Should You Contribute to an IRA When You Still Have Student Loans?

 August 19, 2019
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When you enter the workforce, one of the trickiest tasks is figuring out how to make sure your take-home pay not only covers your current bills but also your future savings. This is especially true when you have monthly student loan bills.

With all those current financial obligations, you may wonder if it’s smart to invest in an IRA or pay off student loans first. After all, how can you invest money in a retirement account when you still have large amounts of debt? Shouldn’t you pay off that debt before worrying about saving?

Not necessarily. Sometimes it’s better to start investing for retirement before worrying about repaying your student loans in full.

Should you invest in an IRA or pay off student loans?
Understanding the different types of IRAs
How to contribute to an IRA while paying off debt
Using Roth IRA contributions to pay off student loans
Invest in IRA or pay off student loans: Which should you choose?

Should you invest in an IRA or pay off student loans?

Retirement may be several decades away, but socking away cash now in a tax-advantaged retirement account like an IRA can help ensure a more comfortable retirement. It can be easy to save for retirement if you work at a company with a 401(k) match, but it can get trickier if your company doesn’t offer a 401(k) or you’re working several part-time gigs.

In this case, an IRA can be a good option because, unlike a 401(k), an IRA is independent of your employer. If you simultaneously invest in your IRA and pay off loans — even if it means budgeting more carefully than some of your peers — it gives you more time over which you can gain interest and dividends in your IRA or 401(k), increasing your overall retirement savings.

When it comes to saving for retirement and paying down student loan debt, you can do both. However, you need to weigh the options while thinking about your overall financial picture, as well as your future goals. One factor in your decision may depend on the type of retirement savings vehicles offered by your employer. If your employer offers a 401(k) match, for instance, then it might make sense to contribute up to the match and supercharge your contributions later, once your loans are paid off.

And while it’s crucial to save for retirement, it’s not smart to do it at the expense of your current financial obligations. It’s important to make at least the minimum payment on your student loans, and you may also have to pay off credit card debt as well. Prioritizing both your debt payments and your savings can help you decide on a realistic budget. You may have to cut back on expenses during your first few years out of college, but your future self will thank you when you’re able to retire earlier.

Understanding the different types of IRAs

Individual retirement accounts (IRAs) are tax-advantaged investing tools geared toward retirement savings. There are several types of IRAs, each of which may have slightly different rules and tax treatments. Understanding the basics of the different types of IRAs can help you decide on the best option for you.

Traditional IRA

Traditional IRAs allow people to invest part of their earned income pretax, up to a certain limit per year, in a tax-deferred savings account. Capital gains and dividend income grow tax-deferred.

Pretax contributions mean the money is deducted from your income before taxes. If you earned $50,000 and contributed $2,000 to a traditional IRA, you’re taxed as if you earned $48,000. (That’s an overly simplistic example of taxable income; you’ll also have to factor in other tax deductions such as your standard deduction, loan interest deductions, etc.)

Investments grow tax-deferred, meaning you don’t pay any taxes on that growth until you withdraw the money in retirement.

Roth IRA

A Roth IRA is similar in some ways to a traditional IRA. However, contributions to a Roth IRA are made with after-tax income, rather than pretax income.

Why would anyone want to invest in this tax-exempt account? Because you pay taxes once on this contribution… and never again. Your capital gains and dividends don’t just grow tax-deferred, they grow tax-exempt. That means you’ll never pay a dime in taxes on that investment growth, even if it enjoys 40 years of compounding.

In addition, your current tax rate might be lower than your tax rate in retirement, which means you’re taking the tax hit at a time when you’re in a lower tax bracket and are likely to be paying a lower percentage of taxes anyway.

SIMPLE IRA

SIMPLE (Savings Incentive Match PLan for Employees) IRA accounts are retirement plans that can be established by employers and self-employed individuals. The employer makes a matching or nonelective contribution, which is tax-deductible, to each eligible employee’s SIMPLE IRA. And the employees can also make salary-deferral contributions to their own account.

SIMPLE accounts must be set up by the employer. If you’re self-employed, you may also be able to set up a SIMPLE IRA for yourself.

If your job offers a SIMPLE IRA, you’ll want to think about which IRA you should prioritize: your employer’s SIMPLE IRA or your own traditional or Roth IRA. If your employer offers matching contributions, it may make the most sense to prioritize funding the SIMPLE IRA. On the other hand, if your job doesn’t offer matching contributions, prioritize the account that has the taxable structure you prefer (tax-deferred or tax-exempt).

