Should I Contribute To Traditional Instead Of Roth To Lower My SAVE Student Loan Payments?

Hi, Dr. Dali. My white coat is actually just a lab coat. However, my husband is the MS.4 who's applying to residency this year. We were wondering if it might actually make sense for us to make pre tax contributions to our retirement accounts in the coming years instead of doing Roth as we traditionally have. In 2023, I was able to do a Roth conversion to get our entire retirement savings into Roth. And now with the save plan, we're wondering if it actually makes sense to try to reduce our taxable income a little bit by contributing pre tax rather than Roth. Curious to hear your thoughts on this. Thanks for everything you do.

All right, we're getting more and more of these questions on the speak pipe. We can't answer your question. We don't have enough information. It's impossible to answer that question. In fact, even if I had 10 minutes with you on a call, I might not be able to answer your question. This is the whole reason we started studentloanadvice.com is to help people like you get the right answer to the question. This is going to take an hour to sort out with someone that has full access to your financial information to give you the right answer on whether you should do married filing separately, whether you should contribute pre tax. Obviously, the benefit of contributing pre tax and doing married filing separately is to make your income as low as possible. That makes your saved payment as low as possible, makes your saved subsidy as big as possible, leaves the amount that could potentially be forgiven via PSLF or via save after 25 years as big as possible. But whether that's worth any additional tax you might pay, which you probably will by doing pre tax in a year when you'd normally do Roth and which you'd normally do by filing married filing separately instead of married filing jointly. You know, it's hard to say. You got to run the numbers and compare it. You getting this question as often as we are, Chad?

Yeah, yeah. And that's. You said it perfectly right. It's one of those ones where, you know, you need all the documents and an hour plus with Andrew to walk through it because there are so many moving parts. You know, when we, when we speak on this topic, we usually try to come back to keeping it simple on, hey, if you're going for pslf, there's likely a good chance that doing pre tax is a good call. If you're not going for pslf, usually in those lower income years, you know, the Roth is going to make a lot of sense. My biggest takeaway from Kim's question Was especially again kind of coming into match week and you know, a whole new group of physicians entering their intern year. There is, you know, married filing separately is a whole new ballgame and there's analysis. You know, we asked, we look at our clients tax drafts that are going for student loan forgiveness. You know, we want to see that comparison every year from the accountant, married filing jointly versus married filing separately. We want to see the tax number and then we want to compare that to the savings on the student loans. And then we'll let their tax filer know, hey, married filing separately by a long shot or married filing jointly works here. And it's amazing how so many similar situations you think on paper the tax bill wouldn't vary that much, but then the tax bill varies quite a bit. So you said it perfectly. It's not as simple. You know, I try to work up some basic numbers trying to compare like the 24% to the 22% tax bracket. But even there you're making high level assumptions where I'm just trying to compare that if you had that 23,000, like you only had 23,000 that you would have picked to which bucket you were going to move to. Or I always say teamwork makes a dream work in those early years. Right. And then comparing it to the SAVE program, you know, if the tax, if it was that simple, it's a 2% versus a 10% savings, but it's not that simple. And that I was just trying to figure out how can I make this digestible to a large audience on a very complicated topic. And that's, that's as close as I could get.

