Why Contributing to Retirement Accounts While Still in Debt may be Beneficial

If you have ever tried to get your finances in order and looked to the industry's leading experts, you've probably heard of Dave Ramsey and his infamous Baby Steps.

We all know em; Step 1: $1,000 emergency fund, step 2: Pay of ALL debt (and that is your only focus), then after you have paid off every single penny of debt including credit cards, car loan, and student loans (not the house though), you can move on to step 3: which consists of more savings, 3-6 months worth of expenses then finally in step 4 you can invest 15% of your income.

While this method has helped hundreds and thousands of people gain financial independence, it doesn't mean it's right for everyone. There are many ways and many paths to reach financial freedom. You just have to find what works best for you.

>> Keep in mind, the below info may not be applicable to you or it may not be right for your circumstances. <<

So I'm going to share another option for you (which is similar to the Baby Steps with a few minor tweaks):

1) Save $1,000 emergency fund

2) Pay off all credit card debt

3) Invest in a 401k (or 403b) if your company offers a match. But if your employer does not offer a match (or you are not eligible at the time) consider opening a Roth IRA to contribute to.

4) At the same time as step 3, still work diligently on paying off any other debts you have (focusing on the smaller ones first).

My reasoning behind this:

WE ARE YOUNG! Time is on our side! Have you seen those charts comparing Sally who contributed x number of dollars from age 21 to 30 and then never contributed again versus Bob who didn't start contributing till age 30 and he won't have as much as Sally come retirement.

So when it comes to investing in a 401k, this can be a very easy way to get started. It's through your employer so you can always reach out to someone in HR if you need help or have questions. & if your company offers a match that means they will match your contributions up to a certain percentage.

Sit down with your HR person and find out exctaly what the company match is and how long you need to be working there to be 100% vested.

Don’t leave money on the table!

If your employer does not offer a match or you are not eligible yet, the next best option may be to start contributing to a Roth IRA. (or a Traditonal IRA is you are able to deduct the contributions) but remember, Roths are post-tax money, so you can contribute to one with the money from your bank account. As long as your Modified Adjusted Gross Income (MAGI) is below a certain limit (learn more about this here.)

When deciding on whether to contribute to a Roth or not, ask yourself, “will I be in a higher tax bracket when I retire and need this money?”

Contributing to a Roth at a young age while you are in a lower tax bracket and you are still under the income limits, could prove to be beneficial. Because one day, you may not be able to take advantage of a post-tax retirement account.

For example, let's say from 2017 to 2019 Jenny meets all the requirements and can contribute to her Roth IRA so she does. Starting 2020 she has $17,000 plus or minus any gains or losses in the account. However, in 2020 Jenny's MAGI is over the limit, she can no longer contribute to her Roth.

The money is going to stay in the account though and (hopefully) continue growing. If Jenny would have waited until she was completely debt-free, she may not have been able to contribute anything to her Roth and it would be sitting there empty, not working hard for her.

Of course, there are other options for her to invest in if she is over the MAGI limits, but Roths can be beneficial because, when Jenny wants to withdraw that money in retirement, she may not need to pay any taxes on it!


Investing early can outweigh not investing at all while working to get debt-free. Of course, you should still work on paying off all your debt. But at the same time, you can also take advantage of retirement accounts you may not have full access to later in your life.

- Madison

P.S. You can now join my 1:1 Money Coaching Program!

*Please visit the IRS website for more on MAGI and contribution limits.*

DISCLAIMER: I am not a financial advisor. This is not financial or tax advice. Please consult a professional before making any investment or tax decisions. Returns are not guaranteed. Different investments result in different returns. Investing involves risk and possible loss of money. Information in this article may become outdated. Do your own due diligence before investing. The information contained in this article is for informational and entertainment purposes only. Read my full disclaimer HERE.