I can pull from (which the megabackdoor thankfully allows for) in case things go bad for a long period of time.

FWIW, like most junior BigLaw associates, I'm not planning on staying in this highly-paid of a position for longer than a few more years. I'll likely pivot to something that's closer to ~120k-~150k in 2-4 years.

Would love to hear the group's thoughts. It feels crazy to invest rather than prepay the loans, but also feels crazy to "burn cash" by doing the opposite.

EDIT: Note that I graduated in June 2019 with $210k debt and $0 savings. Now that I have savings, I'm maxing out my pre-tax 401(k) and unsure what to do with excess cash, both in 2020 and onward. I'll likely retain at least $30k in a liquid e-fund but not sure whether/how I should tier that amount (HYSA / savings bonds / ?) and how that approach interacts with my excess cash flow decision.
Last edited by quenchgum on Sat Sep 05, 2020 3:22 pm, edited 3 times in total.
hoffse
Posts: 124
Joined: Wed Aug 03, 2016 7:47 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by hoffse »

You should be able to do both.

Max out the mega back door and then put everything else toward the loan. Or...

Ride the loan out a little bit and save for other life goals. Husband and I started with more law debt than you did. We picked a time frame in which we wanted to pay it off, set ourselves on that course with autopay, and then used everything else we took home for other goals. At this point our loan balances are low enough that we could pay them off at any time. We are both 33. I’m letting them ride until we naturally pay them off based on our schedule though because the interest rate is piddly.

During the time we have had those loans we bought two houses, fully remodeled one, and are in the process of remodeling our second. Our second house is our “forever” house. It’s really nice having that in our early 30’s with a young kid. We have the playroom, the yard, the walkability, the school district, all of it. No need to move for a very long time, if ever. I do not regret for one moment holding those loans a few years longer in order to get into our starter house in our 20’s and leverage that to our forever house in our 30’s.

I know lots of people will disagree with this approach, but our loans just weren’t a problem with our incomes, and even doing all this we set ourselves on a course to pay them off like 15 years early. We also maxed out retirement accounts as we went, so our nest egg is nice and plump.

It worked for us because we got over the psychological aspect of it and focused on the math. YMMV.

Of course, you might work so much in biglaw that you never have the opportunity to spend it, in which case you might as well kill the debt. That happened to many of my friends. I never even applied to biglaw because the lifestyle did not appeal to me.

Finally, when you burn out of biglaw look at mid law and lower COL areas. It’s not so bad at all, and you can actually have a life in parts of the country where $150-$200k per year puts you in the top strata of earners.
runner540
Posts: 1326
Joined: Sun Feb 26, 2017 5:43 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by runner540 »

quenchgum wrote: Sat Sep 05, 2020 1:05 am Hi all,

I'm an appreciative long-time lurker, and was hoping y'all could help with my question. I'm not sure whether I should use my excess cash flow to aggressively pay down my student loans or if I should instead invest that excess in the market (likely through a megabackdoor roth, which my employer offers).

Some stats:
-salary: 190,000
-student loan debt: 180,000 (refinanced at 3.25%; no prepayment penalty & can easily refinance again)
-50k emergency fund in a checking account (for now)
-plan to max out pre-tax 401(k) and HSA by end of 2020
-26 y/o and first year working, so no other assets/debt to speak of
-no plan to buy a home or other major purchases any time soon
-can easily move in w/ parents if prolonged unemployment, etc

Is the obvious answer to invest in the market? It feels silly to prepay a 3% loan. I could likely beat that even in a taxable account, but can *extra* beat it with all gains growing tax-free in a Roth IRA forever, especially if I contribute so young.

With that said, it hurts psychologically to carry that much debt. I enjoy thinking about the Roth IRA as a secondary emergency fund: though I'm certainly not planning on pulling from it any time soon, it is something that I could pull principal from at any point if there were to be a prolonged period of unemployment. That perspective adds a lot of peace of mind to ease the sting of the debt.

Also, I'm a bit concerned regarding job security. I don't expect to be fired/laid off, but would estimate it at about a 20% chance, especially if the economy heads south. The common wisdom seems to be that you should aggressively pay off your loans such that you are able to pivot to a better career at your leisure, avoid burnout, etc. But my sense is that, since I'm so far from nearing a lower balance regardless, I may as well build up a fund of savings that I can pull from (which the megabackdoor thankfully allows for) in case things go bad for a long period of time.

FWIW, like most junior BigLaw associates, I'm not planning on staying in this highly-paid of a position for longer than a few more years. I'll likely pivot to something that's closer to ~120k-~150k in 2-4 years.

Would love to hear the group's thoughts. It feels crazy to invest rather than prepay the loans, but also feels crazy to "burn cash" by doing the opposite.
You mentioned the debt “hurt” and “stings”. Work to pay it off aggressively and contribute to your Pretax 401k,HSA etc. Single person who works a lot (not a lot of free time to spend money) can do all that on $180k (plus any bonuses go toward the debt)

Especially since you expect to move to a lower paying position, you need to use your current high income to pay it off.
Mindbender
Posts: 31
Joined: Sat Feb 01, 2020 7:40 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by Mindbender »

Here’s where Dave Ramsey has it right I think. Debt is psychological even though your math is accurate. You win when you focus. Pay off the debt then throw everything at maxing out retirement. You’re young and have the benefit of time.

ETA: this is especially true because of your plan to drop in salary. Use the power of your bigger income now.
petulant
Posts: 1901
Joined: Thu Sep 22, 2016 1:09 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by petulant »

Very few of my friends who started in big law stayed. My recommendation is to pay off the loans aggressively due to the risk of moving to a different position, but maintain the emergency fund.
User avatar
anon_investor
Posts: 3522
Joined: Mon Jun 03, 2019 1:43 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

Former big law associate here.

Definitely keep the emergency fund, there is no loyalty it big law, your firm could easily layoff your entire class if your firm's economic situation gets bad. This happened to friends during the Great Recession. Even if you have the option to move home, you will still need money for your monthly student loan payments.

Your student loans will be a big ball and chain while you have them. They may psychologically keep you from thinking about leaving big law even though you no longer really want to be in big law. I suggest aggressively attack your student loans over mega backdoor Roth. Definitely max out your pretax 401k and HSA. Are you able to do the regular backdoor Roth IRA. If not, maybe just do $6k in mega backdoor Roth (to effectively be like a regular backdoor roth), and put the rest to loans. Those tax advantaged savings alone will put you in a great position.

Also know if you become sick of big law there are $200k+ in house positions available in MCOL areas (obviously varies by practice area so YMMV). I pivoted to one of these roles because marriage plus kids and big law do not mix well. On a per hour basis (9 to 5, M to F) I probably make a lot more now than any big law associate.

Just avoid lifestyle creep and you will be in great shape.
bltn
Posts: 882
Joined: Mon Feb 20, 2017 9:32 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by bltn »

I think there is an appeal to both accumulating a Roth IRA and retiring the student loans.

In your situation I would do both. I would contribute 6000 to a back door Roth. I would then aggressively pay off the student loans. I would also build up my taxable account a bit.

I guess my overall plan would be to live way below my means. I d spend no more than 40% of my take-home pay, not including the 401k deductions.
peterwantstosave
Posts: 361
Joined: Fri Nov 24, 2017 8:28 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by peterwantstosave »

You may not like my solution, but I would pay off all your debt before I contributed another penny to investments. Student loan debt is not bankruptable, so it will be there until you make it disappear. The psychological benefit of being debt free will allow you to pour into investments.

In this case, I agree with Dave Ramsey.

P
403b: 54% VTSAX, 36% BTMKX 10% QCBMRX | GSRA: 100% Money Market (100% QCBMRX on Dec 11, 2020) | Roth IRA: 100% FIPFX | Taxable: 100% FSKAX
buddyblack
Posts: 4
Joined: Sun Oct 06, 2019 11:11 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by buddyblack »

quenchgum wrote: Sat Sep 05, 2020 1:05 am -plan to max out pre-tax 401(k) and HSA by end of 2020
-26 y/o and first year working, so no other assets/debt to speak of
I think it's great that you're on track to max your 401(k) and HSA by the end of the year. It also sounds like you graduated in May 2020 and probably just started working.

If so, your 2020 taxable income is going to be a lot smaller than your $190K salary suggests...probably in the 12% federal tax bracket given your 401(k) & HSA contributions. This makes the mega backdoor Roth in 2020 the clear winner in my mind. You should also consider doing a regular backdoor Roth for 2020 for the same reasons, but you can wait until early 2021 to do that. So the MBR should be your priority after maxing pre-tax contributions and covering your other obligations (rent, food, minimum loan payment, etc.).

For the rest of 2021, skip the mega backdoor Roth and start throwing everything at your debt.

Good luck!
MBB_Boy
Posts: 195
Joined: Sat May 12, 2018 4:09 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by MBB_Boy »

If you're uncomfortable with prepaying something as low as 3.25%......what if I told you that after refinancing to a variable student loan post MBA, my wife's student loan is currently 0.18%?

I'm in the camp of putting as much in to the MBR as you can and refinancing the student loan to a lower rate. We are maxing out both of ours, and carrying the debt load. When the rate rises (hahahahahahahahahaha.......never according to J-Pow), we can swap to paying it off instead. But honestly, our 5 year term will probably be expired before then (only 3.5 left).

Of course, this is about your personal risk tolerance, not mine. What may be informative is to look at what your student loan payments do to your budget. If you can afford them comfortably even with this theoretical 120K job after you downshift in a few years, I would strongly consider doing the MBR while you can. It's a fairly rare benefit, and there's a chance you won't have it in a few years.

But if the debt is actually a big weight in your budget, perhaps reconsider. In our case, we live completely just on one of our salaries - including the student loan debt payment. We can take quite the income hit before the debt matters to us. You'll have to do your budget and see what makes sense for you
Dylan222
Posts: 1
Joined: Sat Sep 05, 2020 11:48 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by Dylan222 »

I was in your shoes eight years ago as a Biglaw associate who graduated with 210K in debt (and a lower 160k salary at the time). Refinancing was also more difficult at the time (SoFi didn’t exist yet) so I was paying off my 7~8% loans. I threw everything at my loans (no rainy day fund even) and no 401K even for the first few years. I paid off my loans in around 5 years (refinancing with SoFi at around 3.5 half way through).