Yeah, I used to have lots of rules of thumb that were very helpful. Things like Roth is for residents when you're in residency, you should contribute to a Roth account. Well, the federal student loan policy has changed such that that's not true for a pretty significant number of people. And it's not just those going for forgiveness programs. Right. Just because this subsidy for SAVE can be so big, it's all the interest that is unpaid that can be, you know, $1,000, $2,000 a month. It's not a small amount of money. But you also have to consider the difference between, you know, what that Roth's going to grow to over the next 20, 30, 40, 60 years, maybe 10 more as it's stretched by your heirs. I mean, there are just a ton of moving parts here and it's very hard to get right. The good news is I don't think you have to get it all Right here. Right. So let's say you did a Roth contribution instead of a pre tax contribution, right? Yeah. Now your saved payment's going to be a little higher, maybe you get a little less forgiven. But you also got money into a Roth account when you were in a very low tax bracket, and that's really beneficial. So I think if we actually run the numbers here, the amount of difference, these little sorts of decisions where you're trying to optimize a makeup are not as big as I think we fear they are. And I think for a lot of docs, you know, down the line, they're going to have more than enough money than they need. And this sort of thing just doesn't matter that much. Let me give you an example from my own life. When I was in the military, 2006-2010, my retirement plan was a thrift savings plan, and there was no Roth option. It was tax deferred only. And I was in a pretty low tax bracket. Right. I was only making about $120,000 a year, and about 30 or 40 of that was tax free. One year, I think I paid $3,000 in taxes. It was a year I was deployed. And meanwhile, I'm saving money in a tax deferred account. Right. I'm in. I don't know what it was. A 15% bracket, maybe the 10% bracket. I don't know what it was. It was really low. I'm never going to be in that bracket again. Clearly this was not the optimal thing. If I could have done Roth, maybe I would have even been better off saving in a taxable account than that tax deferred account because it's like this reverse arbitrage of tax rates. But it doesn't matter. I'm going to have enough money. And I've decided that's just, you know, the money sitting in those tax deferred accounts is going to be used for charitable contributions. So it doesn't matter that much. For most of you out there, you're going to end up with more than enough. You don't have to optimize every single little thing. And some things are really difficult to optimize, and this is one of them.

Yeah, I mean, it's one of those ones where. Just listen to Kim's note. She's financially savvy. She's thinking through it. She's putting money towards savings. That's probably the most important part of all, that she cares about her financial situation. For her and her husband, she's saving. And while there might be you know, well, we could have saved a little bit here, made a little bit here. As long as she keeps that foundation, keeps it growing, we're probably never going to look back to this episode and say, Kim, if you would have changed it by that much, probably retired 15 years earlier, we should have changed that. I think take those victories, let those continue to compound. There's always going to be, well, we could have did this or did that. Personal finance is a lot of keep getting those small victories year after year after year and you'll be in a good spot.

And for sure, Kim, you're paying attention to this. Your husband's an Ms. 4. You're going to win, right? Just the fact that you're asking this question, do you realize how much financial sophistication and education it takes to get to the point where you can ask this question? You're a winner. You guys are going to be so rich. I can tell that just now from the fact that you're asking this question at this stage of life. So congratulations on that. All right, let's introduce a little bit more controversy to this episode. Just because the speak pipes, I don't think naturally do it today. Let's talk for a minute about live like a resident, right? This is a mantra I've had and I've been throwing out there since probably the first month of the blog. Since 2011, I've been telling people, live like a resident. This is a huge key to building wealth. Front load your wealth building activities. When you come out of residency, keep a lifestyle that's about like what you had as a resident. And use that difference between your resident lifestyle and your attending income to do all these great things like pay off your student loans or save up a big down payment or max out your retirement accounts, do a Roth conversion, build an emergency fund. All that stuff you have to do, you now have more money to do it with if you'll just live like a resident. People don't like to be told to live like a resident. And the truth is lots of docs can still be successful without living like a resident. What do you think about this phrase, Chad? Where's this bad advice? Are there people that shouldn't live like a residential. Should we make it less dogmatic somehow? What do you think the merits of that phrase are and how beneficial is it to doctors if they'll do this?

Yeah, and again, I'd love to fight you on this one, but since I quote this line and quote you in almost, whether it's blog posts, speaking engagements, YouTube videos. I think we put you in all of them with this sentence that you've created. I don't know if you copyrighted this one, but I hope you did.

Yeah.

We always come at it in a little bit of a different way in the sense of tell your money.

Where to go first.

