Written By Travis Hornsby, CFA®, CFP®
Updated on April 26, 2025
If you have any chance of being eligible for student loan forgiveness, you’ll want to treat your student loan payments as an “income tax,” where you seek to pay as little as legally possible.
Given that income-driven repayment (IDR) monthly payments are a percentage of your adjusted gross income (AGI), lowering that AGI number is paramount.
We’ll explain how this relates to pretax retirement accounts and why you should probably be prioritizing this type of account over most other investment options.
Why pretax retirement contributions are generally better with student loans
Most investors are actually in a lower tax bracket in retirement than they were when they were working. So, before accounting for student loans, most individuals would be better off with pretax accounts than with Roth accounts, which are taxed now but become tax-free later.
Now layer on 10% to 15% of your income that goes to your IDR payment, and the likelihood that you’ll be in a lower tax bracket in retirement is extremely high.
Example: Physician in California saves big on pretax accounts over Roth
Consider a physician in California earning $300,000 a year. She’s in a 35% tax bracket while also working toward forgiveness under the Public Service Loan Forgiveness (PSLF) program.
She’s in a 9.3% tax bracket for state taxes and pays 0.9% additional Medicare tax.
She’s on the Pay As You Earn (PAYE) plan, so her payments are 10% of her income. If it’s overturned at some point, she’ll be forced back into the old Income-Based Repayment (IBR) plan with payments at 15% of her income
In total, her marginal tax rate is approximately 55.2% to 60.2%, depending on whether she uses PAYE or old IBR.
What are the chances that she’s in that tax bracket in retirement?
Currently, that rate is above the highest available tax rate for federal + California income tax due to the 10% to 15% of income that the student loans cost under IDR.
So, if she’s going to be in a higher tax bracket while working than in retirement, that’s a powerful argument for choosing pretax retirement accounts instead of traditional for this physician (and anyone like her in a high tax area).
When do Roth accounts make sense as a student loan borrower?
The primary reason to use a Roth account is if you’re doing a backdoor Roth, as you can’t deduct traditional IRA contributions if you’re covered under a workplace 401(k) or 403(b) plan at income levels most professionals earn.
Therefore, backdoor Roths are a good addition to a strategy of maxing out pretax retirement accounts, but they’re not a replacement.
Why do personal finance influencers push Roth accounts to student loan borrowers?
You need sizzle to sell steak, and the idea of never paying taxes again is intoxicating. In contrast, it could be a bit depressing to some to realize you’ll likely be in a lower tax bracket in retirement than when you’re working.
Roth retirement accounts attract more attention because of the exciting idea of not paying taxes in the future.
In reality, though, the decision should be based on your overall tax bracket.
If you’re paying back your loans in full, live in a no-income tax state like Texas, and are in a 12% marginal bracket, for example, Roth accounts look great. With that low of a tax rate, you will likely exceed it in retirement.
But the California borrower who pays more than 50% of her income to taxes desperately needs to focus on increasing pretax contributions to every account that she can.
What if you want to change your pretax vs. Roth contribution amounts
Keep in mind that the annual limit for employee contributions to 401(k) plans is across all accounts you have.
If you’ve made Roth contributions already this year to a 401(k) or 403(b), be sure to adjust your future contributions downward if you switch to contributing pretax. That will make sure you don’t overfund the account, which could lead to penalties.
Pretax retirement contributions are a critical way to grow wealth as a student loan borrower
There are very few investments out there that could cut your tax bill by more than 50% of what you contribute.
Pretax retirement accounts in many parts of the country allow this, though, and all you need to do is know the loopholes available and take advantage of them.
And if you’re a business owner or have a side hustle, you can expand beyond regular 401(k) plans to start Solo 401(k)s, SEP IRAs, and more to put away even more for retirement.
So, before you put thousands a month into your brokerage account, mortgage pay down, college fund, or other account, contribute as much as you can to these pretax retirement accounts to maximize your family’s financial opportunities for the future (as well as your own).