Another option is to contribute to both accounts if you’re financial able. Contributions to your SIMPLE IRA do not preclude you from contributing to a traditional or Roth IRA.

SEP IRA

SEP stands for “simplified employee pension.” SEP IRAs are retirement plans in which employers make tax-deductible contributions into the SEP accounts of eligible employees.

SEP IRA rules only allow contributions by employers to an employee’s plan, or to their own plans if they are self-employed.

How to contribute to an IRA while paying off debt

Once you decide which retirement account to fund, you’ll need to determine how to tackle both student debt and fund your retirement account.

However, if you also have consumer debt, it’s important to prioritize paying that off first because it’s high-interest debt. While the interest rate on direct subsidized loans and unsubsidized loans for undergraduates is 4.53%, the average APR for credit cards can be above 15%. If, for example, you assume a return on investments of 10% that means that your consumer credit card interest charges will grow faster than any potential investment returns. But the same is not true for student loans, or any loans where the interest rate is lower than 10%. You can use this student loan payoff vs. invest calculator to help determine the right decision for your situation.

As you start figuring out how to balance student loan repayment and saving for retirement, try reframing your thinking to stop viewing debt payoff and IRA contributions as an either/or decision. Once you decide to contribute to both, you can figure out how to balance your monthly payments and savings.

If you can dedicate an extra $1,000 per month towards these goals, do you want a 50/50 split? 60/40? 70/30? Your answer depends on the following questions:

  • Are you struggling to pay the minimum on your student loan debt? If you struggle each month to pay your student loans, then it may be a sign you need to consolidate that debt, look for ways to increase earnings or cut down spending. While it’s important to make sure you’re saving adequately for retirement, it’s equally important to make sure your current financial obligations are covered. If you’re scrambling to pay your bills, it may be a sign that you need to audit your finances and find places to budget.
  • Does your employer offer a match on your retirement account? If your employer offers a contribution match and you’re making the minimum payments toward your student loan debt, try to contribute at least up to the match offered. Some people call it free money, but it’s really part of your benefits package. Not taking advantage of it is leaving part of your benefits on the table.
  • How old are you? If you’re in your 20s, you have time on your side when it comes to saving for retirement and may want to prioritize paying down your student loans first. In your 30s or beyond? It may be a good idea to aggressively focus on saving for retirement, especially if you had a later start in savings. You could also look at student loan forgiveness or debt consolidation for your loans, which could potentially lower interest rates or balances due.
  • What’s your tax bracket? Understanding your tax bracket can help you choose the best retirement savings strategy for you. For instance, if your current salary places you on the border between two tax brackets, it may make sense to first contribute to your 401(k), if you employer offers it, since the contribution is pretax and your taxable income will fall in a lower tax bracket. On the other hand, if you feel comfortable with your salary and are firmly in a particular tax bracket, it could make sense to contribute to your Roth IRA. While this is after-tax contribution, the thinking is that you might be in a lower tax bracket now than you’d be in retirement. A financial planner or accountant may help you with these questions.

Using Roth IRA contributions to pay off student loans

Here’s a reason why some millennials are so intrigued by Roth IRAs: Your Roth IRA contributions can be withdrawn without penalty. Remember, this is just the post-tax money that you’ve contributed, not any growth from investment earnings, which can’t be withdrawn without incurring a penalty. You could use your original Roth IRA contributions (or the principal amount) to make a student loan payment.

Here’s an example: Let’s say you save $5,500 per year in your Roth IRA. At the end of five years, you’ve contributed $27,500, and these investments may have grown by an additional $3,000. You hold a total of $30,500 in your account.

You can withdraw the original contribution without penalties or taxes. You’ve already paid taxes on this income, so the government won’t penalize you for tapping into it early. The other $3,000 in earnings needs to stay in your account or else you’ll face penalties and taxes if you withdraw it.

Why would you choose this option? Let’s imagine that right now, you’re equally contributing to both goals. You save $5,500 per year in your Roth IRA and put another $5,500 per year toward your student loan payments.

But let’s say that five years from now, you lose your job. It’s the middle of a recession and you’re having a tough time job hunting. You understand that retirement is important, but your immediate goal is to become debt-free so you can lower your monthly bills. A nice $27,500 chunk of change could wipe away your debts in one fell swoop.

The flexibility of a Roth IRA can help you invest for retirement, while still preserving liquidity and flexibility for the times that you may need cash in the future.

Invest in IRA or pay off student loans: Which should you choose?