And we call it top down budgeting. I didn't come up with that term, but I've always liked the idea where, hey, if you get your new attending salary, obviously we have the mortgage and expenses. We got to eat food, so we have groceries. But if you're maxing out your 401, you're doing your backdoor Roth, you're getting, you know, X dollars into your joint taxable account every year. You're putting some money away for the kiddos in the 529 plan. And the longer term outlook looks good because again, we're sitting here in our 30s. There's a lot of assumptions to say, hey, does that plan stick or not? We're going to have a lot of course corrections. There's a lot of life in there. I almost like to do it. I almost like to force that upon our new attendings as opposed to trying to nitpick the budget. Because all humans, right, you know, if it sits in our bank account long enough, we're all going to go buy F250s because it sits there and you want to spend it. We're humans, right? We want to go spend that money. So we try to say, hey, put that money to good use at the start so that you almost don't see. And some things are easier said than done, right? The 403B, the 457B, they literally won't hit your actual bank account. But then the joint account, the 529 plan, those are things that they sit there. So the sooner you can get them out, the better. I wish I could argue with you and live like a resident, but I think it's important, and I think it brings in the importance, too, of just understanding your cash flow and budgeting. You know, talk about one of the best foundational pieces of advice you can give, you know, both today, but also for decades to come. Whatever you're spending is just knowing what you're spending money on, money coming in and where it's going. That puts you so far ahead of so many individuals in this world, just knowing that. And that's where I think living like a resident is so powerful. Because, you know, if you go up to $300,000 of salary, but you're still trying to live like you were at 60 or 65, that's really powerful. And there's always going to be some lifestyle creepy. And we'll tell our clients that too. That's normal. It's okay. Now we just. This is where we don't want you to have the biggest house in the neighborhood. We don't want you to have the most expensive car yet and always come back and say you'll have that day. Right. If that's something you value and you really want to put time and effort to the biggest house because your family creates all the memories in the kitchen in the backyard, you. We'll make that work. But you got to understand that today is your chance to get ahead on a lot of things, whether that's student loans, whether that's just getting the market going, the stock market going in terms of compounding interest. So I think the term is beautiful. It's straightforward, it's easy. But I think the deeper meaning to that is too is just understanding how to even live like that, which comes back to the word that not many of us love. But budgeting is so vital. And, and that's where I think live like a resident has such a profound effect on.

Okay, so how could I mean, live like a resident is not a prescription for your entire career. The idea is not that you're a 56 year old attending spending $70,000 a year. A few people, I think get that wrong. They leave a lot of money to their heirs. But when is enough enough? How do you know it's time to exit your live like a resident face?

Yeah. You know, probably the simplest way to look at it would probably be, you know, bad debts. You know, did you build up any credit card debt throughout your training years because, you know, you just needed some extra wiggle room? You know, PSLF makes it a little. We work with a lot of academic physicians, so PSLF is a big part of the financial plan. So that's a number built in there. But I can tell you, for our physicians with private loans, you know, that is one where in a perfect world, we either know when you come out of it, we either know we're going for PSLF or we know we're going for aggressive payoff. And if we're going for a five year, I mean even a ten year, or coming back to that five or even shorter, that would be a time where, if you can get that bad debt out of your way, I think that would be a good time where you can open it up a little bit. That would be probably the easiest description of when can you kind of loosen it up a little bit? And I also agree with your last note there on you can also take it too far. I joke with our clients the day that I tell you you don't need to actually max out the 457B plan because now we're starting to hit some like serious RMD issues down the road because it's too much pre tax. Or hey, we can actually maybe turn back some of the risk because we don't need grand slams anymore. We're okay with singles and doubles the rest of the way out. You know, those are all really good signs coming from your financial planner. So I think it, it depends on a case by case basis, but I'd say, you know, at the very onset, the sooner we can get any bad debts out of the way, that probably gives a lot more wiggle room on the discretionary spending.

Yeah, I've always thought of it generically as a two to five year period, but the only real thing that I can think of out there that kind of marks the end of it for lots of people is to have the student loans gone. And that's not necessarily a five year thing. Some of those it's a seven year thing for most of them. It shouldn't be longer than that though. And if you were in training for six years, it might only be a four year thing before you get pslf. But you know, I think there's very few docs that won't benefit from doing it for a year or two and that will regret that you're only putting things off for a little bit longer and it just makes everything else the whole rest of your life so much easier to front load all those financial activities.

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