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

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Goldwater85
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by Goldwater85 »

I always thought of my V-10 stint as a highly paid residency—great training from top-of-their-field lawyers with lots and lots of flight hours. But, like a residency, 3-5 years from now you’ll have to look up and decide what you want to do.

While I was an associate, I focused on building up a chunk of cash and knocked out all of my loans. I have never regretted it.

If you choose to stay in Big Law, the opportunity cost relative to your long term income will be meaningless. But if as 4th year you want to jump to the DOJ or public interest or small law (which can actually pay well but takes time to ramp) or not be a lawyer or whatever, you don’t have to factor lack of liquidity or debt service into your decision making.

Congrats on the Big Law gig, but you won’t really be choosing a career for a few years. Would prioritize flexibility then over tax optimization now.
Compound
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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 11:41 pm
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.
Please clarify. Do you have money in a traditional IRA account at present? If so, you will be subject to the pro rata rule if you choose to do a backdoor Roth IRA, unless you rollover the money presently in the traditional IRA into a 401k.
Compound
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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 11:32 pm 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).
Yes, that expense ratio (ER) is very reasonable. Target date funds with low ERs, such as what you have available to you, are excellent investment choices. As you move along in your investing career, you may choose to specifically tailor the asset allocation to your particular situation and move away from target date funds. That said, many people simply stick with target retirements funds because they are so simple and cheap.
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quenchgum
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

anon_investor wrote: Mon Sep 07, 2020 8:39 am
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).
Thanks, that's interesting and helpful to hear. Would it be accurate, then, to say that there aren't any tax or other consequences associated letting the money sit in my Roth 401(k) and then pulling the trigger to stash it in the Roth IRA whenever/if I ever need to pull out the principal? [With the caveat that I should put a small amount in the Roth IRA to get the normal 5 year clock started.] If so, I suppose that if my suite of investment options are equal between the Roth IRA and the 401(k), then I should be indifferent between letting the money sit in the Roth 401(k) or in the Roth IRA.
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quenchgum
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

Goldwater85 wrote: Mon Sep 07, 2020 8:55 am I always thought of my V-10 stint as a highly paid residency—great training from top-of-their-field lawyers with lots and lots of flight hours. But, like a residency, 3-5 years from now you’ll have to look up and decide what you want to do.

While I was an associate, I focused on building up a chunk of cash and knocked out all of my loans. I have never regretted it.

If you choose to stay in Big Law, the opportunity cost relative to your long term income will be meaningless. But if as 4th year you want to jump to the DOJ or public interest or small law (which can actually pay well but takes time to ramp) or not be a lawyer or whatever, you don’t have to factor lack of liquidity or debt service into your decision making.

Congrats on the Big Law gig, but you won’t really be choosing a career for a few years. Would prioritize flexibility then over tax optimization now.
Thanks, Goldwater. I agree completely that having flexibility in 2-4 years will be the single best thing that I can do for myself now. I suppose I just don't see myself as foregoing that flexibility even if I were to pursue the MBDR strategy very aggressively.

It seems that I could annually put 30k into the MBDR and, for the next couple of years, invest those amounts VERY conservatively (i.e., just to keep up with inflation). If so, then as a fourth year I should have the same flexibility that I would have had if I were to have instead aggressively prepaid the loans: I could simply pull the principal and wipe out the loans, if desired, with no harm or lost opportunity (besides perhaps some small difference between my actual return within the Roth IRA and my "guaranteed" return on the low-rate refinanced loans, which will be somewhere from 1-3%). The difference is that if I were to decide at that point to ride out the actual remaining debt a bit more (as at that point, I'd be at about ~80k left or so) and refinance to lower monthly payments (if necessary), then all the power to me for the remainder of my life to have those Roth amounts growing tax-free in perpetuity.

I suppose that this mental trick wouldn't necessary work for everyone -- i.e., I imagine that there's a psychological benefit to having the loans paid off as compared to having a sizeable account to pull from that could pay off the loans at your leisure -- but I feel relatively well-versed on the topic by now and imagine that I could be equally comfortable with both options. I suppose what I'm looking for is for someone to tell me why the above "mental trick" doesn't actually pan out -- i.e., some piece of the picture that I seem to be missing, some understanding of the rules that I have mixed up, etc.
Last edited by quenchgum on Mon Sep 07, 2020 2:13 pm, edited 4 times in total.
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quenchgum
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

Compound wrote: Mon Sep 07, 2020 9:43 am
quenchgum wrote: Sun Sep 06, 2020 11:41 pm
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.
Please clarify. Do you have money in a traditional IRA account at present? If so, you will be subject to the pro rata rule if you choose to do a backdoor Roth IRA, unless you rollover the money presently in the traditional IRA into a 401k.
I haven't yet opened either a tIRA or a Roth IRA account. [I haven't yet done any MBDR or normal backdoor Roth contributions for 2020 and have not made any retirement contributions before now.] My thinking is that if I were to go from the after-tax 401(k) --> Roth IRA, then any growth before that rollover could go to my tIRA account. That's part of my rationale for saying that if I were to have ~30k funds between my IRA and MBDR, then perhaps it makes sense to simply avoid the backdoor Roth and go exclusively into the MBDR: I would be able to stuff any growth in my tIRA without worrying about the pro rata rules. (Alternatively, it seems that I could simply do automatic rollovers to my Roth 401k to avoid any growth/pro rata issues. I'm planning to speak with my 401k administrator tomorrow to see what that after-tax 401k --> Roth IRA process looks like!)
thatme
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by thatme »

As a fellow Biglaw worker, is the fact that your 401(k) plan allows after-tax contributions unique to your firm or is this a common attribute that I'm just not aware of? I've been maxing out my pre-tax 401(k) since joining the firm, but I wasn't aware that I could make additional contributions on an after-tax basis. Maybe I just needed to ask? Kind of curious now...
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quenchgum
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

thatme wrote: Mon Sep 07, 2020 2:19 pm As a fellow Biglaw worker, is the fact that your 401(k) plan allows after-tax contributions unique to your firm or is this a common attribute that I'm just not aware of? I've been maxing out my pre-tax 401(k) since joining the firm, but I wasn't aware that I could make additional contributions on an after-tax basis. Maybe I just needed to ask? Kind of curious now...
I think it's relatively uncommon within biglaw. I only heard about it because I had scheduled a call with my firm's employee that administers our 401(k) plan, and he was thankfully very well-versed and was able to give me the heads up. I've told a couple of friends about this at other biglaw firms and their firms have not allowed it.
thatme
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by thatme »

Got it, thanks. I've often wondered if there's some good reason why the firm doesn't utilize a portion of our year-end bonus as a "match" for our 401K. I'm sure it's a logistical nightmare, not everyone is maxing out, probably some tax code provision, highly comp'ed employee rules, etc... but it sure would be great if they did.
unbiased
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by unbiased »

quenchgum wrote: Sun Sep 06, 2020 11:48 pm
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.
Sorry, I thought I responded to your question, I must have left it in draft.

