lower payments and build retirement

Last Chance to Get Lower Student Loan Payments and a Bigger 2017 Tax Refund

Michael Lux Blog, Strategy, Student Loans 0 Comments

2017 may be over, but student loan borrowers still have a couple months to lower their student loan payments, get a bigger refund on their 2017 tax return, and set some money aside for retirement.  While this trifecta may sound too good to be true, it is actually a very simple move that can have lasting benefits.

By making a 2017 contribution to an IRA (Individual Retirement Account), student loan borrowers get an extra deduction on their 2017 tax return.  Because this particular deduction lowers an individuals AGI (adjusted gross income), it also means that their monthly student loan bill will be lower if they are enrolled in an income-driven repayment plan for their federal loans.

The IRS allows 2017 IRA contributions to be made until April 17, 2018… the day taxes have to be filed.

What is an IRA?

An IRA isn’t a type of investment, instead it is an investment account.  With the uncertain future of social security, setting money aside for retirement has never been more important.  An IRA allows you to put money aside without having to pay taxes on it.

Major brokerages like Fidelity, Charles Schwab, and Vanguard all offer IRA accounts and allow individuals to set money aside in a variety of investment options such as stocks, bonds and mutual funds.  For those new to investing, target date retirement funds are a common choice.  These funds are invested more aggressively for those far away for retirement and as the retirement year approaches become more conservative.

Individuals considering an IRA contribution should be sure to understand the IRA income limits as not everyone is able to make a contribution if they make too much money.

Should I contribute to a Roth IRA?

A Roth IRA is a common option, but handled very differently than a traditional IRA from a tax and student loan perspective.  Roth IRA contributions are made on an after tax basis.  This means you pay full taxes on the money that goes into the Roth account.  Because Roth contributions do not lower an individual’s tax burden, the AGI does not change, and income-driven student loan payments are not changed.

The advantage behind saving in a Roth account is that when the money is pulled out of the account, it is not taxed.

Why not just make the contribution a 2018 contribution?

During the next couple months, funds contributed to an IRA can be specified as 2017 or 2018 contributions.

For those not worried about yearly contribution limits (currently $5,500 per year for those under 50), the decision comes down to what year you want the tax break.  Given the tax cuts, many will have a lower tax rate in 2018, as a result making 2017 tax return might save more tax money.  Plus, you get the tax money this year instead of having to wait until next year.

What if I really don’t need lower student loan payments?

We usually suggest a student loan repayment strategy where borrowers try to get the lowest payment on all of their student loans and then attack the student loan with the highest interest rate.  An income-driven federal repayment plan can help some borrowers achieve this objective.

For those without federal loans, or any student loans, IRA contributions are still a good idea because of the retirement benefits.

Bottom Line

For student loan borrowers, IRA contributions are an excellent opportunity to lower your tax bill, lower your student loan bills, and save money for retirement.  It may require some short-term sacrifice to pull off, but the long-term benefits are significant.  It is one of those rare opportunities for student loan borrowers to get interest working for them instead of against them.