I probably would’ve made more in retrospect given the market performance if I had made minimum payments on my loans and bought stocks. But I don’t regret it. Paying off my loans was one of the best days of my life. The psychological pressure is enormous. I used to look at my loans every few months and feel sick to my stomach. Now, I look at my brokerage account every few days and feel happy and secure that I could live off my savings for years even I were fired.

Looking back, the only thing I would do differently is pay into a 401K starting from year 1. My combined tax bracket was pretty high back then ~35% so I could have turned $12,000 into $18,000 in contributions with those tax savings. That’s a far higher return than my loan payments. And you’re in even better shape with your interest rate.

The only danger is that leaves you without a rainy day fund. Given your low interest rate on your loans, something small might be prudent, though it should be a true rainy day fund and kept in cash. But I also think your 20% chance of getting fired seems way too high. Are you on track to hit your hours this year? Do people generally like your work product? If so, you should be pretty safe. Also, every single person I know that got fired just found another biglaw job (or something at least close to Biglaw).

In sum, you’ll be fine. And I only planned to stay in Biglaw for a few years but ended up staying much longer. Because of the slope of salary increases, the mid to senior years is where you can really build wealth. I went from basically a zero net worth in year 5 after paying off my loans to over $500,000K in only a few years.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

Thanks very much to all for your perspectives. I want to make clear that in ALL cases, regardless of my strategy, I'm maxing my pre-tax 401k and my HSA, will maintain a truly liquid emergency fund of at least ~30k or so, and will continue to live far below my means for the next couple of years (as I have been since I graduated in June 2019). I'm also not planning to purchase a home in the next 3-7 years (I'm not in a relationship and unsure where I want to live long-term). I get good informal feedback, am on pace for hours, and seem liked - the 20% is based solely on the economic downturn.

For those that advocate for aggressively prepaying the loans: wouldn't stashing the money in a MBDR -- where I could pull the principal without any tax or penalty at any time -- work just as well? For example, if I were to aggressively prepay the loans and contribute nothing through the MBDR, then in 3 years (ballparking) I could be debt-free with no money invested in the MBDR. In comparison, if I make my minimum payments of ~3000 month (on an already aggressive 5-year plan) and put all of my excess money (another ~3000 month) toward a MBDR, then in 3 years my debt will be at about 90k and my MBDR will be at another ~100k (again ballparking). In the latter scenario, I imagine that I would feel *just as free* to ditch or otherwise exit biglaw: to the extent that my new salary would put me in a pinch to make student loan payments, I could simply withdraw the difference in principal from my Roth IRA without any penalty.

To the extent that I end up not pulling from the Roth IRA, it's a huge win: I manage to have padded a tax-advantaged account in early years of my life and will have ~100k of principal growing tax-free in perpetuity. Once I do pivot to a lower-paying job, I'll likely still have a strong enough salary to make sizeable loan payments (perhaps not ~3000 month but no need at that point), but I'll *always* be able to pull principal from the Roth IRA to make loan payments as necessary. My only hesitation here is that I don't want to have to plan on pulling from amounts that are invested in the market, but I think that's tempered pretty well by the fact that I should have a good amount of flexibility on how much I want to pull: if the market is up, then I can pull without any hesitation; if the market is down, then with ~90k in debt left, my "lower-paying" job will still be a conservative ~120k annually (which should be enough to support my debt payments without stress) and I should be able to refinance to a much lower monthly payment as necessary.

For bonus points, I think the MBDR investment strategy will also RELIEVE some stress in that I'll be able to support myself for a prolonged period of time (above and beyond the already-generous $30k liquid emergency fund) should my job decide to cut me (as opposed to me deciding to leave my job).

I understand the mental stress of the debt -- and I FEEL that, which is why I'm posting here -- but want to play devil's advocate on the above strategy, which logically makes sense to me. Is there something that I'm missing here? If not, then I could see myself getting quite comfortable with contributing to the MBDR -- essentially living and making decisions as though I were paying off my debt balance each time I contributed to the MBDR -- knowing that I could pull principal as necessary and that I won't be too subject to market fluctuations, given my expected lower salary (still high) and ability to refinance.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

buddyblack wrote: Sat Sep 05, 2020 9:47 am
quenchgum wrote: Sat Sep 05, 2020 1:05 am -plan to max out pre-tax 401(k) and HSA by end of 2020
-26 y/o and first year working, so no other assets/debt to speak of
I think it's great that you're on track to max your 401(k) and HSA by the end of the year. It also sounds like you graduated in May 2020 and probably just started working.

If so, your 2020 taxable income is going to be a lot smaller than your $190K salary suggests...probably in the 12% federal tax bracket given your 401(k) & HSA contributions. This makes the mega backdoor Roth in 2020 the clear winner in my mind. You should also consider doing a regular backdoor Roth for 2020 for the same reasons, but you can wait until early 2021 to do that. So the MBR should be your priority after maxing pre-tax contributions and covering your other obligations (rent, food, minimum loan payment, etc.).

For the rest of 2021, skip the mega backdoor Roth and start throwing everything at your debt.

Good luck!
Thank you for your kind thoughts!

I actually graduated about a year ago now! I started with ~200k in student debt, ~10k in credit card debt and $0 emergency fund. Over the past ten months of working, I paid off the credit card debt, built the emergency fund to $50k, made regular payments on my debt and didn't contribute to my 401(k) or HSA because I had no e-fund. Now that I do, I'm catching up by contributing relatively large portions of my paycheck for the next couple of cycles so that I'll max out my pre-tax 401(k) and HSA for 2020. The question for me now is (1) how much do I keep in a truly liquid emergency fund and (2) what do I do with the excess (prepay or MBDR)?
User avatar
anon_investor
Posts: 3522
Joined: Mon Jun 03, 2019 1:43 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

quenchgum wrote: Sat Sep 05, 2020 1:21 pm Thanks very much to all for your perspectives. I want to make clear that in ALL cases, regardless of my strategy, I'm maxing my pre-tax 401k and my HSA, will maintain a truly liquid emergency fund of at least ~30k or so, and will continue to live far below my means for the next couple of years (as I have been since I graduated in June 2019). I'm also not planning to purchase a home in the next 3-7 years (I'm not in a relationship and unsure where I want to live long-term). I get good informal feedback, am on pace for hours, and seem liked - the 20% is based solely on the economic downturn.

For those that advocate for aggressively prepaying the loans: wouldn't stashing the money in a MBDR -- where I could pull the principal without any tax or penalty at any time -- work just as well? For example, if I were to aggressively prepay the loans and contribute nothing through the MBDR, then in 3 years (ballparking) I could be debt-free with no money invested in the MBDR. In comparison, if I make my minimum payments of ~3000 month (on an already aggressive 5-year plan) and put all of my excess money (another ~3000 month) toward a MBDR, then in 3 years my debt will be at about 90k and my MBDR will be at another ~100k (again ballparking). In the latter scenario, I imagine that I would feel *just as free* to ditch or otherwise exit biglaw: to the extent that my new salary would put me in a pinch to make student loan payments, I could simply withdraw the difference in principal from my Roth IRA without any penalty.

To the extent that I end up not pulling from the Roth IRA, it's a huge win: I manage to have padded a tax-advantaged account in early years of my life and will have ~100k of principal growing tax-free in perpetuity. Once I do pivot to a lower-paying job, I'll likely still have a strong enough salary to make sizeable loan payments (perhaps not ~3000 month but no need at that point), but I'll *always* be able to pull principal from the Roth IRA to make loan payments as necessary. My only hesitation here is that I don't want to have to plan on pulling from amounts that are invested in the market, but I think that's tempered pretty well by the fact that I should have a good amount of flexibility on how much I want to pull: if the market is up, then I can pull without any hesitation; if the market is down, then with ~90k in debt left, my "lower-paying" job will still be a conservative ~120k annually (which should be enough to support my debt payments without stress) and I should be able to refinance to a much lower monthly payment as necessary.

For bonus points, I think the MBDR investment strategy will also RELIEVE some stress in that I'll be able to support myself for a prolonged period of time (above and beyond the already-generous $30k liquid emergency fund) should my job decide to cut me (as opposed to me deciding to leave my job).

I understand the mental stress of the debt -- and I FEEL that, which is why I'm posting here -- but want to play devil's advocate on the above strategy, which logically makes sense to me. Is there something that I'm missing here? If not, then I could see myself getting quite comfortable with contributing to the MBDR -- essentially living and making decisions as though I were paying off my debt balance each time I contributed to the MBDR -- knowing that I could pull principal as necessary and that I won't be too subject to market fluctuations, given my expected lower salary (still high) and ability to refinance.
Part of the reason aggressive loan payoff is recommended is that the future is unknown, but the reduction in loan principal is.

The period you will likely holding the loan is relatively short term (unlike a 30 yr mortgage). Short term investment returns may yield less than 3.25% annually. Further you may lose the high paying job (involuntarily) after a short period of time. Also understand that with the mega backdoor roth, you will not have tax free access to "principal" for 5 years after funds are rolled over from the 401k to Roth IRA. So even if you rollover after tax 401k contributions every paycheck to your Roth IRA, if you lose your job after 3 years you will have 0 access to that money without some tax penalties.

Also you don't have to go all MBR or extra loan payments. An alternative is a mix of both.
integrate
Posts: 7
Joined: Sat Aug 15, 2020 3:08 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by integrate »

There's a lot of poor advice on this thread. OP, it's 100% understandable to feel the psychological weight of this amount of debt, but you should strive to look at this analytically, as you are already doing, and not make this decision based on emotion. Dave Ramsey advice is frequently bad advice only helpful for people who are irresponsible and who must rely on psychological crutches, and I'm disappointed to see it cited in this vein by posters here. You must not only consider whether you are likely to get a rate of return exceeding 3% on your invested funds, but the value of the tax advantaged space you are giving up-forever-if you don't mega backdoor. Will your future job's 401k offer the opportunity to mega backdoor? Will mega backdoor even be a thing in a few years? There's no guarantee you'll be able to build up Roth funds at the same rate later in life. For you, the combined value of guaranteeing the roth space and the likelihood that investment returns will exceed your loan rate is almost certainly greater than prepaying the loan.