Short answer -- no. My student loan debt had super flexible repayment terms. I even deferred once no questions asked for six months when I was between jobs. No issue. I don't know if you have private loans with harsher terms. That would make the calculation a bit different. I switched to a graduated plan at one time when I took a lower paying job. I eventually surpassed my old salary after a few years, and the payments grew with it.

I understand you'll get different opinions--both valid--whether paying off debt or building an asset base is more important at your stage of life. Personally, I felt the long term power of compound returns more compelling. I just figured I would be dealing with debt for all my working life but building a "savers" habit young would be the single most important step to financial freedom. I'm now at a point where my assets are well above my debts and could pay everything off tomorrow if I chose to with plenty left over. Everyone has debt. Not everyone saves.
Chadnudj
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by Chadnudj »

I haven't read thru this whole thread, so take this with a grain of salt.....but as a former big law attorney myself, my advice:

Pay off the debt as fast as you can.

Look, you might end up ahead by investing. In fact, you probably will. But if the firm hits a rough patch (and I've been at firms that hit rough patches since I graduated in 2006), you're better off not having debt as a monthly expense you have to pay. Losing the student loan albatross opens up your career options in some really great ways as a lawyer.

(Note: this is a lesson I wish I had followed, as I'm still paying law school student loans today).
TIAX
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by TIAX »

Refinance with first republic at 1.95% and definitely don't prepay.
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quenchgum
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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 and thoughts.

Is anyone aware of a resource -- perhaps a relatively simple spreadsheet -- that they'd recommend to help model out the tax savings over, say, 30 years at an expected growth of 8% if I were to (1) aggressively prepay the loans in ~3 years versus instead (2) ride out the 1.95% student loan to a 7-year term and end up leaving all excess cash in the Roth IRA? I'm new to the forum and unsure whether there is a stickied resource that would be a good base to work from to model out those scenarios.

TIA and thank you all regardless!
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quenchgum
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

I came across a follow-up question regarding the interaction between the MBDR and the normal backdoor Roth, and was hoping someone could confirm my reasoning if they came across this and had knowledge!

Say that my after-tax non-Roth 401(k) amounts accrue interest before I move them to the Roth IRA. If so, I can simply move the principal to the Roth IRA and move the growth to a traditional IRA. If I had no other IRA balances in any other IRA accounts, would any such growth amounts within a traditional IRA create an aggregation / pro rata / other type of issue when executing a normal backdoor Roth?

I think the answer is that the aggregation rules do NOT create an issue because the growth would not be considered a pre-tax amount within the IRA. Is that right? Thank you!
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Thrifty Femme
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by Thrifty Femme »

quenchgum wrote: Tue Sep 15, 2020 9:33 pm I came across a follow-up question regarding the interaction between the MBDR and the normal backdoor Roth, and was hoping someone could confirm my reasoning if they came across this and had knowledge!

Say that my after-tax non-Roth 401(k) amounts accrue interest before I move them to the Roth IRA. If so, I can simply move the principal to the Roth IRA and move the growth to a traditional IRA. If I had no other IRA balances in any other IRA accounts, would any such growth amounts within a traditional IRA create an aggregation / pro rata / other type of issue when executing a normal backdoor Roth?

I think the answer is that the aggregation rules do NOT create an issue because the growth would not be considered a pre-tax amount within the IRA. Is that right? Thank you!
You would run into pro rata trouble if you did not send the growth back your 401k. Check to see if your 401k plan allows you to rollover money into your 401k account.
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quenchgum
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

Thrifty Femme wrote: Tue Sep 15, 2020 9:57 pm
quenchgum wrote: Tue Sep 15, 2020 9:33 pm I came across a follow-up question regarding the interaction between the MBDR and the normal backdoor Roth, and was hoping someone could confirm my reasoning if they came across this and had knowledge!

Say that my after-tax non-Roth 401(k) amounts accrue interest before I move them to the Roth IRA. If so, I can simply move the principal to the Roth IRA and move the growth to a traditional IRA. If I had no other IRA balances in any other IRA accounts, would any such growth amounts within a traditional IRA create an aggregation / pro rata / other type of issue when executing a normal backdoor Roth?

I think the answer is that the aggregation rules do NOT create an issue because the growth would not be considered a pre-tax amount within the IRA. Is that right? Thank you!
You would run into pro rata trouble if you did not send the growth back your 401k. Check to see if your 401k plan allows you to rollover money into your 401k account.
Is there a specific rule (or perhaps blog article) that you could point me to? I don't think I understand -- I had thought that the pro rata rule only caused an issue if you had both pre-tax and post-tax assets within your tIRA. Would you say that that's an inaccurate summary, or are you instead suggesting that the growth from the after-tax amounts would be considered as "pre-tax" once within the tIRA? Or is there something else entirely that I'm missing?
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anon_investor
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

quenchgum wrote: Tue Sep 15, 2020 10:23 pm
Thrifty Femme wrote: Tue Sep 15, 2020 9:57 pm
quenchgum wrote: Tue Sep 15, 2020 9:33 pm I came across a follow-up question regarding the interaction between the MBDR and the normal backdoor Roth, and was hoping someone could confirm my reasoning if they came across this and had knowledge!

Say that my after-tax non-Roth 401(k) amounts accrue interest before I move them to the Roth IRA. If so, I can simply move the principal to the Roth IRA and move the growth to a traditional IRA. If I had no other IRA balances in any other IRA accounts, would any such growth amounts within a traditional IRA create an aggregation / pro rata / other type of issue when executing a normal backdoor Roth?

I think the answer is that the aggregation rules do NOT create an issue because the growth would not be considered a pre-tax amount within the IRA. Is that right? Thank you!
You would run into pro rata trouble if you did not send the growth back your 401k. Check to see if your 401k plan allows you to rollover money into your 401k account.
Is there a specific rule (or perhaps blog article) that you could point me to? I don't think I understand -- I had thought that the pro rata rule only caused an issue if you had both pre-tax and post-tax assets within your tIRA. Would you say that that's an inaccurate summary, or are you instead suggesting that the growth from the after-tax amounts would be considered as "pre-tax" once within the tIRA? Or is there something else entirely that I'm missing?
Any growth of the after-tax funds prior to a roth conversion is considered "pre-tax". This is why after-tax 401k contributions are only advantagous if in plan roth conversions OR in service Roth IRA rollovers are possible.

This is one reason for simplicity I just do in-plan roth conversions of my after-tax contributions to my 401k, especially since my plan allows me to rollover the now converted roth funds to my Roth IRA anytime I want (for a small $5 fee per transaction). Never any risk of "taxable growth".

However, from a practical perspective, assuming you are doing Roth IRA rollovers every pay check, the small amount of taxable growth should not be too painful to just convert to Roth and just pay the tax. How much growth can there be in such a short period of time? The hassle of trying to rollover a few dollars back into your 401k is probably not worth the hassle of saving a couple of bucks in tax (like literally $2 probably).
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quenchgum
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

anon_investor wrote: Tue Sep 15, 2020 10:35 pm
quenchgum wrote: Tue Sep 15, 2020 10:23 pm
Thrifty Femme wrote: Tue Sep 15, 2020 9:57 pm
quenchgum wrote: Tue Sep 15, 2020 9:33 pm I came across a follow-up question regarding the interaction between the MBDR and the normal backdoor Roth, and was hoping someone could confirm my reasoning if they came across this and had knowledge!

