by Dave McWilliams, CPA

For anyone who has recently graduated from medical school and has begun their residency, there comes a point when they start to weigh the options of whether to pay down their student loan or to start saving for retirement. There are a number of variables that impact the answer to this question.

Each individual's situation is unique but I will describe what could be considered a typical case for any new doctor with student loan debt.
 

But, paying off the student loan debt before deferring income to a 401(K) could be of significient value to any new doctor graduating with debt from school.
 

The assumptions for our doctor are as follows: 

• They file as single on their tax returns;
• They have a student loan balance of $200,000 that accrues interest at 6.8% per annum; 
• They make approximately $125,000 a year from their job;  
• They have no other significant income;
• We expect them to pay 30% in income taxes on average over the term of our example, and;  
• The maximum they can contribute per year to a 401(k) or 403(b) is $17,000.   
   

There are a couple of tax implications for this person's situation that should be addressed. First is Internal Revenue Code section 221 which allows an individual to deduct up to $2,500 of student loan interest per year. However, for those taxpayers making over $75,000 as a single ($155,000 if married and filing a joint return), the deduction is completely phased out. In our example, this individual will not receive any tax benefit for paying student loan interest. Read more