Do note the 5 year conversion rule noted above, however. There is potentially a cash flow risk for you, but it's mitigated substantially by the salary rises in class year and your stated willingness to move back in with parents. I think the risk is almost certainly worth taking given the upside in retirement for you is likely quite large.
User avatar
anon_investor
Posts: 3522
Joined: Mon Jun 03, 2019 1:43 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

quenchgum wrote: Sat Sep 05, 2020 1:50 pm
buddyblack wrote: Sat Sep 05, 2020 9:47 am
quenchgum wrote: Sat Sep 05, 2020 1:05 am -plan to max out pre-tax 401(k) and HSA by end of 2020
-26 y/o and first year working, so no other assets/debt to speak of
I think it's great that you're on track to max your 401(k) and HSA by the end of the year. It also sounds like you graduated in May 2020 and probably just started working.

If so, your 2020 taxable income is going to be a lot smaller than your $190K salary suggests...probably in the 12% federal tax bracket given your 401(k) & HSA contributions. This makes the mega backdoor Roth in 2020 the clear winner in my mind. You should also consider doing a regular backdoor Roth for 2020 for the same reasons, but you can wait until early 2021 to do that. So the MBR should be your priority after maxing pre-tax contributions and covering your other obligations (rent, food, minimum loan payment, etc.).

For the rest of 2021, skip the mega backdoor Roth and start throwing everything at your debt.

Good luck!
Thank you for your kind thoughts!

I actually graduated about a year ago now! I started with ~200k in student debt, ~10k in credit card debt and $0 emergency fund. Over the past ten months of working, I paid off the credit card debt, built the emergency fund to $50k, made regular payments on my debt and didn't contribute to my 401(k) or HSA because I had no e-fund. Now that I do, I'm catching up by contributing relatively large portions of my paycheck for the next couple of cycles so that I'll max out my pre-tax 401(k) and HSA for 2020. The question for me now is (1) how much do I keep in a truly liquid emergency fund and (2) what do I do with the excess (prepay or MBDR)?
Are you able to do the regular backdoor Roth? I would probably do that before the MBDR.

Have you considered Series I US Savings Bonds for a portion of your emergency fund? More tax efficient for a high tax bracket.

How many months of expenses does $50k represent?
petulant
Posts: 1901
Joined: Thu Sep 22, 2016 1:09 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by petulant »

Dylan222 wrote: Sat Sep 05, 2020 12:11 pm I was in your shoes eight years ago as a Biglaw associate who graduated with 210K in debt (and a lower 160k salary at the time). Refinancing was also more difficult at the time (SoFi didn’t exist yet) so I was paying off my 7~8% loans. I threw everything at my loans (no rainy day fund even) and no 401K even for the first few years. I paid off my loans in around 5 years (refinancing with SoFi at around 3.5 half way through).

I probably would’ve made more in retrospect given the market performance if I had made minimum payments on my loans and bought stocks. But I don’t regret it. Paying off my loans was one of the best days of my life. The psychological pressure is enormous. I used to look at my loans every few months and feel sick to my stomach. Now, I look at my brokerage account every few days and feel happy and secure that I could live off my savings for years even I were fired.

Looking back, the only thing I would do differently is pay into a 401K starting from year 1. My combined tax bracket was pretty high back then ~35% so I could have turned $12,000 into $18,000 in contributions with those tax savings. That’s a far higher return than my loan payments. And you’re in even better shape with your interest rate.

The only danger is that leaves you without a rainy day fund. Given your low interest rate on your loans, something small might be prudent, though it should be a true rainy day fund and kept in cash. But I also think your 20% chance of getting fired seems way too high. Are you on track to hit your hours this year? Do people generally like your work product? If so, you should be pretty safe. Also, every single person I know that got fired just found another biglaw job (or something at least close to Biglaw).

In sum, you’ll be fine. And I only planned to stay in Biglaw for a few years but ended up staying much longer. Because of the slope of salary increases, the mid to senior years is where you can really build wealth. I went from basically a zero net worth in year 5 after paying off my loans to over $500,000K in only a few years.
I feel like one thing I've seen is that my friends who paid off the loans or never had very large loans from the start actually did better in biglaw--probably something about less psychological pressure etc.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

MBB_Boy wrote: Sat Sep 05, 2020 11:45 am If you're uncomfortable with prepaying something as low as 3.25%......what if I told you that after refinancing to a variable student loan post MBA, my wife's student loan is currently 0.18%?

I'm in the camp of putting as much in to the MBR as you can and refinancing the student loan to a lower rate. We are maxing out both of ours, and carrying the debt load. When the rate rises (hahahahahahahahahaha.......never according to J-Pow), we can swap to paying it off instead. But honestly, our 5 year term will probably be expired before then (only 3.5 left).

Of course, this is about your personal risk tolerance, not mine. What may be informative is to look at what your student loan payments do to your budget. If you can afford them comfortably even with this theoretical 120K job after you downshift in a few years, I would strongly consider doing the MBR while you can. It's a fairly rare benefit, and there's a chance you won't have it in a few years.

But if the debt is actually a big weight in your budget, perhaps reconsider. In our case, we live completely just on one of our salaries - including the student loan debt payment. We can take quite the income hit before the debt matters to us. You'll have to do your budget and see what makes sense for you
Logically, this plan makes the most sense to me, yes! I was hoping that the Bogleheads would applaud the math and hype me up on this (so that I could also psyche myself up on it).

Once I do pivot to a lower-paying job, I'd hazard to say that ~120k is a pretty reliable (and conservative) salary to rely upon for planning purposes. Even if I were to go the MBDR route, I'd be making good headway in my loans in the meantime by paying ~3k monthly or so, such that once I do swap jobs in 2-4 years, I'll be anywhere from 70-110k or so of debt remaining. At that point, I imagine that I could easily refinance to a slightly longer term as necessary and would have no issue making monthly payments -- with the safety, of course, that I could pull from the Roth as necessary to subsidize my normal salary at that point.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

anon_investor wrote: Sat Sep 05, 2020 1:54 pm
Part of the reason aggressive loan payoff is recommended is that the future is unknown, but the reduction in loan principal is.

The period you will likely holding the loan is relatively short term (unlike a 30 yr mortgage). Short term investment returns may yield less than 3.25% annually. Further you may lose the high paying job (involuntarily) after a short period of time. Also understand that with the mega backdoor roth, you will not have tax free access to "principal" for 5 years after funds are rolled over from the 401k to Roth IRA. So even if you rollover after tax 401k contributions every paycheck to your Roth IRA, if you lose your job after 3 years you will have 0 access to that money without some tax penalties.

Also you don't have to go all MBR or extra loan payments. An alternative is a mix of both.
My understanding is that the MBDR will allow for me to access the "principal" immediately. My current 401(k) plan allows for after-tax non-roth contributions and immediate in-service rollovers. I currently have no money in my Roth IRA (or traditional IRA, for that matter), so the Roth IRA ordering rules should not be an issue for me: my "direct conribution" amount would be 0, my "taxable conversion" amount would be 0, and all mega backdoor funds would be considered "non-taxable conversions" that could immediately be withdrawn penalty-free. This is a huge part of my mental planning, so anyone with experience here please feel free to jump in if this is inaccurate.
runner540
Posts: 1326
Joined: Sun Feb 26, 2017 5:43 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by runner540 »

integrate wrote: Sat Sep 05, 2020 2:00 pm There's a lot of poor advice on this thread. OP, it's 100% understandable to feel the psychological weight of this amount of debt, but you should strive to look at this analytically, as you are already doing, and not make this decision based on emotion. Dave Ramsey advice is frequently bad advice only helpful for people who are irresponsible and who must rely on psychological crutches, and I'm disappointed to see it cited in this vein by posters here. You must not only consider whether you are likely to get a rate of return exceeding 3% on your invested funds, but the value of the tax advantaged space you are giving up-forever-if you don't mega backdoor. Will your future job's 401k offer the opportunity to mega backdoor? Will mega backdoor even be a thing in a few years? There's no guarantee you'll be able to build up Roth funds at the same rate later in life. For you, the combined value of guaranteeing the roth space and the likelihood that investment returns will exceed your loan rate is almost certainly greater than prepaying the loan.

Do note the 5 year conversion rule noted above, however. There is potentially a cash flow risk for you, but it's mitigated substantially by the salary rises in class year and your stated willingness to move back in with parents. I think the risk is almost certainly worth taking given the upside in retirement for you is likely quite large.

OP is the one who said that he/she is not psychologically comfortable with the debt.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

integrate wrote: Sat Sep 05, 2020 2:00 pm There's a lot of poor advice on this thread. OP, it's 100% understandable to feel the psychological weight of this amount of debt, but you should strive to look at this analytically, as you are already doing, and not make this decision based on emotion. Dave Ramsey advice is frequently bad advice only helpful for people who are irresponsible and who must rely on psychological crutches, and I'm disappointed to see it cited in this vein by posters here. You must not only consider whether you are likely to get a rate of return exceeding 3% on your invested funds, but the value of the tax advantaged space you are giving up-forever-if you don't mega backdoor. Will your future job's 401k offer the opportunity to mega backdoor? Will mega backdoor even be a thing in a few years? There's no guarantee you'll be able to build up Roth funds at the same rate later in life. For you, the combined value of guaranteeing the roth space and the likelihood that investment returns will exceed your loan rate is almost certainly greater than prepaying the loan.

Do note the 5 year conversion rule noted above, however. There is potentially a cash flow risk for you, but it's mitigated substantially by the salary rises in class year and your stated willingness to move back in with parents. I think the risk is almost certainly worth taking given the upside in retirement for you is likely quite large.
Thanks, Integrate (I'm a fan of calculus myself). Yes, I would say that I'm probably in the camp of people that have less of a need to handicap their future planning by purposefully limiting their spending flexibility. I've been living a pretty frugal lifestyle the past year and will continue to do so for the immediate future regardless of my approach to my excess cash flow.

