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Intern year- Pay back loans or Roth IRA?
Started by cokebottle
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Income based repayment to get on the public healthy loan forgiveness track if you have a long training program or a high ratio of debt to anticipated income. After that, the financial outcome of putting extra money in an IRA vs paying down loans is negligibly comparable, maybe a 1 or 2 percent difference for a few years. I went for Roth IRA for several reasons but above all establishing a habit of saving seemed more valuable...
Pubic service loan forgiveness if a unique situation.
For everyone else...it's pretty simple. Your loans are going to be 7+% interest rate. Will your investments make more than that? The answer is almost always no. The exception is if your employer matches to a certain percent. That is free money and you should take advantage of it to fullest extent.
A few percent difference is thousands of dollars in the long run...that isn't negligibly to me. Carefully run the numbers and prove which choice is the best bet for your particular situation.
For everyone else...it's pretty simple. Your loans are going to be 7+% interest rate. Will your investments make more than that? The answer is almost always no. The exception is if your employer matches to a certain percent. That is free money and you should take advantage of it to fullest extent.
A few percent difference is thousands of dollars in the long run...that isn't negligibly to me. Carefully run the numbers and prove which choice is the best bet for your particular situation.
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the part about loans being 7%+ is almost true, unless you refinance your debt which is a good idea almost every time. It usually drops your interest rate a few percentage points which does matter, but the only thing is that some companies that do this include the current interest that you have into the original lump sum of the debt, meaning you'll be paying the new interest percentage on that accrued old interest also. Here's a pretty well written explanation regarding this. http://www.benwhite.com/medicine/you-can-now-refinance-your-student-loans-during-residency/
PS. I am in no way involved/know/get paid by the person/companies etc that wrote that.
The only wrinkle that I'll mention is the tax situation. Most physicians will only be able to contribute directly to Roth IRAs during residency, and who knows how long before the 'backdoor' Roth IRA is closed off? If you believe that you'll be in a much higher tax bracket when you withdraw that money, then the post-tax Roth IRA contributions during residency can yield a much higher return than a simple compounding ROI calculation might indicate. Conversely, the tax benefit of paying of student loans during residency, via the interest deduction, is relatively low because your tax burden is already so relatively little. And phase outs for both direct Roth IRA contributions and student loan interest deduction are about the same. I'm not saying that the Roth IRA is the best choice, just that there are other things that might change the calculus. Certainly though, if you're going to put your Roth IRA money into T-bills right now, then you'd be better off paying off the loans.
Interesting. Up until this point you had to make "full monthly payments" which no resident is capable of doing.
If it really allows you to 'only' pay $100/mo in residency this is game changer for many.
Fully funding a Roth should be your first move. As you know, it's a post-tax contribution, and money is not taxed when you withdraw money 40 years from now. This means your money is taxed once at your current income tax rate; the advantage is you'll likely never be in as low a bracket again. You'll also probably never be able to contribute after residency/fellowship other than via a backdoor IRA. Check out white coat investor if you want to read more.
I know this depends on various factors, but what is the average return on an IRA annually? Is the percentage approximately in the single digits or teens?
You can invest your IRA or Roth IRA in virtually anything out there. You could put your money into a money market account or choose stock in a single company. Slapping the IRA label on it simply confers contribution, tax, and withdrawal implications.
As to what you invest in, you have to decide how much risk you're willing to assume after considering your overall financial picture. Most people right out of medical school will have decades until they'll want to get at the money in the IRA, so they'll choose to be relatively aggressive - the idea being that you'll get a higher rate of return while still having enough time to recover should there be a downturn. I would hazard to guess that most people will choose a mutual fund that matches their risk tolerance because that provides a high level of diversification within a single account.
ETFs are also nice as you can buy them in shares, and there is typically no minimum investment. Allows you to diversify quickly if you're limited in terms of the initial amount you can contribute.
Where are you getting 7+%? The rates I've seen are all in the 6-7% range and that's not accounting for the tax deduction. Either way we're not talking about in the long run, we're talking about during residency...
My grad plus loans are in the mid-7%s. My other loans are mid-6%s.
Regardless it looks like you can refinance now in residency so it's a moot point. I'm all for the roth IRA with this turn of events.