Say that my after-tax non-Roth 401(k) amounts accrue interest before I move them to the Roth IRA. If so, I can simply move the principal to the Roth IRA and move the growth to a traditional IRA. If I had no other IRA balances in any other IRA accounts, would any such growth amounts within a traditional IRA create an aggregation / pro rata / other type of issue when executing a normal backdoor Roth?

I think the answer is that the aggregation rules do NOT create an issue because the growth would not be considered a pre-tax amount within the IRA. Is that right? Thank you!
You would run into pro rata trouble if you did not send the growth back your 401k. Check to see if your 401k plan allows you to rollover money into your 401k account.
Is there a specific rule (or perhaps blog article) that you could point me to? I don't think I understand -- I had thought that the pro rata rule only caused an issue if you had both pre-tax and post-tax assets within your tIRA. Would you say that that's an inaccurate summary, or are you instead suggesting that the growth from the after-tax amounts would be considered as "pre-tax" once within the tIRA? Or is there something else entirely that I'm missing?
Any growth of the after-tax funds prior to a roth conversion is considered "pre-tax". This is why after-tax 401k contributions are only advantagous if in plan roth conversions OR in service Roth IRA rollovers are possible.

This is one reason for simplicity I just do in-plan roth conversions of my after-tax contributions to my 401k, especially since my plan allows me to rollover the now converted roth funds to my Roth IRA anytime I want (for a small $5 fee per transaction). Never any risk of "taxable growth".

However, from a practical perspective, assuming you are doing Roth IRA rollovers every pay check, the small amount of taxable growth should not be too painful to just convert to Roth and just pay the tax. How much growth can there be in such a short period of time? The hassle of trying to rollover a few dollars back into your 401k is probably not worth the hassle of saving a couple of bucks in tax (like literally $2 probably).
Thanks so much. For some reason, not sure why, I had thought that the "after-tax" character would stay given the "after-tax" principal it grew from.

The only rationale is that I want to be able to withdraw all of my MBDR principal from my Roth IRA without having to pay a penalty, even if I were to withdraw within five years (and I don't have any direct contributions to pad the starting balance). So, I really want to avoid having any "taxable conversions" that get stacked before my "non-taxable conversions" (my after-tax principal). I spoke with my 401(k) plan administrator -- I think, in part, based upon your comments! -- and they also do not automate in-plan Roth conversions, so I figure I'll likely have some growth regardless of approach (unless I'm super vigilant). So, I'll need to either put that into my Roth IRA (which I believe is a "taxable conversion") or put that into my tIRA, where it will cause issues when executing a normal backdoor Roth (unless I'm able to roll it back into my 401(k) - not sure whether that's available, I'll have to call tomorrow).
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anon_investor
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

quenchgum wrote: Tue Sep 15, 2020 10:45 pm
anon_investor wrote: Tue Sep 15, 2020 10:35 pm
quenchgum wrote: Tue Sep 15, 2020 10:23 pm
Thrifty Femme wrote: Tue Sep 15, 2020 9:57 pm
quenchgum wrote: Tue Sep 15, 2020 9:33 pm I came across a follow-up question regarding the interaction between the MBDR and the normal backdoor Roth, and was hoping someone could confirm my reasoning if they came across this and had knowledge!

Say that my after-tax non-Roth 401(k) amounts accrue interest before I move them to the Roth IRA. If so, I can simply move the principal to the Roth IRA and move the growth to a traditional IRA. If I had no other IRA balances in any other IRA accounts, would any such growth amounts within a traditional IRA create an aggregation / pro rata / other type of issue when executing a normal backdoor Roth?

I think the answer is that the aggregation rules do NOT create an issue because the growth would not be considered a pre-tax amount within the IRA. Is that right? Thank you!
You would run into pro rata trouble if you did not send the growth back your 401k. Check to see if your 401k plan allows you to rollover money into your 401k account.
Is there a specific rule (or perhaps blog article) that you could point me to? I don't think I understand -- I had thought that the pro rata rule only caused an issue if you had both pre-tax and post-tax assets within your tIRA. Would you say that that's an inaccurate summary, or are you instead suggesting that the growth from the after-tax amounts would be considered as "pre-tax" once within the tIRA? Or is there something else entirely that I'm missing?
Any growth of the after-tax funds prior to a roth conversion is considered "pre-tax". This is why after-tax 401k contributions are only advantagous if in plan roth conversions OR in service Roth IRA rollovers are possible.

This is one reason for simplicity I just do in-plan roth conversions of my after-tax contributions to my 401k, especially since my plan allows me to rollover the now converted roth funds to my Roth IRA anytime I want (for a small $5 fee per transaction). Never any risk of "taxable growth".

However, from a practical perspective, assuming you are doing Roth IRA rollovers every pay check, the small amount of taxable growth should not be too painful to just convert to Roth and just pay the tax. How much growth can there be in such a short period of time? The hassle of trying to rollover a few dollars back into your 401k is probably not worth the hassle of saving a couple of bucks in tax (like literally $2 probably).
Thanks so much. For some reason, not sure why, I had thought that the "after-tax" character would stay given the "after-tax" principal it grew from.

The only rationale is that I want to be able to withdraw all of my MBDR principal from my Roth IRA without having to pay a penalty, even if I were to withdraw within five years (and I don't have any direct contributions to pad the starting balance). So, I really want to avoid having any "taxable conversions" that get stacked before my "non-taxable conversions" (my after-tax principal). I spoke with my 401(k) plan administrator -- I think, in part, based upon your comments! -- and they also do not automate in-plan Roth conversions, so I figure I'll likely have some growth regardless of approach (unless I'm super vigilant). So, I'll need to either put that into my Roth IRA (which I believe is a "taxable conversion") or put that into my tIRA, where it will cause issues when executing a normal backdoor Roth (unless I'm able to roll it back into my 401(k) - not sure whether that's available, I'll have to call tomorrow).
Yes, the taxable growth rolled over to your Roth IRA is a taxable conversion. However, realistically how much growth will there be? My 401k plan also requires manual roth conversion of after-tax contributions. On the occasions I have not immediately converted (done so a few days later, the grow has been peanuts (so I convert and pay the tax at tax time). If I failed to be vigilant and waited a day or 2 before converting, the tax for the year likely would have been a couple of bucks at most. I just make it a habit now to make my conversions every pay day before 4pm.
sd323232
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by sd323232 »

Get rid of student loan asap. Yes, math does not make sense to do so, but psychological effect will make ur life aloooot easier.

