Question: I am graduating from medical school. I have debt of about $170,000 at 6.8 percent non-compounding interest and $12,000 at 4 percent. I also have a Roth IRA with about $4,000 in it. Should I invest in my Roth IRA while making payments next year? I make $45,000 next year then $52,000 the year after, then $60,000 the third year. Do I put everything I can into paying off debt, or do I try to put a little in the Roth while making my income-based repayments on the loan? (Expected payoff is in 10 years.) John, Wauwatosa, WI
Answer: Congratulations on graduating from medical school. I'm always stunned at how much debt it takes to earn a medical degree. But it's a career that you can do for a long period of time and earn a good living. You can't go wrong with your choice in a very important sense. No matter what, you're adding to your savings if you focus on paying off your student loans or fund a Roth and pay down your student loans on a slightly less stringent schedule. If you attack the student loan, you'll be "earning" a 6.8 percent return on your money.
Nevertheless, I would lean in favor of funding the Roth -- at least with a little bit of your earnings. For one thing, your retirement money will have a longer period to grow and compound. Time is critical with retirement savings. For another, I've learned over the years that it's important to maintain the discipline of funding retirement accounts even if you don't fund the Roth to the $5,000 annual maximum contribution. The Roth is also a safety-valve investment in these years right after graduation. You don't want to withdraw the money, but in a pinch, the Roth is an emergency savings fund. You can take out your contributions -- but not any earnings -- without tax or penalty. Last, the contributions to the Roth aren't enough to stop you from sticking to a schedule that will get you out of student loan debt within a reasonable period of time.
Your income is on an upward trajectory, and within a few years, you'll be able to get more aggressive on both your student loans and with your Roth. There's no prepayment penalty with student loans. So, if your income continues to move up -- or perhaps you get a bonus -- you can always accelerate your principal payments on the student loans, especially the 6.8 percent portion of your debt.