I appreciate your perspective -- it feels absurd to forego the ability to stuff money into a tax-advantaged space, especially so when in the worst case scenario, I could withdraw principal at my leisure to subsidize if I do end up in a far lower-paid position. I'm blessed to have the extra extra backup worst case scenario protection of living with my parents without issue (no fixed costs) and ability to refinance across a longer term, which allows me to *really* avoid the sting of "having" to pull from the Roth IRA during a low period in the market.

Do you understand the 5-year conversion rule to limit my ability to withdraw principal from non-taxable conversions (i.e. my MBDR amounts)? If so, that certainly affects my comfort with shoving more money into the MBDR.
User avatar
anon_investor
Posts: 3522
Joined: Mon Jun 03, 2019 1:43 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

quenchgum wrote: Sat Sep 05, 2020 2:03 pm
MBB_Boy wrote: Sat Sep 05, 2020 11:45 am If you're uncomfortable with prepaying something as low as 3.25%......what if I told you that after refinancing to a variable student loan post MBA, my wife's student loan is currently 0.18%?

I'm in the camp of putting as much in to the MBR as you can and refinancing the student loan to a lower rate. We are maxing out both of ours, and carrying the debt load. When the rate rises (hahahahahahahahahaha.......never according to J-Pow), we can swap to paying it off instead. But honestly, our 5 year term will probably be expired before then (only 3.5 left).

Of course, this is about your personal risk tolerance, not mine. What may be informative is to look at what your student loan payments do to your budget. If you can afford them comfortably even with this theoretical 120K job after you downshift in a few years, I would strongly consider doing the MBR while you can. It's a fairly rare benefit, and there's a chance you won't have it in a few years.

But if the debt is actually a big weight in your budget, perhaps reconsider. In our case, we live completely just on one of our salaries - including the student loan debt payment. We can take quite the income hit before the debt matters to us. You'll have to do your budget and see what makes sense for you
Logically, this plan makes the most sense to me, yes! I was hoping that the Bogleheads would applaud the math and hype me up on this (so that I could also psyche myself up on it).

Once I do pivot to a lower-paying job, I'd hazard to say that ~120k is a pretty reliable (and conservative) salary to rely upon for planning purposes. Even if I were to go the MBDR route, I'd be making good headway in my loans in the meantime by paying ~3k monthly or so, such that once I do swap jobs in 2-4 years, I'll be anywhere from 70-110k or so of debt remaining. At that point, I imagine that I could easily refinance to a slightly longer term as necessary and would have no issue making monthly payments -- with the safety, of course, that I could pull from the Roth as necessary to subsidize my normal salary at that point.
Any reason you would not refinance now as interest rates are at all time historical lows? If your student loan interest rate was substantially less than 3.25%, some of the advice you are getting might be different.

I know many here (including myself) take any opportunity to refinance morgages when it makes sense financially.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

anon_investor wrote: Sat Sep 05, 2020 2:01 pm
Are you able to do the regular backdoor Roth? I would probably do that before the MBDR.

Have you considered Series I US Savings Bonds for a portion of your emergency fund? More tax efficient for a high tax bracket.

How many months of expenses does $50k represent?
I can do the regular backdoor Roth. Can I ask why you would recommend that prior to to the MBDR? I'll probably not have enough money (at least, for 2020, but perhaps also in 2021 and 2022) to max out both my IRA (whether tIRA or backdoor Roth) and my MBDR; in that case, which would you recommend?

As an aside, do you know whether/how the normal backdoor Roth contributions would affect the Roth IRA ordering rules if I were to also make MBDR contributions, whether that year or afterwards? I'm not sure the extent to which normal backdoor Roth amounts are considered 'taxable conversions' for purposes of the Roth IRA ordering rules.

I am COMPLETELY UNFAMILIAR with Series I US Savings Bonds, and actually have no idea where to keep my emergency fund, and at what amounts! I would love to hear any thoughts you have. My current plan is to put some into a HYSA, but otherwise am clueless.

My only monthly expense is my student loan payment, which is currently $3000k (which I figure I can refinance to a lower monthly payment, even after losing my job?). That's it. I've been living with my parents rent-free since remote work began in March and was lucky to immediately sublet my apartment at full price. I'll enter into a new lease once in-person work starts back up again. When I do, it'll likely be around ~1500-2000 monthly.
jaqenhghar
Posts: 51
Joined: Sat Feb 22, 2020 3:24 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by jaqenhghar »

buddyblack wrote: Sat Sep 05, 2020 9:47 am
quenchgum wrote: Sat Sep 05, 2020 1:05 am -plan to max out pre-tax 401(k) and HSA by end of 2020
-26 y/o and first year working, so no other assets/debt to speak of
I think it's great that you're on track to max your 401(k) and HSA by the end of the year. It also sounds like you graduated in May 2020 and probably just started working.

If so, your 2020 taxable income is going to be a lot smaller than your $190K salary suggests...probably in the 12% federal tax bracket given your 401(k) & HSA contributions. This makes the mega backdoor Roth in 2020 the clear winner in my mind.
This. So much this. I wish I had been smart enough to do the same.
Last edited by jaqenhghar on Sat Sep 05, 2020 2:36 pm, edited 1 time in total.
tryingtogetahead
Posts: 79
Joined: Tue Apr 07, 2020 11:45 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by tryingtogetahead »

I was in your almost exact situation 12-13 years ago. I worked in BigLaw and had over $200,000 of student loans and about $50-60,000 saved when I graduated law school. I immediately bought a small condo with my savings and then started aggressively paying off my student loans. I paid them all off in 3 years. The only place where my money went other than debt was maxing out my 401k and IRA. My firm didn’t allow the mega back door Roth. Let me make an important point here: that was 100% an emotional decision. I would have been far better off financially if I kept all the debt and invested the money. I hate debt and avoid it like the plague. You need to know yourself. Will you stress over it? If not, keep the debt and pay it off over 25 years and take max advantage of all tax deferred accounts. DM me if you want to get into this further.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

runner540 wrote: Sat Sep 05, 2020 2:12 pm
OP is the one who said that he/she is not psychologically comfortable with the debt.
petulant wrote: Sat Sep 05, 2020 2:01 pm I feel like one thing I've seen is that my friends who paid off the loans or never had very large loans from the start actually did better in biglaw--probably something about less psychological pressure etc.
OP here. Thanks all.

I suppose my comfort with the debt hinges on whether my MBDR "debt payoff" strategy -- i.e., the knowledge that I can pull my principal at my leisure combined with the understanding that I likely won't need to pull large amounts in the event of a market downturn, given "high" lower salary, ability to refinance and live with parents in worst case scenario -- actually works. If it does, then I would say I'm quite comfortable with the debt and can see myself mentally equating a payment into my Roth IRA as effectively a payment off my debt.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

anon_investor wrote: Sat Sep 05, 2020 2:23 pm
quenchgum wrote: Sat Sep 05, 2020 2:03 pm Logically, this plan makes the most sense to me, yes! I was hoping that the Bogleheads would applaud the math and hype me up on this (so that I could also psyche myself up on it).

Once I do pivot to a lower-paying job, I'd hazard to say that ~120k is a pretty reliable (and conservative) salary to rely upon for planning purposes. Even if I were to go the MBDR route, I'd be making good headway in my loans in the meantime by paying ~3k monthly or so, such that once I do swap jobs in 2-4 years, I'll be anywhere from 70-110k or so of debt remaining. At that point, I imagine that I could easily refinance to a slightly longer term as necessary and would have no issue making monthly payments -- with the safety, of course, that I could pull from the Roth as necessary to subsidize my normal salary at that point.
Any reason you would not refinance now as interest rates are at all time historical lows? If your student loan interest rate was substantially less than 3.25%, some of the advice you are getting might be different.

I know many here (including myself) take any opportunity to refinance morgages when it makes sense financially.
Great question. Contrary to what I said above, I'm actually currently with SoFi on a fixed 7-year plan at 4.75%, making payments of 2900. I've been shopping around and am almost certain that I'll imminently refinance to a fixed 5-year plan at 3.25%, making payments of 3200.

With that said, I was offered a ~1.25% variable rate or so, which I would be comfortable with taking. I'd imagine that if I did, that would support putting more amounts into the MBDR. Would love to hear your thoughts.
integrate
Posts: 7
Joined: Sat Aug 15, 2020 3:08 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by integrate »

quenchgum wrote: Sat Sep 05, 2020 2:18 pm Thanks, Integrate (I'm a fan of calculus myself). Yes, I would say that I'm probably in the camp of people that have less of a need to handicap their future planning by purposefully limiting their spending flexibility. I've been living a pretty frugal lifestyle the past year and will continue to do so for the immediate future regardless of my approach to my excess cash flow.

I appreciate your perspective -- it feels absurd to forego the ability to stuff money into a tax-advantaged space, especially so when in the worst case scenario, I could withdraw principal at my leisure to subsidize if I do end up in a far lower-paid position. I'm blessed to have the extra extra backup worst case scenario protection of living with my parents without issue (no fixed costs) and ability to refinance across a longer term, which allows me to *really* avoid the sting of "having" to pull from the Roth IRA during a low period in the market.

Do you understand the 5-year conversion rule to limit my ability to withdraw principal from non-taxable conversions (i.e. my MBDR amounts)? If so, that certainly affects my comfort with shoving more money into the MBDR.
You'll pay a 10% penalty on conversion principle withdrawn sooner than 5 years after being put into the Roth (really closer to 4 years if you do the conversion closer to the end of the tax year), but you won't pay any tax as you've already paid it on those funds. While obviously not desirable, I think the risk is mitigated by its relatively low probability of withdrawal, provided you have a proper emergency fund, and also the likelihood that the conversion principle will have generated some earnings, which will remain in the Roth to continue growing tax free.

