Student Loans vs. 401k Contribution vs. Roth IRA

Over at Reddit we came across the following discussion: Student Loans vs. 401k Contribution vs. Roth IRA (self.personalfinance)

submitted 10 hours ago* by _pf_account_

Hi All.

A bit about myself: I'm 28, unmarried, and starting my career after a decade of higher education. I put together a brief monthly budget and am interested in the most effective way to get rid of my loans and begin saving.

Income and 401k (monthly):

• + $8333 Gross Income
• - $150 Health Insurance
• - $833 10% 401k Contribution (Employer matches 2/3 up to 6%)
• = $7350 Taxable Income
• - $2430 Fed, State, Social Security, and Medicare deductions
• = $4920 Take home each month

Expenses (monthly):

• -$1000 for Rent and Utilities (shared house)
• -$300 for Groceries
• -$120 for Car Insurance
• -$110 for Fuel
• -$70 for Cell Phone
• -$500 for Travel (girlfriend lives out of town, this is for a monthly visit.)
• -$250 for Misc (vehicle maintenance, etc.)
• = -$2350 of essential monthly expenses.

This leaves me with about $2570 monthly or $30840 yearly for savings and spending money.

Other Assets and Debt:

• + $5000 in Savings
• + $1500 in Checking (average)
• - $0 Credit Card (paid monthly)
• + $4000 in Roth IRA that is losing money monthly (I haven’t contributed to it in 5 years).
• - $3250 Unsubsidized student loan @ 1.75% interest
• - $17320 Subsidized student loan @ 6.8% (I have 6 months before interest starts)

So $20570 total in student loans. No car payment and vehicle is relatively new, I stay up to date on proper maintenance and do the work myself.

Financial Goals:

• Wipe out student loans ASAP
• Save $50k for a down payment on a house
• Be smart about retirement contributions

Questions:

• Is it dumb to be putting 10% into 401k when employer match is only 2/3 up to 6% and I have student loans that will begin accruing interest in 6 months? I’m not sure how a 401k gains value or at what rate.
• I plan on liquidating the Roth IRA immediately and putting it towards the $3250 unsubsidized loan accumulating interest now. Is this a smart move?
• I believe I can knock out the student loans with help from the Roth IRA before they begin accumulating interest in about 6 months. This would mean no savings (red flag!). How much of the take home after expenses should be going into emergency savings monthly? 10%, 25%, 50%?

Thanks in advance for your advice. I’m mostly interested in the explanation behind why I should or shouldn’t do something.

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[–]FacelessBureaucrat 4 points 10 hours ago

Definitely prioritize knocking out that 6.8% loan, although I wouldn't worry about the 1.75% one unless the rate changes.

Are you sure you need to spend $10k on a ring? There are many good financial and moral reasons for going with a gem other than a diamond for an engagement ring - talk to your fiancee and make sure you know what she really cares about. She may prefer putting that money toward a house. (The ring I gave mine is a blue sapphire with white sapphires, cost about $1100.) Look into Moissanite and other alternatives for rings that look as good as diamonds for a fraction of the cost and without the nasty child-slavery implications.

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[–]buckets_of_ducats 4 points 10 hours ago

The diamond business is brutal and disgusting and you only have to be careless/mugged once to be out an amount that could buy a decent used car. I can't second that critique enough. That amount of money could be worth over $50,000 by the time you retire if it was in a retirement account.

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[–]_pf_account_[S] 3 points 10 hours ago

Thanks for the reply!

You're right, knocking out the 6.8% ones would definitely be better. I was just thinking about the interest on the 1.75% one now but I doubt I'll be able to get rid of the 6.8% ones before they start accumulating interest. Thanks for opening my eyes to that.

As for the ring, no, I'm not sure. It's just a goal. I haven't been shopping yet and I know she would never let me spend more than that. It's a conversation we'll need to have but the value is just a placeholder for now. We would prefer to spend the money on traveling.

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[–]duhhhh 3 points 10 hours ago

I'd drop back to 6% on the 401k. Take the extra $ and use it to knock out that 6.8% loan before it starts costing you. Once you have that out of the way, build an emergency fund of $9500 in savings. Then add $5500 more into the Roth IRA (can also be used for dire emergencies also). Then worry about paying more than the minimum on the 1.75% loan. Then build up another $5k+ in the savings emergency fund.

Talk to your girlfriend about the ring. She may be fine with two weeks pay and Moissanite instead of two months pay and diamond if it means you can buy a house together sooner. The whole two months pay is DeBeers marketing. They are an evil cartel.

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[–]_pf_account_[S] 1 point 10 hours ago

Thanks for the insight. I have never had multiple financial goals to work towards before. Just a single CC bill each month.

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[–]ForOldNassau 2 points 10 hours ago

Why is your Roth IRA losing money monthly?

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[–]_pf_account_[S] 1 point 10 hours ago

That's a question I can't answer at the moment. Maybe because of how it's invested? I was 18 when I started it they put me on the most aggressive plan because I'm low risk at that point. I contributed about $50 per month while I worked through undergrad. Last statement I had lost $75.

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[–]ForOldNassau 3 points 10 hours ago

Last statement I had lost $75

There's your problem--just because you lost $75 last statement doesn't mean it's losing money monthly, just that it lost money in the last statement period, which isn't incredibly surprising, given the market correction a few weeks ago.

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[–]_pf_account_[S] 1 point 10 hours ago

I understand now. I believe a one-time withdrawal for education is allowed without any additional penalties. Would it be dumb to liquidate the Roth IRA at this time to cover some of the student loans?

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[–]FacelessBureaucrat 3 points 10 hours ago

You can withdraw your contributions at any time, but you can't ever get that space back (unless you repay it within 60 days), so I'd be careful about withdrawing any if you have any other way of paying down those loans.

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[–]_pf_account_[S] 1 point 9 hours ago

I guess the best plan at the moment would be to sit on the Roth IRA and re-evaluate where I stand with the loans when the 6.8% interest becomes active.

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