Imagine to live with this debt for over 5 years? That's not even an option, pay loan even if it is at 0% interest.
MrJedi
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by MrJedi »

If you can't max both normal Backdoor Roth and Mega Backdoor Roth, there is a small benefit for maxing the normal one first. That is the chance that your employer fails the 401k ACP test (discrimination testing) and some of your after tax 401k contributions have to be returned since you may be considered an HCE. If your employer has a well setup plan, this may not be a concern for you.
MrJedi
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by MrJedi »

quenchgum wrote: Mon Sep 07, 2020 1:41 pm
anon_investor wrote: Mon Sep 07, 2020 8:39 am
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).
Thanks, that's interesting and helpful to hear. Would it be accurate, then, to say that there aren't any tax or other consequences associated letting the money sit in my Roth 401(k) and then pulling the trigger to stash it in the Roth IRA whenever/if I ever need to pull out the principal? [With the caveat that I should put a small amount in the Roth IRA to get the normal 5 year clock started.] If so, I suppose that if my suite of investment options are equal between the Roth IRA and the 401(k), then I should be indifferent between letting the money sit in the Roth 401(k) or in the Roth IRA.
This is plan dependent, but your plan may or may not allow your distributable amounts to be distributed in-service after the Roth 401k conversion. My plan for example does not, though the IRS does allow it. I still opt for the 401k route because my logic is that if I really need early access to those funds, then I must have separated from my employer and thus won't be restricted from rolling it out to a Roth IRA at that time.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by HootingSloth »

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.
As someone who has stayed in biglaw for many years now, I think this point cannot be emphasized enough. The financial returns you get from biglaw will be dominated by how long you are able to stay and continue to save at a high rate, not by your investment decisions (within a range of reasonable options). Biglaw is a marathon, and you need to take care of your mental health more than anything else. For many people, including myself, paying off the debt as early as possible has had returns that far outweigh an uncertain gain of a few percentage points of growth on a portfolio that is just starting out.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by mcraepat9 »

Chadnudj wrote: Mon Sep 07, 2020 9:52 pm I haven't read thru this whole thread, so take this with a grain of salt.....but as a former big law attorney myself, my advice:

Pay off the debt as fast as you can.

Look, you might end up ahead by investing. In fact, you probably will. But if the firm hits a rough patch (and I've been at firms that hit rough patches since I graduated in 2006), you're better off not having debt as a monthly expense you have to pay. Losing the student loan albatross opens up your career options in some really great ways as a lawyer.

(Note: this is a lesson I wish I had followed, as I'm still paying law school student loans today).
+1

Signed, NYC biglaw partner who summered in 2008 and started in 2009.
Amateur investors are not cool-headed logicians.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by financiallycurious »

I haven't read thru this whole thread, so take this with a grain of salt.....but as a former big law attorney myself, my advice:

Pay off the debt as fast as you can.

Look, you might end up ahead by investing. In fact, you probably will. But if the firm hits a rough patch (and I've been at firms that hit rough patches since I graduated in 2006), you're better off not having debt as a monthly expense you have to pay. Losing the student loan albatross opens up your career options in some really great ways as a lawyer.

+ 2 - someone who put in more than enough years in big law and left for greener pastures, with zero student loan debt, a healthy 401k and zero regrets.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

HootingSloth wrote: Wed Sep 16, 2020 10:12 am
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.
As someone who has stayed in biglaw for many years now, I think this point cannot be emphasized enough. The financial returns you get from biglaw will be dominated by how long you are able to stay and continue to save at a high rate, not by your investment decisions (within a range of reasonable options). Biglaw is a marathon, and you need to take care of your mental health more than anything else. For many people, including myself, paying off the debt as early as possible has had returns that far outweigh an uncertain gain of a few percentage points of growth on a portfolio that is just starting out.
mcraepat9 wrote: Wed Sep 16, 2020 10:17 am
Chadnudj wrote: Mon Sep 07, 2020 9:52 pm I haven't read thru this whole thread, so take this with a grain of salt.....but as a former big law attorney myself, my advice:

Pay off the debt as fast as you can.

Look, you might end up ahead by investing. In fact, you probably will. But if the firm hits a rough patch (and I've been at firms that hit rough patches since I graduated in 2006), you're better off not having debt as a monthly expense you have to pay. Losing the student loan albatross opens up your career options in some really great ways as a lawyer.

(Note: this is a lesson I wish I had followed, as I'm still paying law school student loans today).
+1

Signed, NYC biglaw partner who summered in 2008 and started in 2009.
financiallycurious wrote: Wed Sep 16, 2020 10:50 am

+ 2 - someone who put in more than enough years in big law and left for greener pastures, with zero student loan debt, a healthy 401k and zero regrets.
Thank you to all three of you (HootingSloth, mcraepat9, financiallycurious) for your perspectives. (And to others!) As a stressed rising second year.. it is very appreciated and timely advice that I am considering with gravity.

I wanted to push back to get your thoughts on how my specific investment strategy changes your recommendation, if at all. I would agree without hesitation -- for the same reasons that all three of you listed -- that for junior biglaw associates, prepaying student debt is probably preferable to investing excess amounts in a taxable account that's tied up in the market (likely largely in stocks), but only because those amounts would be subject to the market, such that I couldn't rely on pulling them if needed. However, to the extent that I were to pursue the MBDR option, I would instead invest any amounts that are in my Roth IRA very conservatively (perhaps targeting 1-2%) over the next few years, such that I could fully rely upon pulling the principal at any point without tax or penalty and at extremely low market risk, especially given that I don't expect to need to pull large amounts in even the most dire of scenarios. Another complicating difference is the tax-free growth going forward, for 40+ years. [Of course, that's the only reason to want to do this anyway - why else "invest in the market" to target 2% when you can pay off your loan with the same guaranteed rate?]

Does the above at all affect your advice? If it doesn't affect your advice, then is that because you think it's unlikely that I'll be to fully psychologically equate the Roth IRA amounts with paying off my debt [if so, I think that that's a fair point] or is it instead for some other reason?

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

Post by gclancer »

quenchgum wrote: Wed Sep 16, 2020 2:15 pm Does the above at all affect your advice? If it doesn't affect your advice, then is that because you think it's unlikely that I'll be to fully psychologically equate the Roth IRA amounts with paying off my debt [if so, I think that that's a fair point] or is it instead for some other reason?

Thank you, all!
This is really more a psychology question than it is financial one. The feedback you’re getting is that having the debt paid off will have a significant non-financial return on investment, including lessening the chance of burnout so that you can continue earning a big law salary (feeling like you’re choosing to work somewhere feels a lot better than feeling like you have to work somewhere).

