Author Topic: all 401k no ROTH to lower AGI for student loan IBR?  (Read 9658 times)

getmoneyeatpizza

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all 401k no ROTH to lower AGI for student loan IBR?
« on: December 13, 2014, 08:39:57 PM »
So my wife has student loan debt and is on an incomes based repayment that will be forgiven in 5 years.

We have both been maxing out our ROTH IRAs.

2015 was $5500 ROTH $6750 401k

I realized that her payment  formula was based on AGI.  Using the formula I calculated she would pay roughly $60 a month less on her student loan payment for 2016 if she moved all  $5500 to the 401k instead of the Roth. That is if the AGI would be $5500 less. Plus she would add the extra $60 a month to the 401k as well.

So my question is this: Should she just forget about the ROTH for the next 5 years and dump all the money into the 401k?

which would be 2015: $12,250 into 401k then when 2015 AGI is low and IBR is adjusted start to reinvest the $60 a month savings in student loan.

Let me know if you need more info. The IBR is roughly $360 a month now.

drtownhouse

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Re: all 401k no ROTH to lower AGI for student loan IBR?
« Reply #1 on: December 14, 2014, 10:09:55 AM »
Very important and timely question. Seems to be a triple whammy in terms of benefits: (1) lower taxes; (2) lower loan payments; and (3) additional funds to invest.

I'm in the same boat as you and just filled up a Roth IRA the other day. I'm wondering if that can be converted to a traditional or if it's too late. I've read the Madfientist's post which seems to favor traditional IRAs (even in the absence of loans), which makes trad seem more appealing.

The .gov site with the IBR calculator is down due to maintenance. Is this the site you used to calculate the payment based on various factors? Does it actually let you enter 401k/IRA contributions, or do you just manually subtract them to calculate the AGI?

Sorry, I am not much help. I hope this gets bumped, as it would be great to hear different opinions on this important question.

getmoneyeatpizza

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Re: all 401k no ROTH to lower AGI for student loan IBR?
« Reply #2 on: December 14, 2014, 11:50:33 AM »
I'll put it another way for readers:

Is it worth it to reallocate the amount from a maxed out ROTH ($5500) to a 457 for 5 years for a free $3600 that will go into the 457 (saving $60 a month which is $729 a year for 5 years)

After the loan is forgiven in 2020 she will go back to maxing a ROTH. that $360 a month will be freed up :)

I assume yes but I want to make a good decision. both funds have a 100% allocation in target date 2040.

getmoneyeatpizza

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Re: all 401k no ROTH to lower AGI for student loan IBR?
« Reply #3 on: December 14, 2014, 11:55:57 AM »
Sorry. another post to answer drtownhouse. This is the formula for her plan:

"The Income-Based Repayment (IBR) plan is a repayment plan with monthly
payments that are limited to 15 percent of your discretionary income. 
Discretionary income for this plan is the difference between your
adjusted gross income and 150 percent of the poverty guideline amount
for your state of residence and family size, divided by 12.  To
initially qualify for IBR and to continue making income-based payments
under this plan, you must have a partial financial hardship (see
definition)."



DI*0.15 DI=AGI-(1.50*15510/12)

DK

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Re: all 401k no ROTH to lower AGI for student loan IBR?
« Reply #4 on: December 14, 2014, 12:13:51 PM »
I'd agree go with a tIRA or 401k instead of the roth.

i think you would even be able to take out the money from the roth from this year 2014, and move it into a tIRA, to get the benefits.

wtjbatman

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Re: all 401k no ROTH to lower AGI for student loan IBR?
« Reply #5 on: December 14, 2014, 05:19:57 PM »
I'm on an IBR plan. Specifically Pay As You Earn, which gives me by far the lowest monthly payment. My ultimate goal is loan forgiveness, not loan payback, so I am trying to have the lowest monthly payment as possible, as anything I pay in is effectively "wasted" money to me. Because of that, I do as much as I can to reduce my taxable income. I contribute to a 401k, Traditional IRA, and HSA. No Roth for me.

I guess I'm not really giving you advice, just letting you know that yes, there are others out there who A) Make an effort to reduce their taxable income, specifically because B) I want to lower my monthly student loan payment as eventually the remaining balance of my SL's will be forgiven.

teen persuasion

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Re: all 401k no ROTH to lower AGI for student loan IBR?
« Reply #6 on: December 15, 2014, 09:16:19 AM »
So switching from maxing a Roth IRA to putting that $5500 into a 457 should reduce the IBR payments equivalent to 15% of the $5500 per year, AND reduce your taxes (state and federal).  You could put those savings in the Roth IRA, it wouldn't max it, but it would still be >$0.  You could also put those savings into the 457, and reduce things a little bit more.

OP, you mentioned that you both max Roth IRAs.  Would switching your Roth contributions to a pre-tax account lower the AGI even more?  I'm not sure if IBR calcs are based on household or individual income.

getmoneyeatpizza

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Re: all 401k no ROTH to lower AGI for student loan IBR?
« Reply #7 on: December 15, 2014, 10:16:59 AM »
Not sure if we are going to file jointly or separately this year as we just got married this summer.

DrF

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Re: all 401k no ROTH to lower AGI for student loan IBR?
« Reply #8 on: December 15, 2014, 10:29:56 AM »
I would put all of your money into the 457 until you are able to max it out. For 2015 that should be $18000.

The 457 is the most amazing retirement account, because if you (or your wife, whoever is the owner of the 457) should leave your employer at any time for any reason you are allowed to withdraw from the 457.

Once you max out the 457, then I would do a traditional IRA on top of that.

You probably would benefit more from filing jointly. Rare circumstances that you wouldn't.

Also, start thinking of your retirement accounts as 1 unit. If both of you are contributing to separate accounts, I would recommend only contributing enough to get any match, then allocate all the remainder to the 457 until you have that maxed out. Once you have that maxed out, then allocate any additional savings to the other persons 401k (or similar), or traditional IRAs.

Joel

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Re: all 401k no ROTH to lower AGI for student loan IBR?
« Reply #9 on: December 15, 2014, 08:48:44 PM »
It's pretty amazing to me that Income-based repayment is determined based on AGI and can be manipulated like this. Something just seems wrong that the government is subsidizing one's student loans but they are maximizing their 401k contributions. Good for you guys for playing within the rules and taking advantage. Bad for the government for allowing this abuse.