Retirement is a big decision that you should make well before it’s time. But when money’s tight, you might not think there’s enough to go toward retirement and paying off debts. So which is the higher priority, paying off your student loans or saving for retirement? And is using retirement to pay off debt a good idea, or are you setting yourself up for hardship later? Here’s what you need to know.

The different ways to save for retirement

There are a few different ways to save for retirement, each with its own pros and cons. You can contribute to an IRA or 401k, or invest in stocks, bonds, and other securities.

Contributing to an IRA or 401k

Contributing to an IRA or 401k is one of the simplest ways to save for retirement. You don’t have to do any paperwork or track your investments, and you don’t have to pay taxes on the money until you withdraw it in retirement. Plus, you can contribute as much money as you want without penalty.

One downside of contributing to an IRA is that you must take the required minimum distributions (RMDs) beginning at age 70½ if you want all of the money in your account at once.

This means you’ll have to start withdrawing a set percentage of your account each year, no matter how much money you have left.

Investing in stocks, bonds, and other securities

You can also invest your money in stocks, bonds, and other securities. This is a more complex process than contributing to an IRA or 401k, but it can offer you greater returns over time.

One downside of investing is that you may have to pay taxes on the profits you make.

Why paying off your student loans first makes sense

Paying off your student loans first makes sense for most debt holders for a few reasons. First, you’ll save money on interest payments. Second, you may qualify for tax breaks that can lower your taxable income. And finally, paying off your debt will make it easier to get a mortgage or take out other loans in the future.

When it makes more sense to save for retirement instead of paying off student loans

However, there are some situations when putting the money toward retirement savings instead of your debt is a better idea. For example, if you’re eligible to have a significant portion of your student loan debt forgiven due to President Biden’s forgiveness plan or other federal government programs. If you’re eligible for student loan forgiveness, you may want to consider putting those monthly payments you’d usually pay on your loans into an IRA instead.

You potentially might have the best of both worlds soon

Since both saving for retirement and getting out of student loan debt are so critical, Congress is looking into how it can help. A proposed piece of legislation called SECURE 2.0 would allow employers to consider employees’ student loan payments as a portion of their retirement match. So if your company offers a 4% retirement contribution match, you could use your contribution to pay off your student loans while your company still invests 4% of that into a retirement account.

The bottom line

The decision to save for retirement or pay off debts is a personal one that depends on your financial situation and goals. But understanding the pros and cons of each option can help you make the best decision for yourself.