I would also add, re: discomfort around the debt: were you comfortable taking out the loan balance to attend law school? Admittedly, student debt can be easy to ignore as a student. But I think you were in a much riskier position a few years ago, before you had a job, and also before you refinanced what I presume were government grad loans at awful rates to your current 3.25%. I think your chances of getting fired or failing to transition to a government or in-house job that still lets you service your debt are much lower than the chance was of you never grabbing a biglaw job in the first place.
pasadena
Posts: 648
Joined: Sat Jul 02, 2016 1:23 am
Location: Washington State

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by pasadena »

I also don't like carrying debt My car loan, though intentional, is psychologically killing me but I'm forcing myself to let it run for now, because I do like having that money in my taxable account more.

What I would probably do in your case:
- Put everything in Roth this year - including 401(k). For the reasons stated above by Buddyblack.
- Give money to my parents to compensate for their extra cost due to my presence.
- Refinance the loan if possible.
- After maxing out pre-tax 401(k) and HSA next year, contribute some to Roth IRA (doesn't matter how, Backdoor or Mega Backdoor), and some to the loan. That will help with the psychological part of the debt.
- Throw anything else that I could find at the loan. Bonus for example.
- If you have to go back to renting sometime next year, go as small as you can bear. Lower rent = higher savings or loan payments,

I wouldn't forgo MBDR entirely. Those are rare enough that you really want to use it while you have access to it. But nobody said that you have to max it out. It isn't and either/or situation, you can do both.

But if you do manage to refinance to a very good rate, do let the loan run for a while.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

integrate wrote: Sat Sep 05, 2020 2:47 pm
quenchgum wrote: Sat Sep 05, 2020 2:18 pm Do you understand the 5-year conversion rule to limit my ability to withdraw principal from non-taxable conversions (i.e. my MBDR amounts)? If so, that certainly affects my comfort with shoving more money into the MBDR.
You'll pay a 10% penalty on conversion principle withdrawn sooner than 5 years after being put into the Roth (really closer to 4 years if you do the conversion closer to the end of the tax year), but you won't pay any tax as you've already paid it on those funds. While obviously not desirable, I think the risk is mitigated by its relatively low probability of withdrawal, provided you have a proper emergency fund, and also the likelihood that the conversion principle will have generated some earnings, which will remain in the Roth to continue growing tax free.
Based solely on my own research, I understand the bolded portion to be inaccurate. I believe that the 5-year conversion rule refers only to the portion that was taxed on the conversion. Thus, if I were able to immediately shift from paycheck --> after-tax 401(k) --> roth IRA (which I am able to do), then I would have no growth within the after-tax 401(k) subaccount and thus no amounts will be taxed on the conversion. As a result, so long as there are no other taxable conversion amounts otherwise in my Roth IRA (which there currently aren't), then I would be able to immediately withdraw the principle without penalty or tax. Please please chime in if you or others are familiar with the details here -- this ability to withdraw is hugely important to me and is the key comfort point that I would rely upon if I were to be able to psychologically equate MBDR payments with paying off my debt.
integrate wrote: Sat Sep 05, 2020 2:47 pm I would also add, re: discomfort around the debt: were you comfortable taking out the loan balance to attend law school? Admittedly, student debt can be easy to ignore as a student. But I think you were in a much riskier position a few years ago, before you had a job, and also before you refinanced what I presume were government grad loans at awful rates to your current 3.25%. I think your chances of getting fired or failing to transition to a government or in-house job that still lets you service your debt are much lower than the chance was of you never grabbing a biglaw job in the first place.
Really helpful perspective. FWIW, I felt comfortable with the debt because I was fortunate to attend a top five law school and knew that I would almost certainly be able to nab this biglaw job, so I'd say that unfortunately the chances of me getting prematurely fired in this weird pandemic economy are higher than the chances that I never got the job in the first place. The debt still definitely weighs on me, but I think that if I were able to pull the principal without any penalty, then I think I could get pretty comfortable with the debt through the mental trick (and if not, perhaps split the baby a bit so that I at least feel a little less dead set).
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

pasadena wrote: Sat Sep 05, 2020 2:55 pm I also don't like carrying debt My car loan, though intentional, is psychologically killing me but I'm forcing myself to let it run for now, because I do like having that money in my taxable account more.

What I would probably do in your case:
- Put everything in Roth this year - including 401(k). For the reasons stated above by Buddyblack.
- Give money to my parents to compensate for their extra cost due to my presence.
- Refinance the loan if possible.
- After maxing out pre-tax 401(k) and HSA next year, contribute some to Roth IRA (doesn't matter how, Backdoor or Mega Backdoor), and some to the loan. That will help with the psychological part of the debt.
- Throw anything else that I could find at the loan. Bonus for example.
- If you have to go back to renting sometime next year, go as small as you can bear. Lower rent = higher savings or loan payments,

I wouldn't forgo MBDR entirely. Those are rare enough that you really want to use it while you have access to it. But nobody said that you have to max it out. It isn't and either/or situation, you can do both.

But if you do manage to refinance to a very good rate, do let the loan run for a while.
My original post was a little misleading -- my stub year was 2019, so I'll actually be making the full 190k in 2020. I unfortunately didn't get to Buddyblack's Roth 401(k) strategy in time.

Wholly agree on compensating my parents. Thankfully they are relatively well-off as-is and are very happy to have me. I've been buying some random gifts and splitting the utilities but perhaps should institute a more formal monthly amount. :sharebeer
User avatar
anon_investor
Posts: 3522
Joined: Mon Jun 03, 2019 1:43 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

quenchgum wrote: Sat Sep 05, 2020 2:46 pm
anon_investor wrote: Sat Sep 05, 2020 2:23 pm
quenchgum wrote: Sat Sep 05, 2020 2:03 pm Logically, this plan makes the most sense to me, yes! I was hoping that the Bogleheads would applaud the math and hype me up on this (so that I could also psyche myself up on it).

Once I do pivot to a lower-paying job, I'd hazard to say that ~120k is a pretty reliable (and conservative) salary to rely upon for planning purposes. Even if I were to go the MBDR route, I'd be making good headway in my loans in the meantime by paying ~3k monthly or so, such that once I do swap jobs in 2-4 years, I'll be anywhere from 70-110k or so of debt remaining. At that point, I imagine that I could easily refinance to a slightly longer term as necessary and would have no issue making monthly payments -- with the safety, of course, that I could pull from the Roth as necessary to subsidize my normal salary at that point.
Any reason you would not refinance now as interest rates are at all time historical lows? If your student loan interest rate was substantially less than 3.25%, some of the advice you are getting might be different.

I know many here (including myself) take any opportunity to refinance morgages when it makes sense financially.
Great question. Contrary to what I said above, I'm actually currently with SoFi on a fixed 7-year plan at 4.75%, making payments of 2900. I've been shopping around and am almost certain that I'll imminently refinance to a fixed 5-year plan at 3.25%, making payments of 3200.

With that said, I was offered a ~1.25% variable rate or so, which I would be comfortable with taking. I'd imagine that if I did, that would support putting more amounts into the MBDR. Would love to hear your thoughts.
Is there any fee to refi? How long would the ~1.25% variable rate last before it reset? At ~1.25%, I would be more inclined to favor the MBDR.

For your emergency fund learn about Series I US Saving Bonds: https://www.bogleheads.org/wiki/I_savings_bonds
User avatar
geerhardusvos
Posts: 1145
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by geerhardusvos »

quenchgum wrote: Sat Sep 05, 2020 1:05 am Hi all,

I'm an appreciative long-time lurker, and was hoping y'all could help with my question. I'm not sure whether I should use my excess cash flow to aggressively pay down my student loans or if I should instead invest that excess in the market (likely through a megabackdoor roth, which my employer offers).

Some stats:
-salary: 190,000
-student loan debt: 180,000 (refinanced at 3.25%; no prepayment penalty & can easily refinance again)
-50k emergency fund in a checking account (for now)
-plan to max out pre-tax 401(k) and HSA by end of 2020
-26 y/o and first year working, so no other assets/debt to speak of
-no plan to buy a home or other major purchases any time soon
-can easily move in w/ parents if prolonged unemployment, etc

Is the obvious answer to invest in the market? It feels silly to prepay a 3% loan. I could likely beat that even in a taxable account, but can *extra* beat it with all gains growing tax-free in a Roth IRA forever, especially if I contribute so young.

With that said, it hurts psychologically to carry that much debt. I enjoy thinking about the Roth IRA as a secondary emergency fund: though I'm certainly not planning on pulling from it any time soon, it is something that I could pull principal from at any point if there were to be a prolonged period of unemployment. That perspective adds a lot of peace of mind to ease the sting of the debt.

Also, I'm a bit concerned regarding job security. I don't expect to be fired/laid off, but would estimate it at about a 20% chance, especially if the economy heads south. The common wisdom seems to be that you should aggressively pay off your loans such that you are able to pivot to a better career at your leisure, avoid burnout, etc. But my sense is that, since I'm so far from nearing a lower balance regardless, I may as well build up a fund of savings that I can pull from (which the megabackdoor thankfully allows for) in case things go bad for a long period of time.

FWIW, like most junior BigLaw associates, I'm not planning on staying in this highly-paid of a position for longer than a few more years. I'll likely pivot to something that's closer to ~120k-~150k in 2-4 years.

Would love to hear the group's thoughts. It feels crazy to invest rather than prepay the loans, but also feels crazy to "burn cash" by doing the opposite.

EDIT: Note that I graduated in June 2019 with $210k debt and $0 savings. Now that I have savings, I'm maxing out my pre-tax 401(k) and unsure what to do with excess cash, both in 2020 and onward. I'll likely retain at least $30k in a liquid e-fund but not sure whether/how I should tier that amount (HYSA / savings bonds / ?) and how that approach interacts with my excess cash flow decision.
You should be able to pay off your debt relatively quickly. If I was to do it over again, I would have invested 80% and paid off loans 20%. Or go 50/50. Whatever works for you. Build yourself a plan that pays off your loans by the time you are age 30 or 35. Put the rest in VTSAX. My point is, keep investing aggressively, live below your means, and pay off your debt steadily.

FWIW, I am now in my early 30s and I paid off a similar amount of debt and I make a similar amount as you. It feels really good to be debt-free. But I missed out by not focusing more on investing. There are different schools of thought on this obviously, but I wholeheartedly would have kept my student loans and they were at five and 6%. At under 4%, I would take out that loan today if I had the option and I would put it all in my taxable brokerage account in VTSAX. No joke. Even in today’s market.