What you’re saying makes complete sense. The question is, will having a side Roth account big enough to pay off your student loans impart the same psychological benefits as actually paying them off? Or will you feel hesitant to drain a Roth account you worked so hard to build up and continue working in a job you don’t enjoy to avoid doing so? Only you can answer that question.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by financiallycurious »

Does the above at all affect your advice? If it doesn't affect your advice, then is that because you think it's unlikely that I'll be to fully psychologically equate the Roth IRA amounts with paying off my debt [if so, I think that that's a fair point] or is it instead for some other reason?
I’m probably imposing my own psychological hang-ups on you and your mileage may vary. After my loans were paid off completely, I slept better at night and hated my job in big law less. Maybe you love big law and will always feel that way. Maybe knowing that you have enough money in a Roth IRA to pay off your student loan is enough for you. It wouldn't have been for me. After I burned out in big law, I took a salary cut for a job that suits me much better. Now, a little more than a decade into my career, I still *only* make a salary similar to yours from my legal practice, but I’ve managed to accumulate 7 figures in NW not including home equity, my kids’ 529 accounts, or my husband’s retirement/company stock. My strategy was very simple: max out 401k every year, pay down student loan as fast as possible, then redirect money previously allocated to debt pay down to new investments.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

quenchgum wrote: Wed Sep 16, 2020 2:15 pm
HootingSloth wrote: Wed Sep 16, 2020 10:12 am
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.
As someone who has stayed in biglaw for many years now, I think this point cannot be emphasized enough. The financial returns you get from biglaw will be dominated by how long you are able to stay and continue to save at a high rate, not by your investment decisions (within a range of reasonable options). Biglaw is a marathon, and you need to take care of your mental health more than anything else. For many people, including myself, paying off the debt as early as possible has had returns that far outweigh an uncertain gain of a few percentage points of growth on a portfolio that is just starting out.
mcraepat9 wrote: Wed Sep 16, 2020 10:17 am
Chadnudj wrote: Mon Sep 07, 2020 9:52 pm I haven't read thru this whole thread, so take this with a grain of salt.....but as a former big law attorney myself, my advice:

Pay off the debt as fast as you can.

Look, you might end up ahead by investing. In fact, you probably will. But if the firm hits a rough patch (and I've been at firms that hit rough patches since I graduated in 2006), you're better off not having debt as a monthly expense you have to pay. Losing the student loan albatross opens up your career options in some really great ways as a lawyer.

(Note: this is a lesson I wish I had followed, as I'm still paying law school student loans today).
+1

Signed, NYC biglaw partner who summered in 2008 and started in 2009.
financiallycurious wrote: Wed Sep 16, 2020 10:50 am

+ 2 - someone who put in more than enough years in big law and left for greener pastures, with zero student loan debt, a healthy 401k and zero regrets.
Thank you to all three of you (HootingSloth, mcraepat9, financiallycurious) for your perspectives. (And to others!) As a stressed rising second year.. it is very appreciated and timely advice that I am considering with gravity.

I wanted to push back to get your thoughts on how my specific investment strategy changes your recommendation, if at all. I would agree without hesitation -- for the same reasons that all three of you listed -- that for junior biglaw associates, prepaying student debt is probably preferable to investing excess amounts in a taxable account that's tied up in the market (likely largely in stocks), but only because those amounts would be subject to the market, such that I couldn't rely on pulling them if needed. However, to the extent that I were to pursue the MBDR option, I would instead invest any amounts that are in my Roth IRA very conservatively (perhaps targeting 1-2%) over the next few years, such that I could fully rely upon pulling the principal at any point without tax or penalty and at extremely low market risk, especially given that I don't expect to need to pull large amounts in even the most dire of scenarios. Another complicating difference is the tax-free growth going forward, for 40+ years. [Of course, that's the only reason to want to do this anyway - why else "invest in the market" to target 2% when you can pay off your loan with the same guaranteed rate?]

Does the above at all affect your advice? If it doesn't affect your advice, then is that because you think it's unlikely that I'll be to fully psychologically equate the Roth IRA amounts with paying off my debt [if so, I think that that's a fair point] or is it instead for some other reason?

Thank you, all!
Conservative investments at your age in Roth is a waste. You have time on your side. Your Roth space should be 100% equities. You are better paying off your loans than wasting roth space in that manner.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by mcraepat9 »

financiallycurious wrote: Wed Sep 16, 2020 2:57 pm
Does the above at all affect your advice? If it doesn't affect your advice, then is that because you think it's unlikely that I'll be to fully psychologically equate the Roth IRA amounts with paying off my debt [if so, I think that that's a fair point] or is it instead for some other reason?
I’m probably imposing my own psychological hang-ups on you and your mileage may vary. After my loans were paid off completely, I slept better at night and hated my job in big law less. Maybe you love big law and will always feel that way. Maybe knowing that you have enough money in a Roth IRA to pay off your student loan is enough for you. It wouldn't have been for me. After I burned out in big law, I took a salary cut for a job that suits me much better. Now, a little more than a decade into my career, I still *only* make a salary similar to yours from my legal practice, but I’ve managed to accumulate 7 figures in NW not including home equity, my kids’ 529 accounts, or my husband’s retirement/company stock. My strategy was very simple: max out 401k every year, pay down student loan as fast as possible, then redirect money previously allocated to debt pay down to new investments.
+1

This is how I feel too. OP you are applying a strictly mathematical, analytical approach to this. Normally, I agree with that approach, and do when it comes to thing like whether to pay down your mortgage vs investing etc. This is a different animal. Biglaw in particular is undergoing substantial and industry-shaking changes, some Covid-related, some have been simmering for years. You can see it from reading ATL. It's been a stodgy, white shoe, by-the-book profession for most of my career, but it's changing now that older Millennials are ascending to positions of power at these law firms. The student loans will keep you trapped in biglaw longer than you'd like.

You can say it won't (maybe many Boglehead junior associates would say that), but I've seen it firsthand. The ones who got out of their loans quickest ended up taking less crap, leaving for better in-house (GCs at companies you've heard of) and non-legal positions (mostly finance and finance-adjacent), and ultimately ended up having better lives. Invariably, the associates who ended up eating the most crap, working the hardest and hating the job most, were ones with substantial student loan debt - even at low interest rates. There is an emotional element the analysis of which is not susceptible to merely evaluating numbers on a computer screen. My old firm has alumni events every few years, and those who left the profession look the youngest, best and have lived the fuller lives. The ones who aged the worst and were generally run down? Biglaw partners through and through, most of whom had substantial student loans that altered their career trajectory.

I followed an investment/loan paydown path very similar to financiallycurious, and didn't take nearly as much garbage as others once I knew i had the freedom to PTFO when I wanted to. That attitude and general approach to this job gave me the confidence to focus on doing excellent work that I actually enjoyed doing - I ended up outperforming and making partner relatively easily. Biglaw has its downsides (you already know them), but when you are able to leave whenever you want, your workload becomes surprisingly manageable.

