Roth IRA vs. Student Loans: Where Should Your Money Go?
What is a Roth IRA is and Why It Matters
So what is a Roth IRA? Well to start, it’s a type of investment account. More specifically, IRA stands for “Individual Retirement Account.” A Roth IRA is a specific type of retirement account where you contribute or put in money that has already been taxed, meaning when you withdraw it in retirement, you pay no taxes on it. It also include all the growth it accumulated over the years. The other type of account is a Traditional IRA, where your contributions may be tax-deductible now, but when you withdraw the money in retirement, you owe taxes on it. The Roth IRA is especially powerful for younger people or those who expect to be in a higher tax bracket later in life, because you’re locking in today’s lower tax rate. For 2024, the contribution limit is $7,000 per year. There are also income limits… If you earn too much, your ability to contribute phases out, so it’s worth checking where you fall.
Investing While in Debt
The best thing about investing early is the power of compound interest. Every time you put money into an investment account, it earns returns, and then those returns start earning returns on top of themselves. In the early stages it doesn’t seem like much, but once your balance grows, the growth becomes dramatic. Kind of like a snowball rolling down a hill. The bigger it gets, the faster it grows. For example, if you invest $7,000 a year starting at 25, you could have over $1 million by retirement assuming a 7% average annual return. If you wait until 35 to start, and that number drops significantly despite contributing the same amount. Time in the market is one of the biggest advantages you have when you’re young.
Paying Off Debt First
The most concerning part of carrying loans is the interest rates, especially when they’re above 6% on a large balance. If you have approximately $100,000 in student loans at 6.8% interest with a minimum payment of around $1,100 a month, you’ll end up paying roughly $40,000 in interest over a standard 10-year repayment period. In the early years of repayment, about 30% of each payment goes toward interest while only 70% goes toward your actual principal balance. That $40,000 in interest isn’t just money lost… It’s a down payment on a house, a brand new car, or years’ worth of travel that you’ll never see. There’s also a strong psychological argument for paying off debt aggressively. Debt can feel like a weight hanging over every financial decision you make. The peace of mind that comes with being debt-free is real and shouldn’t be underestimated. Some people simply invest better and live better when they’re not carrying that mental burden.
Which Did I Chose?
For me, I chose to do both. I’m maxing out my Roth IRA contributions every year because the earlier I put money in, the longer it has to compound before I reach retirement. Because I earn a six-figure income, I have enough financial flexibility to prioritize retirement savings without completely neglecting my loans. As much as I want to eliminate my student loans quickly, the long-term power of compound interest makes it hard to justify pausing contributions entirely. That said, I’m not just paying the minimum on my loans either. I’m committed to paying at least double my minimum payment every month, and I’m actively looking for ways to accelerate that. Whether it’s picking up extra hours, taking on a side job, or redirecting any bonuses or tax refunds straight to the principal. The goal is to build wealth for the future while not letting debt drag on longer than it has to.