Biggest thing for you is to make yourself Marketable outside your firm in case you need to hop over to corporate. Build some connections and work your butt off, and if you keep investing you are going to be extremely pleased with your position at age 35. If you live on either of the coasts, do not buy a house right now. I repeat, do not buy a house right now.
VTSAX and chill
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

anon_investor wrote: Sat Sep 05, 2020 6:31 pm Is there any fee to refi? How long would the ~1.25% variable rate last before it reset? At ~1.25%, I would be more inclined to favor the MBDR.

For your emergency fund learn about Series I US Saving Bonds: https://www.bogleheads.org/wiki/I_savings_bonds
There is no fee to refi - a lot of these companies (First Republic, Earnest, SoFi, etc) actually offer cash incentives to refi. I’m not sure how long the 1.25 would last, but feel comfortable that a higher rate would likely correlate with a strong market, meaning that I could pull from the Roth IRA during “up” times as necessary to meet a debt payment as a worst case scenario.

Thanks for the links on the savings bonds - I appreciate it.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

geerhardusvos wrote: Sat Sep 05, 2020 7:09 pm
You should be able to pay off your debt relatively quickly. If I was to do it over again, I would have invested 80% and paid off loans 20%. Or go 50/50. Whatever works for you. Build yourself a plan that pays off your loans by the time you are age 30 or 35. Put the rest in VTSAX. My point is, keep investing aggressively, live below your means, and pay off your debt steadily.

FWIW, I am now in my early 30s and I paid off a similar amount of debt and I make a similar amount as you. It feels really good to be debt-free. But I missed out by not focusing more on investing. There are different schools of thought on this obviously, but I wholeheartedly would have kept my student loans and they were at five and 6%. At under 4%, I would take out that loan today if I had the option and I would put it all in my taxable brokerage account in VTSAX. No joke. Even in today’s market.

Biggest thing for you is to make yourself Marketable outside your firm in case you need to hop over to corporate. Build some connections and work your butt off, and if you keep investing you are going to be extremely pleased with your position at age 35. If you live on either of the coasts, do not buy a house right now. I repeat, do not buy a house right now.
It’s helpful to hear that perspective. I imagine that once my loans are paid off, I would feel the same way if I were to direct my excess cash toward my loans. Of course, with that said, I’d imagine that it’s not mutually exclusive to both (1) be thankful I pay off debt during the debt-holding years and (2) regret having paid off the debt so aggressively once it’s paid off. I am hoping that mentally it’ll feel similarly freeing to pay off debt versus contributing to the MBDR, given its total flexibility with contributed tax-free basis.
Compound
Posts: 835
Joined: Mon May 26, 2014 1:32 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by Compound »

quenchgum wrote: Sat Sep 05, 2020 2:27 pm
anon_investor wrote: Sat Sep 05, 2020 2:01 pm
Are you able to do the regular backdoor Roth? I would probably do that before the MBDR.

Have you considered Series I US Savings Bonds for a portion of your emergency fund? More tax efficient for a high tax bracket.

How many months of expenses does $50k represent?
I can do the regular backdoor Roth. Can I ask why you would recommend that prior to to the MBDR? I'll probably not have enough money (at least, for 2020, but perhaps also in 2021 and 2022) to max out both my IRA (whether tIRA or backdoor Roth) and my MBDR; in that case, which would you recommend?

As an aside, do you know whether/how the normal backdoor Roth contributions would affect the Roth IRA ordering rules if I were to also make MBDR contributions, whether that year or afterwards? I'm not sure the extent to which normal backdoor Roth amounts are considered 'taxable conversions' for purposes of the Roth IRA ordering rules.

I am COMPLETELY UNFAMILIAR with Series I US Savings Bonds, and actually have no idea where to keep my emergency fund, and at what amounts! I would love to hear any thoughts you have. My current plan is to put some into a HYSA, but otherwise am clueless.

My only monthly expense is my student loan payment, which is currently $3000k (which I figure I can refinance to a lower monthly payment, even after losing my job?). That's it. I've been living with my parents rent-free since remote work began in March and was lucky to immediately sublet my apartment at full price. I'll enter into a new lease once in-person work starts back up again. When I do, it'll likely be around ~1500-2000 monthly.
OP — this blog post will likely address your questions about mega backdoor Roth withdrawal penalties. The author posts here under the moniker “tfb.”

https://thefinancebuff.com/rollover-aft ... 9-1-2.html

If you can make it work, I like the idea of refinancing to a fixed low rate and then applying all extra money to the backdoor and mega backdoor Roth strategies.

If you have enough funds to only do the regular backdoor or mega backdoor Roth, I’d favor the regular because it’s so simple to execute. No 401k plan rules to worry about (can you preload contributions, how often can rollovers happen, what investments are available while awaiting rollover, etc). The regular backdoor Roth can be executed from start to finish within days (assuming you have the funds available to do the entire contribution and conversion at once) at your brokerage of choice.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

Compound wrote: Sun Sep 06, 2020 5:35 am
OP — this blog post will likely address your questions about mega backdoor Roth withdrawal penalties. The author posts here under the moniker “tfb.”

on

If you can make it work, I like the idea of refinancing to a fixed low rate and then applying all extra money to the backdoor and mega backdoor Roth strategies.

If you have enough funds to only do the regular backdoor or mega backdoor Roth, I’d favor the regular because it’s so simple to execute. No 401k plan rules to worry about (can you preload contributions, how often can rollovers happen, what investments are available while awaiting rollover, etc). The regular backdoor Roth can be executed from start to finish within days (assuming you have the funds available to do the entire contribution and conversion at once) at your brokerage of choice.
Thanks, Compound.

Unless I choose to 100% aggressively prepay the loans — which I don’t think I’ll do — then I’ll almost certainly have enough excess cash to devote more to the Roth IRA than the normal backdoor Roth would allow. It’s just that I wouldn’t have enough to max both the 6k and the MBDR. For example, before any IRA contributions or prepaying loans, I’d estimate maybe $20k-$35k annually of “free money” (and no employer match on the 401k amounts). In that case, I’d be between the options of (1) either maxing my annual 6k IRA contributions (whether to tIRA or to normal backdoor) + putting the remainder to the MBDR, OR (2) instead devoting those amounts entirely to the MBDR. In that scenario, what’s the argument for using up my 6k IRA contribution limitation at all?

Am I missing some obvious tax benefit that makes a tIRA/backdoor Roth contribution more beneficial than a MBDR contribution? For example, are there any greater tax benefits/ deductions associated with that process, or would I be equally well off putting ALL IRA money (that same 6k plus the excess) into the MBDR, knowing that I plan to utilize the MBDR to some extent regardless and wouldn’t otherwise have enough to max our both the 6k and MBDR? I know that executing a backdoor Roth becomes tricky if you have amounts lying around in your tIRA, but in this case I’m not even sure whether there’s a benefit to putting that 6k in the tIRA if I would otherwise place it in the MBDR? Right now, I’m indifferent between the two given my understanding that I wouldn’t otherwise plan to backdoor Roth and that I wouldn’t get a deduction for the tIRA contributions, but I’m afraid I could be missing something here.

Thanks for the link. I’ve read that article (and others) and they actually are what got me thinking that the MBDR strategy could work in the first place! Many thanks to TFB. The one thing that I can’t figure out is whether/when the normal backdoor Roth contributions are considered “taxable conversions” for purposes of the Roth IRA ordering rules. For example, if I execute the normal backdoor Roth by immediately going from tIRA —> Roth IRA, then would any of those amounts be considered a bucket 2 taxable conversion that I would be forced to withdraw before withdrawing my bucket 3 non-taxable conversion amounts (i.e. my MBDR amounts) that I contributed in the same year? If so, that seems like an obvious reason (all else equal) to avoid the normal backdoor Roth if I’m not able to max out both but otherwise have more than the normal backdoor alone allows for.
User avatar
anon_investor
Posts: 3522
Joined: Mon Jun 03, 2019 1:43 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

quenchgum wrote: Sun Sep 06, 2020 6:34 am
Compound wrote: Sun Sep 06, 2020 5:35 am
OP — this blog post will likely address your questions about mega backdoor Roth withdrawal penalties. The author posts here under the moniker “tfb.”

on

If you can make it work, I like the idea of refinancing to a fixed low rate and then applying all extra money to the backdoor and mega backdoor Roth strategies.

If you have enough funds to only do the regular backdoor or mega backdoor Roth, I’d favor the regular because it’s so simple to execute. No 401k plan rules to worry about (can you preload contributions, how often can rollovers happen, what investments are available while awaiting rollover, etc). The regular backdoor Roth can be executed from start to finish within days (assuming you have the funds available to do the entire contribution and conversion at once) at your brokerage of choice.
Thanks, Compound.

Unless I choose to 100% aggressively prepay the loans — which I don’t think I’ll do — then I’ll almost certainly have enough excess cash to devote more to the Roth IRA than the normal backdoor Roth would allow. It’s just that I wouldn’t have enough to max both the 6k and the MBDR. For example, before any IRA contributions or prepaying loans, I’d estimate maybe $20k-$35k annually of “free money” (and no employer match on the 401k amounts). In that case, I’d be between the options of (1) either maxing my annual 6k IRA contributions (whether to tIRA or to normal backdoor) + putting the remainder to the MBDR, OR (2) instead devoting those amounts entirely to the MBDR. In that scenario, what’s the argument for using up my 6k IRA contribution limitation at all?

Am I missing some obvious tax benefit that makes a tIRA/backdoor Roth contribution more beneficial than a MBDR contribution? For example, are there any greater tax benefits/ deductions associated with that process, or would I be equally well off putting ALL IRA money (that same 6k plus the excess) into the MBDR, knowing that I plan to utilize the MBDR to some extent regardless and wouldn’t otherwise have enough to max our both the 6k and MBDR? I know that executing a backdoor Roth becomes tricky if you have amounts lying around in your tIRA, but in this case I’m not even sure whether there’s a benefit to putting that 6k in the tIRA if I would otherwise place it in the MBDR? Right now, I’m indifferent between the two given my understanding that I wouldn’t otherwise plan to backdoor Roth and that I wouldn’t get a deduction for the tIRA contributions, but I’m afraid I could be missing something here.

