The clock seems to be ticking faster.
My wife and I have a little less than 16 months to get my student loans paid off so that we can move and get my little girl into a different school. This has placed us into a bit of a financial crunch when it comes to debt. This timeline is firm, and I cannot change it. My mindset to pay off our student loans before we buy a house is also firm.
So, the question becomes this: How do I pay off my debt faster? The answer might seem strange: By changing my investment philosophy for a year and a half.
Am I going back on my Roth 403B argument?
This is what I looked like when I realized that I could be paying down my debt faster with pre-tax 403B contributions. “Ohhhhhh, my investment philosophy impacts my student loans.”
Many of you know that I have argued the merits of making your 403B/401K contributions via a roth method over a standard (pre-tax) method. I think this allows you to put more money into your retirement accounts ($18,500 post tax is equivalent to a little more than $30,000 pre-tax for me).
The other benefits include it being better to leave Roth money to your heirs; and it can help you to bridge the early retirement gap. There really is a lot of benefits to Roth contributions.
However, something has recently changed my mind…. for now. I realized that my investment philosophy was impacting my ability to pay off my debt.
I’ve been reading a great book by Dr. Cory S. Fawcett called “The Doctor’s Guide to Eliminating Debt.” (Full book review here). This book has re-invigorated my hatred for debt. As I began reading the introduction, I started thinking about ways I could pay down my student loans faster.
After all, my family is on a tight time-line to get my little girl into a new school by third grade. That’s only 16 months away.
What about the math?
Previously, I had been putting $18,500 via post-tax (Roth) contributions into my 403B at work. In order to put this amount of post-tax money in, I was using approximately $30,000 of pre-tax money (state + federal tax).
By switching to pre-tax contributions in my 403B, I will have an additional $11,500 that will come home to my paycheck each year I keep it this way. And this doesn’t count the money I am saving on taxes.
This equates to an extra $575 post-tax dollars per month. Over the next 16 months, that’s an extra $9,200 towards my loans. I currently pay $5,000 each month on my loans.
So, this move will allow my family and I to be student-loan free an extra two months earlier! That’s a win-win in my book. That’s also an extra $10,000 that I can put towards our (admittedly heart happy, yet financially stupid) car loans or more money towards our down payment on the house.
What I’ve learned
This book does a really good job of providing the right perspective on debt. Full book review to follow soon!
I think I was wrong on this one (for now). What this thought experiment has taught me is that there are many reasons that it can be good to put your money into your retirement accounts via a standard pre-tax method.
For one, it’s the typical boglehead’s way. If you are in your peak earning years and are a high-income earner, most people recommend placing your dollars in via pre-tax methods into retirement accounts. If you are not in your peak earning years (i.e. training) then you should contribute via Roth.
More importantly, it has shown me that for the early medical professional swimming in debt, it just makes more sense to be balanced and contribute your maximum dollars via a pre-tax method. It decreases your tax burden, and allows you to chip away at your debt faster. It’s going to help accomplish both of my wealth building goals (destroying debt and investing aggressively).
Don’t you worry, though, my friends. I’ll be back on the post-tax Roth contributions band-wagon once my debt has been obliterated.
Take Home
The take home here is pretty simple.
Think about all the ways you can destroy your student loans (and other debt) as fast as possible.  Live like a resident during and after you finish training for a couple of years. Take a balanced investing approach and put enough into your 401K/403B to get the full match and put the rest towards your debt.
Or, like me, you should probably invest your money pre-tax so that you have more post-tax money to pay off the debt faster.
It’s all about balance. Get it right and you can build both sides of the wealth equation (increasing assets, decreasing debts). Get it wrong, and you could be upside down. Take a step today to think about how you can pay off your debt more quickly.
What do you guys think? Smart move? Bad move? What were some of your unique tactics that you used to combat your student loan debt? Leave a comment.
TPP
I’m reading Cory’s books now too! Great resources.
Completely agree.
I’m only a few years ahead of you in terms of when I started attendinghood. I have also debated whether to put my 401k pretax vs Roth. When I was an associate (en employee and not yet a partner of the group), I contributed it mostly pretax dollars to 401k.
