Everyone knows that a 401k can be a great savings tool while working towards retirement, and many of you are probably even contributing up to your full employers match, but if you're on income driven repayments, you should be contributing more.
The income-driven repayment plans can be excellent tools for minimizing the amount that you pay for student loans, especially if you work at a qualified non-profit organization, or your student loan balance greatly outweighs your projected annual income. They're my favorite plans for anyone who can't repay their student loans with relative ease in 5 to 10 years. The income-driven repayment plans generally use your discretionary income to calculate a monthly payment amount.
For student loan purposes, your discretionary income is the difference between your annual income and 100 (ICR) or 150 percent of the poverty guideline for your family size and state of residence. For annual income, your adjusted gross income (AGI) is used to qualify for income-driven repayment. Adjusted gross income, is your income from all sources (wages, interest paid, dividends, etc.) minus certain deductions (like your 401k contributions) from your income on your federal tax return.
If you only contribute to the employer match with your 401k, you're likely paying an absurd amount of additional taxes, and your student loan payments are higher, since your tax deductions are lower. You're getting penalized twice. Decreasing the amount you pay in taxes is one of the many strategies that the rich employ to increase their net worth that separate them from the majority of the population. By contributing up to the $19,500 per year starting in 2020, you'll be getting the absolute best return on your money by avoiding taxes, AND decreasing your monthly student loan payments. While you're at it, I also would advise looking into investing up to the limit in your HSA as well if you have one ($3,550 for individuals, or $7,100 for families). Fidelity Investments has estimated that a 65 year old couple who retired in 2013 would need $240,000 saved for future medical costs, not including long-term care. It's a safe bet that if you contribute the maximum into your HSA each year, you'll still have plenty of out-of-pocket spending on healthcare throughout your retirement. You might as well invest in it now and decrease your student loan payments even more.
One caveat, even though you can technically take out a loan against your 401k in case of emergency, I would advise keeping a more liquid emergency fund available for unexpected repairs, or a loss of income.
The income-driven repayment plans can be excellent tools for minimizing the amount that you pay for student loans, especially if you work at a qualified non-profit organization, or your student loan balance greatly outweighs your projected annual income. They're my favorite plans for anyone who can't repay their student loans with relative ease in 5 to 10 years. The income-driven repayment plans generally use your discretionary income to calculate a monthly payment amount.
For student loan purposes, your discretionary income is the difference between your annual income and 100 (ICR) or 150 percent of the poverty guideline for your family size and state of residence. For annual income, your adjusted gross income (AGI) is used to qualify for income-driven repayment. Adjusted gross income, is your income from all sources (wages, interest paid, dividends, etc.) minus certain deductions (like your 401k contributions) from your income on your federal tax return.
If you only contribute to the employer match with your 401k, you're likely paying an absurd amount of additional taxes, and your student loan payments are higher, since your tax deductions are lower. You're getting penalized twice. Decreasing the amount you pay in taxes is one of the many strategies that the rich employ to increase their net worth that separate them from the majority of the population. By contributing up to the $19,500 per year starting in 2020, you'll be getting the absolute best return on your money by avoiding taxes, AND decreasing your monthly student loan payments. While you're at it, I also would advise looking into investing up to the limit in your HSA as well if you have one ($3,550 for individuals, or $7,100 for families). Fidelity Investments has estimated that a 65 year old couple who retired in 2013 would need $240,000 saved for future medical costs, not including long-term care. It's a safe bet that if you contribute the maximum into your HSA each year, you'll still have plenty of out-of-pocket spending on healthcare throughout your retirement. You might as well invest in it now and decrease your student loan payments even more.
One caveat, even though you can technically take out a loan against your 401k in case of emergency, I would advise keeping a more liquid emergency fund available for unexpected repairs, or a loss of income.
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