Thanks for the link. I’ve read that article (and others) and they actually are what got me thinking that the MBDR strategy could work in the first place! Many thanks to TFB. The one thing that I can’t figure out is whether/when the normal backdoor Roth contributions are considered “taxable conversions” for purposes of the Roth IRA ordering rules. For example, if I execute the normal backdoor Roth by immediately going from tIRA —> Roth IRA, then would any of those amounts be considered a bucket 2 taxable conversion that I would be forced to withdraw before withdrawing my bucket 3 non-taxable conversion amounts (i.e. my MBDR amounts) that I contributed in the same year? If so, that seems like an obvious reason (all else equal) to avoid the normal backdoor Roth if I’m not able to max out both but otherwise have more than the normal backdoor alone allows for.
The tax benefit of the regular backdoor roth and the MBDR are the same. Regular has just easier execution. Couple mouse clicks to do, the MBDR may be harder depending on your 401k. Many require calls or mailed in forms and/or checks. Personally I just do in-plan Roth conversion for my after-tax 401k contributions because I can do so online immediately every paycheck avoiding any taxable growth and the funds are immediately invested and Roth. If I were to roll over after-tax contributions every paycheck to my roth IRA, it would cost me $5 each time and require my 401k to mail Vanguard a check, meaning time out of the market. Some people with a Fidelity 401k and a Fidelity Roth IRA have report a more seamless rollover process.

One other benefit is Roth IRA may have better investment options.
User avatar
anon_investor
Posts: 3522
Joined: Mon Jun 03, 2019 1:43 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

quenchgum wrote: Sun Sep 06, 2020 4:57 am
anon_investor wrote: Sat Sep 05, 2020 6:31 pm Is there any fee to refi? How long would the ~1.25% variable rate last before it reset? At ~1.25%, I would be more inclined to favor the MBDR.

For your emergency fund learn about Series I US Saving Bonds: https://www.bogleheads.org/wiki/I_savings_bonds
There is no fee to refi - a lot of these companies (First Republic, Earnest, SoFi, etc) actually offer cash incentives to refi. I’m not sure how long the 1.25 would last, but feel comfortable that a higher rate would likely correlate with a strong market, meaning that I could pull from the Roth IRA during “up” times as necessary to meet a debt payment as a worst case scenario.

Thanks for the links on the savings bonds - I appreciate it.
If they are paying you to refi, definitely do that. At 1.25% I would max Roth space out first.

Will you get a bonus for 2020? Would that help you max out your Roth space?
Compound
Posts: 835
Joined: Mon May 26, 2014 1:32 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by Compound »

anon_investor wrote: Sun Sep 06, 2020 8:33 am
The tax benefit of the regular backdoor roth and the MBDR are the same. Regular has just easier execution. Couple mouse clicks to do, the MBDR may be harder depending on your 401k. Many require calls or mailed in forms and/or checks. Personally I just do in-plan Roth conversion for my after-tax 401k contributions because I can do so online immediately every paycheck avoiding any taxable growth and the funds are immediately invested and Roth. If I were to roll over after-tax contributions every paycheck to my roth IRA, it would cost me $5 each time and require my 401k to mail Vanguard a check, meaning time out of the market. Some people with a Fidelity 401k and a Fidelity Roth IRA have report a more seamless rollover process.

One other benefit is Roth IRA may have better investment options.
Yep. This.

One minor point, which depends on the retirement plan rules in question. There could be a tax drag on earnings before conversion if done through the mega backdoor Roth method. For example, some plans only permit in service withdrawals once per year. Earnings that accumulate during the year would be taxed at conversion. In the case of the regular backdoor Roth, you can generally do the contribution and then conversion in a matter of days, thus allowing earnings before conversion to be negligible and earnings after conversion (and thus not taxed) to be maximized.
Compound
Posts: 835
Joined: Mon May 26, 2014 1:32 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by Compound »

quenchgum wrote: Sun Sep 06, 2020 6:34 am
Thanks for the link. I’ve read that article (and others) and they actually are what got me thinking that the MBDR strategy could work in the first place! Many thanks to TFB. The one thing that I can’t figure out is whether/when the normal backdoor Roth contributions are considered “taxable conversions” for purposes of the Roth IRA ordering rules. For example, if I execute the normal backdoor Roth by immediately going from tIRA —> Roth IRA, then would any of those amounts be considered a bucket 2 taxable conversion that I would be forced to withdraw before withdrawing my bucket 3 non-taxable conversion amounts (i.e. my MBDR amounts) that I contributed in the same year? If so, that seems like an obvious reason (all else equal) to avoid the normal backdoor Roth if I’m not able to max out both but otherwise have more than the normal backdoor alone allows for.
In the case of the backdoor Roth, since the contributions to the traditional IRA are not deductible and have therefore been taxed, the money is not taxed during conversion to the Roth. Earnings before conversion however are taxed in the tax year of conversion.

I’m not sure I understand the buckets you are speaking about; perhaps the following will help. If you haven’t already, consider going straight to the source to learn more about the rules on IRA distributions (including ordering and aggregation rules):

https://www.irs.gov/publications/p590b# ... 1000231071
unbiased
Posts: 52
Joined: Sat Apr 25, 2020 5:46 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by unbiased »

I was in the EXACT same boat as you at the same age, same job. Same dilemma. Although my debt was slightly less but I was also earning less than you -- still a lot in those days (early 2000s) at big firms.

My choice: I chose to invest first, pay down debt later. Now, just a couple decades later I'm knocking on the door of an early retirement. If you want to be there too, do what I did. This is despite a major tech rout in 2000 and the devastating losses of 2008--basically almost a decade of lost stock returns. Nevertheless, those assets invested in early years of working when I had no other responsibilities have carried me through the years. The power of compounded returns at a young age cannot be overstated. I was socking away close to 35% of my TAKE HOME salary. Holy smokes! I have never able to do that again--especially as life got more expensive with house, marriage, kid, etc. You'll need to put some money in taxable accounts if you want to retire early as well.

Guess what? I still haven't paid off those darn loans, but the feds just postponed them all anyway. Also, I didn't look at the details of your loans, but some/all might be able to be deferred, etc. if needed. I also expect the possibility of the government forgiving loans or paying interest or whatever on student loans in the coming decades as the indebted generation starts to come to power.

But seriously, you're young and making amazing money. Personally, I chose to leave the "BigLaw" life after a few years because--well--you couldn't pay me enough for the demands. Best part? By saving a ton I never got accustomed to a high-flying expensive lifestyle and was able to have assets to enable me to move. Heck, on a "per hour" basis I actually wasn't making as much as I thought. I found better balanced jobs over the years, but always had those sensibly-invested assets to carry me through. You'll also never get easier terms for repayment than for student loans. Never.
ralph124cf
Posts: 2596
Joined: Tue Apr 01, 2014 11:41 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by ralph124cf »

I think that the most important thing for you to consider right now is taxes.

For somebody with your income, Federal income tax is the lowest that it has been for the last 100 years, and tax rates under current law are scheduled to snap back up in five years. I make no predictions about future tax laws, only about current law.

You have a five year window to make low tax rate contributions to MBR. When looking at total taxes over the next ten or twenty years, now is the best possible time for Roth, when the tax rates snap back up, then maximize pretax to save current taxes.

Ralph
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

anon_investor wrote: Sun Sep 06, 2020 8:33 am The tax benefit of the regular backdoor roth and the MBDR are the same. Regular has just easier execution. Couple mouse clicks to do, the MBDR may be harder depending on your 401k. Many require calls or mailed in forms and/or checks. Personally I just do in-plan Roth conversion for my after-tax 401k contributions because I can do so online immediately every paycheck avoiding any taxable growth and the funds are immediately invested and Roth. If I were to roll over after-tax contributions every paycheck to my roth IRA, it would cost me $5 each time and require my 401k to mail Vanguard a check, meaning time out of the market. Some people with a Fidelity 401k and a Fidelity Roth IRA have report a more seamless rollover process.

One other benefit is Roth IRA may have better investment options.
Thank you very much for confirming that the consequences of both are similar! I’m not sure yet how seamless (or perhaps rather how difficult) the after-tax 401k —> Roth IRA process will be, so that’s a helpful consideration that I’ll have to look into.

I haven’t opened the Roth IRA yet so I’m unsure what my options will be, though I imagine that I could have my pick. I’m not really sure what a good suite of options looks like. My 401k offers me, among other options, the Vanguard target retirement date funds at a .08% ER. Is that generally considered a good ER? I’m relatively unsophisticated in that area and was OK with the aggressiveness of the targeted retirement fund, though would be happy to hear any hesitations or general wisdom on the point (if any).

When you say that you do in-plan Roth conversion, do you mean that you go from after-tax non-Roth 401k —> Roth 401k and simply leave it there? At what point would you transfer it to the Roth IRA? Is there any rationale/benefit/burden associated with that distinction?
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

anon_investor wrote: Sun Sep 06, 2020 8:41 am
quenchgum wrote: Sun Sep 06, 2020 4:57 am There is no fee to refi - a lot of these companies (First Republic, Earnest, SoFi, etc) actually offer cash incentives to refi. I’m not sure how long the 1.25 would last, but feel comfortable that a higher rate would likely correlate with a strong market, meaning that I could pull from the Roth IRA during “up” times as necessary to meet a debt payment as a worst case scenario.
If they are paying you to refi, definitely do that. At 1.25% I would max Roth space out first.