As a recent grad, you have time on your side. But you shouldn’t let that make you complacent or decide that you’ll focus on saving for retirement someday in the future. Putting away money now — even if it’s just a small amount — allows your investments to grow, and can also help you get in the savings habit. The longer you allow your retirement contributions to accrue interest and dividends, the more money you’ll enjoy in retirement.

While paying off student loans can be stressful, having the option gives people freedom to study what they want, when they want to do so. But there’s no such thing as a retirement loan. When you turn 65, you’ll need to have the funds on hand to support yourself throughout your golden years. Your future self will thank you for being diligent about saving in the past, even if it does mean making some tough budgeting decisions now.

Anna Davies contributed to this report.

Interested in refinancing student loans?

Here are the top 9 lenders of 2021!
LenderVariable APREligible Degrees 
1.88% – 6.15%1Undergrad
& Graduate

Visit Splash

1.88% – 5.64%2Undergrad
& Graduate

Visit Earnest

2.50% – 6.85%3Undergrad
& Graduate

Visit CommonBond

1.89% – 5.90%4Undergrad
& Graduate

Visit Laurel Road

1.99% – 6.59%5Undergrad
& Graduate

Visit SoFi

1.88% – 5.64%6Undergrad
& Graduate

Visit NaviRefi

1.90% – 5.25%7Undergrad
& Graduate

Visit Lendkey

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

2.13% – 5.25%8Undergrad
& Graduate

Visit PenFed

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of June 1, 2021.


2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.

Earnest Disclosures

Interest Rate Disclosure

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.48% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions.

Auto Pay Discount Disclosure

You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.

Student Loan Refinancing Loan Cost Examples

These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License.

One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America.

© 2021 Earnest LLC. All rights reserved.


3 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. ‍All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.


4 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of April 29, 2021. Information and rates are subject to change without notice.
 


5 Important Disclosures for SoFi.

SoFi Disclosures

Fixed rates from 2.49% APR to 6.94% APR (with autopay). Variable rates from 1.99% APR to 6.59% APR (with autopay). All variable rates are based on the 1-month LIBOR and may increase after consummation if LIBOR increases; see more at SoFi.com/legal/#1. If approved for a loan your rate will depend on a variety of factors such as your credit profile, your application and your selected loan terms. Your rate will be within the ranges of rates listed above. Lowest rates reserved for the most creditworthy borrowers. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license #6054612; NMLS #1121636 (www.nmlsconsumeraccess.org). Additional terms and conditions apply; see SoFi.com/eligibility for details. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.


6 Important Disclosures for Navient.

Navient Disclosures

1. NaviRefi loans are made by Earnest Operations LLC, a member of the Navient family of companies, subject to individual approval and underwriting criteria. California residents only: Loans made or arranged pursuant to a California Finance Lenders Law license. Additional terms and conditions apply.

– To qualify, you must be a U.S. citizen or non-citizen permanent resident of the United States, reside in a state we lend in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.navirefi.com/help-and-questions. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Loan terms are subject to eligibility. Approval and interest rate depend on the review of a complete application. Loan approval is subject to confirmation that your debt-to-income, free cash flow, credit history and application information meet the minimum requirements. You must have a minimum FICO score to be considered.

– You can choose between fixed and variable rates. Fixed interest rates are 2.75% – 6.04% APR (2.50% – 5.79% APR with Auto Pay discount). Starting variable interest rates are 2.13% – 5.89% APR (1.88% – 5.64% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA.

– You can take advantage of the 0.25% Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. NaviRefi rate ranges are current as of June 1, 2021 and are subject to change based on market conditions and borrower eligibility.

– Loan cost examples: These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,250. Your actual repayment terms may vary.

– The information provided on this page is updated as of 06/1/2021. Earnest Operations LLC reserves the right to modify or discontinue (in whole or in part) this loan program and its associated services and benefits at any time without notice. Check www.navirefi.com for the most up-to-date information. Terms and Conditions apply. Call 855-284-4893 for more information on our student loan refinance product.

– Earnest Operations LLC – NMLS #1204917, CA CFL #6054788 – 535 Mission St., Suite 1663, San Francisco, CA 94105.
Navient Solutions, LLC – NMLS #212430 – 123 Justison St., Wilmington, DE 19801. Visit https://navirefi.com/lending-licenses for a full list of licensed states.


7 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.75% Fixed APR with AutoPay.


8 Important Disclosures for PenFed.

PenFed Disclosures

Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.