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I have about $7K in student loans remaining at 6.25% I also haven't made a contribution to my Roth IRA for 2010. I'm thinking off paying off my loan at the end of the year, but that'll not really leave me enough free cash to maximize my Roth contribution. What should I do?

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Finish off the student loans. If your absolute goal is saving as much as you possibly can for retirement, then you of course will be best off by maxing your IRA contribution every year. However, student loans are just another thing hanging over you, and nothing feels better than getting rid of a large debt.

Pay them off, take yourself out to a nice dinner to celebrate, and tuck away what you have left over in your IRA. Paying off student loans is a great accomplishment - celebrate it! The difference long-term will be negligible.

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    Also, remember that you can make 2010 Roth IRA contributions all the way up through April of 2011. – Eric Petroelje Aug 5 '10 at 13:11
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Do both.

The Roth should be started ASAP so you can start on the 5 year maturity period. Even if you already have the Roth started, it doubles as an emergency fund, so putting money into it couldn't hurt.

Student loan interest is tax deductible, so your "real" interest is probably around 4.7%. However, this is still a good reason to pay them off soon.

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    Student loan interest may be deductible. In the US, the amount that can be deducted varies based on income. In 2009 if you were married filing jointly the deduction starts phasing out when your income is over $120k. If you are singe, it starts phasing out over $60k. irs.gov/publications/p970/ch05.html#en_US_publink1000178272 – firedfly Aug 5 '10 at 17:23
  • Wow. Great FYI firedfly. I did not know that. – James Jones Aug 5 '10 at 18:00
  • The flexibility of the Roth IRA and it's low max annual contribution of $5000 make funding it by April 15 of the following year a high priority. Write up your budget and figure out how many months it will take to fund the IRA with $3-5K, then stop paying extra on your loan when you are that many months away from April 15th. – SpecKK Aug 5 '10 at 18:53
  • Having done my budget, I will have about $4K to spend on my IRA or student loan. I'm not sure $2K on my student loan is worth it, so while it's good advice to do both, I really need to know which is better. – Mike Sherov Aug 5 '10 at 22:19
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Fund the Roth.

If your loan interest is deductible (see firedfly's comment) then your effective cost for the loan is lower than 6.25%

You get tax free earnings on the same amount in a Roth. Assuming you can get 6%, it's at least break even, probably better. And you can never gain back the time for compounding on the retirement account.

With that said, there may be an emotional component to the decision. If you really just want to get rid of the debt, go ahead and do it.

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