Not sure I can add much more than that.
Amateur investors are not cool-headed logicians.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by gclancer »

anon_investor wrote: Wed Sep 16, 2020 3:31 pm Conservative investments at your age in Roth is a waste. You have time on your side. Your Roth space should be 100% equities. You are better paying off your loans than wasting roth space in that manner.
Not if it’s a side fund earmarked for paying off his student loans in the event of an unexpected turn of events. The idea would be to capture the annual Roth space available to him each year as a “student loan payoff fund” while simultaneously maxing out tax deferred contributions and paying down the student loans. As he manages to pay off the student loans without tapping the Roth money he could continue to shift more money into equities within the Roth student loan payoff fund.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

gclancer wrote: Wed Sep 16, 2020 4:56 pm
anon_investor wrote: Wed Sep 16, 2020 3:31 pm Conservative investments at your age in Roth is a waste. You have time on your side. Your Roth space should be 100% equities. You are better paying off your loans than wasting roth space in that manner.
Not if it’s a side fund earmarked for paying off his student loans in the event of an unexpected turn of events. The idea would be to capture to annual Roth space available to him each year as a “student loan payoff fund” while simultaneously making out tax deferred contributions and paying down the student loans. As he manages to pay off the student loans without tapping the Roth money he could continue to shift more money into equities within the Roth student loan payoff fund.
Still seems like a waste. But then again I paid off my law school loans as soon as possible. That freedom was priceless.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

Thank you all very much for the follow-up round of considerate, thoughtful and personal responses. It’s helpful to hear your perspective and to have it be somewhat doubled down on — i.e., even in this somewhat non traditional situation, the psychological point nonetheless stands as a major consideration.

I agree that prepaying the debt would probably be more beneficial to my mental health. And I agree that that’s probably about the best thing I can do for myself right now, even if only for my own financial purposes, funnily enough. Though I had acknowledged and logically understood this point, I appreciate and was affected by the multiple posters that encouraged me to recognize (and helped to illustrate) its gravity.

I’ll probably end up splitting the baby for the remainder of 2020 and see how things feel. Maybe I’ll track some big knockout number — my outstanding principal minus any MBDR principal in the “student debt payoff fund” — and gauge how satisfying (or unsatisfying) it feels. It’s hard to get a sense at this point of whether/the extent to which I’ll be able to successfully pull off the psychological trick.... until then, perhaps I’ll have to ensure I use up my 2020 MBDR space in the interim so as to not foreclose my options... (mostly a joke) :P :oops:
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

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.
OP here. I figured I'd provide an update and see if any new folks have thoughts to share.

My updated stats about eight months later are:
-salary: 200,000 (plus a likely pretax ~40k in bonuses)
-outstanding student loan debt: 130,000 (refinanced at 2.5%; no prepayment penalty & can easily refinance again)
-85k spread among 401k (pre-tax), Roth IRA and HSA
-30k emergency fund in a checking account (have held off on moving it to a HYSA just given how low the rates are)
-no plan to buy a home or other major purchases any time soon
-can easily move in w/ parents if prolonged unemployment, etc

Any new/different thoughts as to what to consider when deciding to aggressively pay down the debt versus keeping the debt on a five-year plan and investing the difference (likely largely, if not entirely, through my Roth IRA)?
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by HomeStretch »

Congratulations on your portfolio contributions and loan balance reduction over the last 7 months!

Consider continuing to both save and aggressively pay down the debt. If you keep up with the current repayment rate you can retire that debt within 2 years. While the loan rate is low, it’s great to become debt free as quickly as possible.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by lakpr »

Given that ibonds are going to yield 3.74% starting in May, I would suggest you buy them for $10k of your emergency fund. If you haven't filed 2020 tax returns yet, make an intentional overpayment of another $5k and buy them through tax refunds (file tax return extension).

Squeezing a little bit more juice out of your EF.

Repeat next year for the remainder $15k.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by inbox788 »

quenchgum wrote: Sat Sep 05, 2020 1:05 amIs 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.
...
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.
How much excess cash? What's your tax bracket? Presumably high, so are you sure you've maxed out all the other pre-tax options?

I compare loan to bond rates, so 3% isn't silly at all. I'd even consider 1-2%. Aside from emergency funds, I'd "invest" every other bond dollar into the student loan.

Would you borrow another 100k at 3% to invest in the market now? How would you invest it? How about $500k or more? Ask yourself the same question after you have paid off your student loans. If you haven't figured it out yet, it's just the other side of the same coin.

Take a balanced approach and consider taxable as vs. Megaroth (short term vs long term goals -- second link below). Depends on how much tax advantaged space you're passing up on and whether you'll have more future opportunities.

viewtopic.php?t=290885
viewtopic.php?p=5742562#p5742562
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

lakpr wrote: Sat Apr 24, 2021 7:55 pm Given that ibonds are going to yield 3.74% starting in May, I would suggest you buy them for $10k of your emergency fund. If you haven't filed 2020 tax returns yet, make an intentional overpayment of another $5k and buy them through tax refunds (file tax return extension).

Squeezing a little bit more juice out of your EF.

Repeat next year for the remainder $15k.
I haven't filed my 2020 tax returns yet. What's the rationale for buying them through tax refunds?

The ibonds would basically just allow me to put $10k of my emergency fund into an inflation-adjusted account, with the only downside/lack of liquidity being that I wouldn't really be able to use those funds for the next year (and that if I pull prior to five years, then I'll lose the last three months of interest), right? Thanks.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by lakpr »

quenchgum wrote: Sun Apr 25, 2021 12:08 pm I haven't filed my 2020 tax returns yet. What's the rationale for buying them through tax refunds?

The ibonds would basically just allow me to put $10k of my emergency fund into an inflation-adjusted account, with the only downside/lack of liquidity being that I wouldn't really be able to use those funds for the next year (and that if I pull prior to five years, then I'll lose the last three months of interest), right? Thanks.
You got the mechanics right, yes. What you may be missing is that, you are allowed to buy $5k per tax return refund, over and above the $10k per SSN limit. For a single that is $10k you can buy per year + $5k through tax refund = $15k. For a married choke that is $10k + $10k + $5k = $25k.

As for the rationale, 3.74% yield that is state tax free, not attractive enough?

Even with three months interest penalty, the yield on I bonds is more than any 1 year CD you can get. 12 months * 0.6% yield (best 1 year CD rate I could find on Bankrate) = 0.6%, is less than 9 months * 3.74% rate.

Even if an emergency were to befall you within 1 year, you still have half your EF not tied up in ibonds. Should the magnitude of such emergency exceed $15k, you could conceivably borrow from your credit cards to tide you over for three months, even at 15% rate; at worst it would wipe out an entire year's worth of interest earned on the ibonds -- but the principal would be preserved. The money is what is meant for emergency, right?

Should the emergency befall you after 1 year, you have the first batch of I bonds fully liquid.
Last edited by lakpr on Sun Apr 25, 2021 1:09 pm, edited 1 time in total.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by DB2 »

I'm not sure I would bother paying student debt, or anything more than the absolute minimal. It's just a matter of time where it will be written off by the federal govt.
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by lakpr »

DB2 wrote: Sun Apr 25, 2021 1:08 pm I'm not sure I would bother paying student debt, or anything more than the absolute minimal. It's just a matter of time where it will be written off by the federal govt.
Speculation on future tax laws is prohibited on this forum. Even if anything remotely like that would happen in the future, I doubt private student loans would come under the purview (OP's loans aren't Federal)
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

quenchgum wrote: Sun Apr 25, 2021 12:08 pm
lakpr wrote: Sat Apr 24, 2021 7:55 pm Given that ibonds are going to yield 3.74% starting in May, I would suggest you buy them for $10k of your emergency fund. If you haven't filed 2020 tax returns yet, make an intentional overpayment of another $5k and buy them through tax refunds (file tax return extension).