Will you get a bonus for 2020? Would that help you max out your Roth space?
The bonus is a discretionary $15k (TBD whether that materializes). If so, it would be paid out in April 2021 for work performed solely throughout 2020. Do you know whether that could be applied toward my 2020 MBDR balance?
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

Compound wrote: Sun Sep 06, 2020 8:44 am
One minor point, which depends on the retirement plan rules in question. There could be a tax drag on earnings before conversion if done through the mega backdoor Roth method. For example, some plans only permit in service withdrawals once per year. Earnings that accumulate during the year would be taxed at conversion. In the case of the regular backdoor Roth, you can generally do the contribution and then conversion in a matter of days, thus allowing earnings before conversion to be negligible and earnings after conversion (and thus not taxed) to be maximized.
Yes, that’s true and a helpful point! My understanding is that since my 401k holds these amounts in separate sub accounts, then I could simply punt the growth portion — if any — toward my tIRA. I certainly would not want to put them into my Roth IRA because those amounts would be taxable conversions that I would be forced to withdraw (and pay a 10% penalty on if withdrawn within 5 years of their conversion into the Roth IRA) prior to withdrawing any MBDR principal that same year. So I suppose the plan would be somewhat of a bust if I were some reason why it would be disadvantageous for me to shove the growth into the tIRA. Again, if I don’t have enough money to max both and if I’m doing the MBDR regardless, then I suppose *especially in that case* that it would make sense to skip the normal backdoor Roth because that would be muddied up by the pro rata rules that would catch whatever taxable growth I had on my after-tax 401k amounts before transferring them to the Roth IRA. Does this make sense? I feel like I’m kind of shooting into the dark here.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

Compound wrote: Sun Sep 06, 2020 8:53 am
quenchgum wrote: Sun Sep 06, 2020 6:34 am
Thanks for the link. I’ve read that article (and others) and they actually are what got me thinking that the MBDR strategy could work in the first place! Many thanks to TFB. The one thing that I can’t figure out is whether/when the normal backdoor Roth contributions are considered “taxable conversions” for purposes of the Roth IRA ordering rules. For example, if I execute the normal backdoor Roth by immediately going from tIRA —> Roth IRA, then would any of those amounts be considered a bucket 2 taxable conversion that I would be forced to withdraw before withdrawing my bucket 3 non-taxable conversion amounts (i.e. my MBDR amounts) that I contributed in the same year? If so, that seems like an obvious reason (all else equal) to avoid the normal backdoor Roth if I’m not able to max out both but otherwise have more than the normal backdoor alone allows for.
In the case of the backdoor Roth, since the contributions to the traditional IRA are not deductible and have therefore been taxed, the money is not taxed during conversion to the Roth. Earnings before conversion however are taxed in the tax year of conversion.

I’m not sure I understand the buckets you are speaking about; perhaps the following will help. If you haven’t already, consider going straight to the source to learn more about the rules on IRA distributions (including ordering and aggregation rules):

https://www.irs.gov/publications/p590b# ... 1000231071
Thanks so very much for this. Extremely helpful. I had seen someone use the “bucket” terminology perhaps on reddit, but I was definitely referring to the 590B groupings — contributions being bucket 1, taxable conversions in bucket 2, non-taxable conversions in bucket 3, and earnings in bucket 4. My understanding is that if I were able to immediately execute the backdoor Roth (which shouldn’t be an issue), then that entire 6k would be a non-taxable conversion, and similarly if I were able to immediately convert my after-tax non-roth 401k —> Roth IRA (which may be a bit more of a hassle) then that would also be a non-taxable conversion, such that (since my IRA is new and otherwise without history) I could withdraw either the backdoor or MBDR principal without penalty!
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

unbiased wrote: Sun Sep 06, 2020 2:07 pm I was in the EXACT same boat as you at the same age, same job. Same dilemma. Although my debt was slightly less but I was also earning less than you -- still a lot in those days (early 2000s) at big firms.

My choice: I chose to invest first, pay down debt later. Now, just a couple decades later I'm knocking on the door of an early retirement. If you want to be there too, do what I did. This is despite a major tech rout in 2000 and the devastating losses of 2008--basically almost a decade of lost stock returns. Nevertheless, those assets invested in early years of working when I had no other responsibilities have carried me through the years. The power of compounded returns at a young age cannot be overstated. I was socking away close to 35% of my TAKE HOME salary. Holy smokes! I have never able to do that again--especially as life got more expensive with house, marriage, kid, etc. You'll need to put some money in taxable accounts if you want to retire early as well.

Guess what? I still haven't paid off those darn loans, but the feds just postponed them all anyway. Also, I didn't look at the details of your loans, but some/all might be able to be deferred, etc. if needed. I also expect the possibility of the government forgiving loans or paying interest or whatever on student loans in the coming decades as the indebted generation starts to come to power.

But seriously, you're young and making amazing money. Personally, I chose to leave the "BigLaw" life after a few years because--well--you couldn't pay me enough for the demands. Best part? By saving a ton I never got accustomed to a high-flying expensive lifestyle and was able to have assets to enable me to move. Heck, on a "per hour" basis I actually wasn't making as much as I thought. I found better balanced jobs over the years, but always had those sensibly-invested assets to carry me through. You'll also never get easier terms for repayment than for student loans. Never.
Thanks, unbiased. It’s helpful to hear that perspective to amp myself up on investing. Did you ever feel that the debt weighed you down/affected your lifestyle and career choices? The last thing that I want is for me to exacerbate the stress and pressure of biglaw unnecessarily by prolonging the mental torture of heavy debt. Even if I’m able to last a year longer mentally, that’s probably a win given the higher salary and ability to contribute to either loans or “retirement” funds.
Topic Author
quenchgum
Posts: 31
Joined: Sat Sep 05, 2020 12:46 am

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

ralph124cf wrote: Sun Sep 06, 2020 3:49 pm I think that the most important thing for you to consider right now is taxes.

For somebody with your income, Federal income tax is the lowest that it has been for the last 100 years, and tax rates under current law are scheduled to snap back up in five years. I make no predictions about future tax laws, only about current law.

You have a five year window to make low tax rate contributions to MBR. When looking at total taxes over the next ten or twenty years, now is the best possible time for Roth, when the tax rates snap back up, then maximize pretax to save current taxes.

Ralph
Thank you, Ralph. I’m currently taxed quite highly (and don’t expect to always be in such a high tax bracket) so my plan is to max my pre-tax 401k.
User avatar
anon_investor
Posts: 3522
Joined: Mon Jun 03, 2019 1:43 pm

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

quenchgum wrote: Sun Sep 06, 2020 11:32 pm
anon_investor wrote: Sun Sep 06, 2020 8:33 am The tax benefit of the regular backdoor roth and the MBDR are the same. Regular has just easier execution. Couple mouse clicks to do, the MBDR may be harder depending on your 401k. Many require calls or mailed in forms and/or checks. Personally I just do in-plan Roth conversion for my after-tax 401k contributions because I can do so online immediately every paycheck avoiding any taxable growth and the funds are immediately invested and Roth. If I were to roll over after-tax contributions every paycheck to my roth IRA, it would cost me $5 each time and require my 401k to mail Vanguard a check, meaning time out of the market. Some people with a Fidelity 401k and a Fidelity Roth IRA have report a more seamless rollover process.

One other benefit is Roth IRA may have better investment options.
Thank you very much for confirming that the consequences of both are similar! I’m not sure yet how seamless (or perhaps rather how difficult) the after-tax 401k —> Roth IRA process will be, so that’s a helpful consideration that I’ll have to look into.

I haven’t opened the Roth IRA yet so I’m unsure what my options will be, though I imagine that I could have my pick. I’m not really sure what a good suite of options looks like. My 401k offers me, among other options, the Vanguard target retirement date funds at a .08% ER. Is that generally considered a good ER? I’m relatively unsophisticated in that area and was OK with the aggressiveness of the targeted retirement fund, though would be happy to hear any hesitations or general wisdom on the point (if any).

When you say that you do in-plan Roth conversion, do you mean that you go from after-tax non-Roth 401k —> Roth 401k and simply leave it there? At what point would you transfer it to the Roth IRA? Is there any rationale/benefit/burden associated with that distinction?
If your 401k plan has it, the in-plan Roth Conversion is just converting the after-tax 401k contribution to Roth. Some 401k plans have weird restrictions (limited times a year, etc.), some do it online or even automatically, while some require phone calls, etc. For my 401k plan there are no restrictions, I can do it as many times as I like, it is all online and if I do it on payday before 4pm the conversion will take effect before the contributions are invested so I avoid any taxable growth. My 401k plan has lower expense rations than my Vanguard Roth IRA, so no rush to rollover, also each rollover costs me $5, but I can do in-service rollovers of my MBDR funds anytime, I cannot access my nonMBDR funds (individual contribution/company match) until I leave my employer. I have substantial balances in both my Roth IRA, taxable account and HSA, so no sense of urgency rolling over either, but I can do it anytime. If I did rollover, my money would likely be out of the market for 1 to 2 weeks, while it was transfered from my 401k to Roth IRA.

One thing to also remember is 401k funds generally receive superior protection from creditors vs. IRAs (although some states grant IRA funds the same level of protection from creditors).

You probably want to fund (at least a little) your roth IRA via the backdoor this year to start the 5 year clock (which starts upon funding not creation).
quenchgum wrote: Sun Sep 06, 2020 11:35 pm
anon_investor wrote: Sun Sep 06, 2020 8:41 am
quenchgum wrote: Sun Sep 06, 2020 4:57 am There is no fee to refi - a lot of these companies (First Republic, Earnest, SoFi, etc) actually offer cash incentives to refi. I’m not sure how long the 1.25 would last, but feel comfortable that a higher rate would likely correlate with a strong market, meaning that I could pull from the Roth IRA during “up” times as necessary to meet a debt payment as a worst case scenario.
If they are paying you to refi, definitely do that. At 1.25% I would max Roth space out first.

Will you get a bonus for 2020? Would that help you max out your Roth space?
The bonus is a discretionary $15k (TBD whether that materializes). If so, it would be paid out in April 2021 for work performed solely throughout 2020. Do you know whether that could be applied toward my 2020 MBDR balance?
Not sure how your law firm handles bonuses. You should check with your payroll department. But at my current mega corp employer 401k contributions (including after tax) are deducted from my bonus. My bonus varies quite a bit year to year but is usually substantial, so I usually have to adjust my per paycheck 401k contribution % after my bonus/annual increase hits which is usually after Q1.
Post Reply