‘Steel man me’: I have a student loan and a Roth IRA. Should I pay off my loan or continue investing in my Roth IRA?

“Hi Money Minder,”

So, here’s the deal. I’ve got a 25k student loan (private) at 4.26% on 15 years (currently on year 9), and a Roth IRA with 28k. Just to be clear, this isn’t my retirement nest egg. I’ve got a 401 for that.

The loan used to be federal, but I switched it to private back in 2019 before the whole pandemic mess. During the chaos of the pandemic, I decided to stash my bonus money into the Roth IRA instead of paying off the loan, what with everything being so up in the air.

Option 1 (my current plan) is to keep chipping away at the monthly amount (255) until it disappears in 9 years.

Option 2 is to save up or bump up my salary to clear off the loan quicker (I reckon I could swing that in 3-4 years).

Now, Option 3 is a bit more drastic. I’m thinking of pulling out my contributions from the Roth to make a big dent in the loan, then using my savings or salary bump to finish it off (probably in about a year).

Farewell,

[name]

Response from THE MONEY MINDER:

Hello There,

While it’s commendable that you’ve been proactive in managing your finances, the situation you find yourself in requires a prudent approach to ensure long-term financial stability. Given the current landscape, it seems like Option 1 may not be the most efficient use of your resources, considering the interest on your loan.

Considering your financial goals, I’d recommend exploring Option 3 as this could potentially offer you a quicker route to being debt-free. By withdrawing contributions from your Roth IRA, you could substantially reduce your student loan balance and then focus on paying off the remaining amount through saving/increasing your salary within a reasonable timeframe. This approach could help you save on interest payments in the long run while still maintaining a comfortable pace of loan repayment.

However, before proceeding with any decisions, I strongly urge you to consult with a financial advisor to thoroughly analyze the implications of withdrawing from your Roth IRA and to ensure it aligns with your overall financial plan. It’s crucial to have a clear understanding of any tax consequences or long-term impacts on your retirement savings.

Remember, financial decisions are highly personal, and what works for one individual may not be suitable for another. Take the time to evaluate your options carefully and make an informed decision that aligns with your financial goals. Keeping a clear vision of your objectives and seeking professional guidance will help you navigate this situation effectively.

Best of luck as you navigate this financial decision, and remember, controlling your finances now will lead to a brighter financial future.

Farewell from THE MONEY MINDER.