Squeezing a little bit more juice out of your EF.

Repeat next year for the remainder $15k.
I haven't filed my 2020 tax returns yet. What's the rationale for buying them through tax refunds?

The ibonds would basically just allow me to put $10k of my emergency fund into an inflation-adjusted account, with the only downside/lack of liquidity being that I wouldn't really be able to use those funds for the next year (and that if I pull prior to five years, then I'll lose the last three months of interest), right? Thanks.
If you buy paper I Bonds via tax refund you can get $5k more than the $10k annual electronic I Bond limit.

I Bond interest is state income tax exempt, and tax deferred until redeemed (reducing tax drag for high income people like you).
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quenchgum
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

inbox788 wrote: Sat Apr 24, 2021 8:56 pm
quenchgum wrote: Sat Sep 05, 2020 1:05 amIs 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.
...
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.
How much excess cash? What's your tax bracket? Presumably high, so are you sure you've maxed out all the other pre-tax options?

I compare loan to bond rates, so 3% isn't silly at all. I'd even consider 1-2%. Aside from emergency funds, I'd "invest" every other bond dollar into the student loan.

Would you borrow another 100k at 3% to invest in the market now? How would you invest it? How about $500k or more? Ask yourself the same question after you have paid off your student loans. If you haven't figured it out yet, it's just the other side of the same coin.

Take a balanced approach and consider taxable as vs. Megaroth (short term vs long term goals -- second link below). Depends on how much tax advantaged space you're passing up on and whether you'll have more future opportunities.

viewtopic.php?t=290885
viewtopic.php?p=5742562#p5742562
I'd imagine my marginal rate is 32%, but yes - I do think I've taken advantage of my pre-tax options (i.e. pre-tax 401(k) and HSA).

Since my initial post, I've refinanced so that my rate is now at about 2.5%. Would I borrow 100k at 2.5% to invest it in the market? I'm not sure -- maybe, right? My first instinct is obviously no: I don't plan to take out debt to invest in index funds (and so I see your point). But to really think it through, isn't that what I'd kind of be doing if I were to get a mortgage and not put cash down for as much as I could? (I.e., if a minimum down payment was $50k and I could somehow know that I'd have the same mortgage rate of 2.5% regardless of whether I put down $150k cash or instead put down $50k cash and invest the remaining $100k.... then I think I'd consider the latter.) If that logic is right, then how does it track to the "would you borrow to invest in the market" question? Are they analogous or am I missing some difference? Obviously the mortgage scenario is tied to a tangible asset, but I feel like it's a similar thought exercise?

Separately, I don't really have any short term goals that would require a taxable brokerage account at this point (unless it was something I wanted to rely on perhaps at ages 50 - 60 if I were to retire early.. but I figure I could always fund that later?). The thought exercise above is purely theoretical, as I don't plan on purchasing a home in the near- or mid- term future (let alone perhaps not even long-term future). I'm single, not really looking to get into a serious relationship, and don't expect to be married nor have kids in the next 5 - 7 years. I'm not sure whether I'll have future opportunities to stuff so much money into a Roth IRA (i.e., whether my next job would allow a mega backdoor roth, too), so I figure it makes sense to max it out (or at least get close)?
Topic Author
quenchgum
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

lakpr wrote: Sun Apr 25, 2021 1:06 pm
quenchgum wrote: Sun Apr 25, 2021 12:08 pm I haven't filed my 2020 tax returns yet. What's the rationale for buying them through tax refunds?

The ibonds would basically just allow me to put $10k of my emergency fund into an inflation-adjusted account, with the only downside/lack of liquidity being that I wouldn't really be able to use those funds for the next year (and that if I pull prior to five years, then I'll lose the last three months of interest), right? Thanks.
You got the mechanics right, yes. What you may be missing is that, you are allowed to buy $5k per tax return refund, over and above the $10k per SSN limit. For a single that is $10k you can buy per year + $5k through tax refund = $15k. For a married choke that is $10k + $10k + $5k = $25k.

As for the rationale, 3.74% yield that is state tax free, not attractive enough?

Even with three months interest penalty, the yield on I bonds is more than any 1 year CD you can get. 12 months * 0.6% yield (best 1 year CD rate I could find on Bankrate) = 0.6%, is less than 9 months * 3.74% rate.

Even if an emergency were to befall you within 1 year, you still have half your EF not tied up in ibonds. Should the magnitude of such emergency exceed $15k, you could conceivably borrow from your credit cards to tide you over for three months, even at 15% rate; at worst it would wipe out an entire year's worth of interest earned on the ibonds -- but the principal would be preserved. The money is what is meant for emergency, right?

Should the emergency befall you after 1 year, you have the first batch of I bonds fully liquid.
anon_investor wrote: Sun Apr 25, 2021 1:17 pm
quenchgum wrote: Sun Apr 25, 2021 12:08 pm
lakpr wrote: Sat Apr 24, 2021 7:55 pm Given that ibonds are going to yield 3.74% starting in May, I would suggest you buy them for $10k of your emergency fund. If you haven't filed 2020 tax returns yet, make an intentional overpayment of another $5k and buy them through tax refunds (file tax return extension).

Squeezing a little bit more juice out of your EF.

Repeat next year for the remainder $15k.
I haven't filed my 2020 tax returns yet. What's the rationale for buying them through tax refunds?

The ibonds would basically just allow me to put $10k of my emergency fund into an inflation-adjusted account, with the only downside/lack of liquidity being that I wouldn't really be able to use those funds for the next year (and that if I pull prior to five years, then I'll lose the last three months of interest), right? Thanks.
If you buy paper I Bonds via tax refund you can get $5k more than the $10k annual electronic I Bond limit.

I Bond interest is state income tax exempt, and tax deferred until redeemed (reducing tax drag for high income people like you).
These are great. I hadn't known about the $5k extra space, so this is all super timely. I'll do a little more research as to the actual procedure but it sounds like the first step is obviously to make sure I overpay my federal taxes by exactly $5k. This feels silly, but if I'm filing through TurboTax/H&R Block/etc., and if I'm slated to get a minor tax refund this year (as I am), then do I just call up one of the company's representatives and they'll adjust the payment for me? Should I file the taxes myself?

Also, maybe a red herring/silly question, but is there any sizeable portion of the population that has qualms about having actual physical paper ibonds in their possession? What happens if they get serious water damage (or worse, just simply lost)? Would you recommend paper ibonds to someone that's lost/ruined iPhones to the extent that they no longer qualify for iPhone replacement insurance? Lol.

Also, if we posit that I want to have a $30k emergency fund going forward for the next 10+ years and that I never really touch any of that emergency fund, is the general idea that I would just get these $15k of i bonds this year, rinse and repeat next year, and then hold on to those ibonds in perpetuity until I need them / want to adjust my e-fund amount or risk level? I imagine that's the general approach but am not sure what the common practice is / if I'm missing any other considerations. Thanks for the heads up on this.