Now that I’m a self-employed partner, I can contribute a total of $55,000. So now I contribute $18,500 to a Roth 401k and the rest ($36,500) is contributed pretax to my Keogh.
I think it’s good to have both pretax and posttax dollars in retirement accounts as a hedge :).
I completely agree! And was doing the same as you (Roth on my own plus pre-tax from employer) for the same reason… And a few others. I am a Roth lover and not afraid to show it!
I think the higher your income, the more it makes sense to go traditional 401k since the taxes saved are probably(not guaranteed) going to be higher than they will be in retirement.
There’s something to be said for tax diversification too and no harm in having some ROTH dollars out there in case the tax rates soars to 90% sometime in the future :).
Funny you should say that. Winning Personal Finance and I are going to do a debate on this exact topic (Roth versus pre tax for high income earners into a 401K).
I think there are merits to both! I am a Roth lover. I’ll admit it though
Only debt I ever had was my mortgage, but I didn’t hate it and I didn’t sweat to retire it. I got a write off on my taxes and I had more available to stuff my accounts. I am not a fan of IRA like investments if you plan to live a long time. The investments grow tax free BUT the government then assumes control and between SS and RMD forces you into a higher tax bracket than you want to be in. Once a spouse dies you are taxed often at 2 brackets higher. It’s absolute robbery to a widow or widower. Take a tax calculator http://taxplancalculator.com/ and an RMD calculator
https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/ira_calculators/rmd
a SS calculator https://www.aarp.org/work/social-security/social-security-benefits-calculator.html#/step1
Work up your RMD cash flow for like 10-15 years then work up single or married taxes based on your maxed out IRA or 401K
If you stuff 55K per year for 20 years starting at age 35 you will have 2,2M at age 55. If that grows to 5.9M at age 70 with no additional input. your RMD at 80, ten years into retirement is 374000 plus about 65K SS between you and the wife, about 439,000 taxes on that are $95000 in the 35% bracket. single taxes would be 124,000 bux on the same income, and that presumes taxes don’t go up. It will actually be a little less since SS would drop a little for the surviving spouse. So much for the lower tax bracket argument. You will easily win the Roth argument see my article
https://www.dadsdollarsdebts.com/2018/04/14/how-to-do-a-roth-conversion-and-optimize-taxes/
Thanks for the thorough reply! I am a big fan of Roth money the larger the pile of money you’ll have because of the lack of RMD on Roth IRA money. So, the more money you can stuff on that side (if you are going to have a large sum), the better. This helps avoid a lot of those pesky RMD’s.
Now you are completely right about my heirs. They will have to pay an RMD on my Roth IRA, but my spouse will not. A Stretch Roth IRA as an heir is a pretty sweet deal, RMD’s included, though. They get tax-free money given to them ever year and the rest continues to grow tax-free. I’d take that in a heart beat.
Cool article on DDD! Lots of math, Gasem. Are you sure you didn’t have an original background as a math professor? 🙂
TPP
I wish I was a math professor! In grad school I had a bunch of friends in the Math dept. Interesting crowd. I was EE and chemistry undergrad and biophysics and neuroscience in grad school, worked on the bio-electricity of strokes and brain injury. Interesting stuff but nobody wanted to fund me. I wound up doing EE and teaching Electronics at a local college before applying to Med school. I used math as a sledge hammer to inelegantly beat my problems into plowshares, instead of the heady and delicate filigree of Mandelbrot sets and such.
Looks like it all worked out in the end. Probably made you a more well rounded person, too.
I am really grateful for my philosophy major in undergrad (doubled with chem). Made me a better person in the end.
I remember sitting in a bar drinking a beer after my P-Chem final. I was fried. I was an undergrad but that P-Chem class was graduate level, most changeling course I ever did. I sat there looking at the bubbles and realized I knew the equations that determine why the bubbles form on the bottom and why if you pour at an angle you get more beer and less head. I realized I now understood the basis of the universe.
I had a total gas in my life no complaints
Hahahah that’s hilarious. I hated P Chem. Only class I can rememeber where I tried as hard as I could and scraped out a B. I wouldn’t put it on my worst enemy!