Edit: I found a great article from thefinancebuff that shows how to get the $5k overpayment towards I Bonds on turbotax/H&R block (and how to convert to electronic if you're also still an irresponsible child that loses/ruins all personal physical possessions): https://thefinancebuff.com/overpay-taxe ... -tips.html. The general question in that last paragraph still stands, though! Thanks all.
lakpr
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by lakpr »

quenchgum wrote: Wed Apr 28, 2021 10:36 am Also, if we posit that I want to have a $30k emergency fund going forward for the next 10+ years and that I never really touch any of that emergency fund, is the general idea that I would just get these $15k of i bonds this year, rinse and repeat next year, and then hold on to those ibonds in perpetuity until I need them / want to adjust my e-fund amount or risk level? I imagine that's the general approach but am not sure what the common practice is / if I'm missing any other considerations. Thanks for the heads up on this.
Purchasing i-Bonds is not just for the emergency fund, they are GREAT for that purpose but that's not the only purpose. You can also use them as your fixed income assets, the only downside being that these can only be bought in taxable account (and thus runs counter to the standard advice on Bogleheads to have all your bonds in your 401k / tax-deferred accounts). Then again, with the i-Bonds, you can choose to defer the interest until you actually redeem them, so you are not burdened with reporting the interest credited on your i-Bonds on your tax returns annually during your peak earning years (and thus pay high taxes).

In short, treat the i-Bonds purchase as an annual thing, and the first two years worth as your EF and the subsequent purchases as part of your fixed-income allocation. If you decide that's 20% of your portfolio and your portfolio is $500k, that's $100k you want in bonds. Which means you continue to buy $15k per year for another 5 years.
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anon_investor
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by anon_investor »

quenchgum wrote: Wed Apr 28, 2021 10:36 am
Also, if we posit that I want to have a $30k emergency fund going forward for the next 10+ years and that I never really touch any of that emergency fund, is the general idea that I would just get these $15k of i bonds this year, rinse and repeat next year, and then hold on to those ibonds in perpetuity until I need them / want to adjust my e-fund amount or risk level? I imagine that's the general approach but am not sure what the common practice is / if I'm missing any other considerations. Thanks for the heads up on this.
We are actually in the process of moving a large portion of our EF into I Bonds. We purchased $20k last year (me+spouse), all of which are now fully redeemable having satisfied the required 12 month holding period. We are already scheduled to purchase another $20k next month (when the guaranteed 6 month variable rate is expected to be 3.54%). We are not that worried about the liquidity of our EF because we have enough liquid assets to access in the event of a true emergency that a CC or regular pay check could not cover. We have redeemable I Bonds, "cash" (savings/checking/NP CDs) and equities in a taxable brokerage account. Our goal is to migrate most of our "cash" to I Bonds, leaving about 2 months of expenses in "cash". This means we likely will buy another $20k of I Bonds in 2022. Beyond that, I am unsure if we will buy more, although we might if we decide to increase our fixed income allocation. The hope is to never have to use the I Bonds and only redeem then when they mature after 30 years, but we have them available just in case.
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quenchgum
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

lakpr wrote: Wed Apr 28, 2021 10:55 am
quenchgum wrote: Wed Apr 28, 2021 10:36 am Also, if we posit that I want to have a $30k emergency fund going forward for the next 10+ years and that I never really touch any of that emergency fund, is the general idea that I would just get these $15k of i bonds this year, rinse and repeat next year, and then hold on to those ibonds in perpetuity until I need them / want to adjust my e-fund amount or risk level? I imagine that's the general approach but am not sure what the common practice is / if I'm missing any other considerations. Thanks for the heads up on this.
Purchasing i-Bonds is not just for the emergency fund, they are GREAT for that purpose but that's not the only purpose. You can also use them as your fixed income assets, the only downside being that these can only be bought in taxable account (and thus runs counter to the standard advice on Bogleheads to have all your bonds in your 401k / tax-deferred accounts). Then again, with the i-Bonds, you can choose to defer the interest until you actually redeem them, so you are not burdened with reporting the interest credited on your i-Bonds on your tax returns annually during your peak earning years (and thus pay high taxes).

In short, treat the i-Bonds purchase as an annual thing, and the first two years worth as your EF and the subsequent purchases as part of your fixed-income allocation. If you decide that's 20% of your portfolio and your portfolio is $500k, that's $100k you want in bonds. Which means you continue to buy $15k per year for another 5 years.
Thanks. I'm young, single, have no dependents, have financially stable parents with retirement funds, and don't expect to stop working any time soon (even though I will likely pivot to a lower-paying, but still relatively high-paying, job in the next few years). Given the above, would you say it's relatively normal to shoot for having a relatively very small fixed-income allocation? (I.e., for the next five years or so, assuming none of the above changes, and assuming that $30k handily covers ~6-9 months of expenses, would it be normal to just keep $30k in i-bonds and have that do double duty as my emergency fund and fixed income allocation?)
lakpr
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by lakpr »

quenchgum wrote: Thu Apr 29, 2021 11:58 am Thanks. I'm young, single, have no dependents, have financially stable parents with retirement funds, and don't expect to stop working any time soon (even though I will likely pivot to a lower-paying, but still relatively high-paying, job in the next few years). Given the above, would you say it's relatively normal to shoot for having a relatively very small fixed-income allocation? (I.e., for the next five years or so, assuming none of the above changes, and assuming that $30k handily covers ~6-9 months of expenses, would it be normal to just keep $30k in i-bonds and have that do double duty as my emergency fund and fixed income allocation?)
Given what you did write here, it looks like you want to go 100% equities until you get at least into late thirties in age .... and that's completely reasonable too. At the end of the day you need to sleep peacefully at night with the investment choices you made! Just remember to NOT PANIC if another Dec-2018 or Mar-2020 or (gasp!) Sep-2008 occurs again.
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quenchgum
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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Post by quenchgum »

lakpr wrote: Thu Apr 29, 2021 12:08 pm
quenchgum wrote: Thu Apr 29, 2021 11:58 am Thanks. I'm young, single, have no dependents, have financially stable parents with retirement funds, and don't expect to stop working any time soon (even though I will likely pivot to a lower-paying, but still relatively high-paying, job in the next few years). Given the above, would you say it's relatively normal to shoot for having a relatively very small fixed-income allocation? (I.e., for the next five years or so, assuming none of the above changes, and assuming that $30k handily covers ~6-9 months of expenses, would it be normal to just keep $30k in i-bonds and have that do double duty as my emergency fund and fixed income allocation?)
Given what you did write here, it looks like you want to go 100% equities until you get at least into late thirties in age .... and that's completely reasonable too. At the end of the day you need to sleep peacefully at night with the investment choices you made! Just remember to NOT PANIC if another Dec-2018 or Mar-2020 or (gasp!) Sep-2008 occurs again.
Glad to hear it's reasonable (or at least not facially implausible)! I feel good about not panic selling and, if anything, would almost consider holding back some funds so that I would be prepared to buy into a dip.... but I feel like that's probably a bit more of "timing the market" than recommended by most folks here!
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