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Student Loan

Discussion in 'Finance and Investment' started by PinchandBurn, 04.19.12.

  1. PinchandBurn

    PinchandBurn

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    SDN Members don't see this ad. (About Ads)
    I've got about $200k in student loans at 4.75% interest. After a few more payments will be at 3.75%

    This is my first year out as an attending, I'm roughly making about $875 monthly payments.

    I've saved up about $90k. I make >$350k a year.

    What would you do in my situation? Should I try to pay of large chunks of my student loans to decrease debt?

    Or should I invest my money to make great than 3.75% a year? If so in what? I'm also inclined to not pay of my student loans right away (but making minimum payments) so that if a good business/investment opportunity arises, I want to have ready cash. Thoughts or advice?
  2. cincincyreds

    cincincyreds

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    I think in your situation, your are best off just making the minimum payment and just investing the money in 401ks iras and 529s. 3.75% is not a ridiculous interest rate. Mine is about half of yours, so I really have no incentive to pay it back. I would say over 30 years, if you just invest in the stock market index in a tax free account you should easily beat on average 3.75% per year.

    I just think it is important to be as liquid as possible with money just in case something happens.
  3. PinchandBurn

    PinchandBurn

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    hey cinccy-

    i agree, I want to be liquid, 'just in case'.

    so when you say tax free acount, are you refrring to what I think fidelity (i'm sure other companies have it too), but it's money market account. OR, is what you are refrring to something that follows the stock market indices such as NYSE,NASDAQ,etc?
  4. papillon2

    papillon2

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    According to a student loan repayment calculator a $200k loan with 4.75% interest in a 10year repayment plan is $2,096 a month. Are you in an extended repayment plan?http://mappingyourfuture.org/paying/standardcalculator.htm

    In a 10yr repayment you pay: $51k in interest
    in a 30yr repayment (about $1k/mo) it is $175k in interest


    I would change to a 10year repayment plan. I think with $350k/yr salary you can achieve all your investment goals and pay off your loans as well without loosing 175k in interest.
  5. Igor4sugry

    Igor4sugry Junior Member

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    The investment strategy I'm following is index fund investing and it is greatly explained and followed by Boggle Head Community.
    Fortunately there are a number of great resources that are free to get more information on how this works:

    [1] Boggle Head Forum (people help you with investment selection)
    http://www.bogleheads.org/forum/viewforum.php?f=1
    [2] Books:
    Guide to retirement planning: http://www.amazon.com/The-Boglehead...=sr_1_2?s=books&ie=UTF8&qid=1334886788&sr=1-2

    [3] Boggle Heads wiki - lots of great information and explanations
    http://www.bogleheads.org/wiki/BogleheadsĀ®_investing_start-up_kit

    [4] http://whitecoatinvestor.com/
    financial blog by an ED doc for other docs
    -very useful information and very relevant

    I would start out slow, get yourself educated.

    I like investing with vanguard because of good plan selection and low costs
    I get my financial advice through above sources. I stay away from what other docs/residents talk about because many times its wrong, and they rely too much on financial planners.
  6. Igor4sugry

    Igor4sugry Junior Member

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    Here is response on boggleheads for exact same question: http://www.bogleheads.org/forum/viewtopic.php?t=83786

    So the basic strategy is to have 6month salary emergency account. This should be in something that can be accessed very fast. People do online banks, I-bonds, CD-ladders or mixture of both. Starting out with online bank is easiest. You can add the other stuff later.
  7. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD Partner Organization

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    That's a crappy book. I heard they let anyone that wanted to write a chapter. The clown who did the chapter on IRAs especially sucked.

    OP-

    Here's what I'd do.

    1) Emergency fund. Say, 3 months of expenses.
    2) Max out available retirement accounts including backdoor Roth IRAs.
    3) Save up any funds you may need for a house downpayment, next car etc.
    4) Pay off the student loan. If I offered to loan you money at 3.75% so you could invest it, would you take the loan? Same thing isn't it?
  8. PinchandBurn

    PinchandBurn

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    thanks everyone. I dont know why I never looked at this forum within SDN!!

    I looked at those online bankouts. WOW!! feel like I have been getting ripped off by Chase at 0.01% APR !!

    Active MD- yes, I think I will try to put away 3mo worth of cash, 6mo is just a lot. I am 'younger'. <35yo. So I am willing to take on some risk. I'd like to mobilize on a good investment or a business if opportunity presented.

    I have a retiremet plan wtih my work. They match a certain percentage. What exactly do you mean by "back door RothIRA". I thought Roths were only for people making <90k a year or 125k a year if married? Then I head that's no longer the case?

    The flip side to a Roth is I heard you get taxed like 40% or something. But when I'm 60+ and take the money out, there's no tax at that point is my understanding?

    The flip side is not doing a Roth and when I want to 'pull' the money out when I'm 65+ as long as I pull out less than a certain amount (like 30k/yr), I'd get tax less anyways right since that would be my 'income' and I'm at a lower tax bracket ?
  9. winkleweizen

    winkleweizen

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    Backdoor roth is where you contribute to a traditional IRA and then later (few days-few months) convert it to a Roth IRA. There are no income limits on doing this. You just pay taxes on the earnings that you made during those few days-months.
  10. Dumb

    Dumb USMLE Tutor - PM me for info

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    Is there a fee for conversion?

    Why isn't everyone above the income limit for Roth doing this?
  11. winkleweizen

    winkleweizen

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  12. Dumb

    Dumb USMLE Tutor - PM me for info

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    Thanks.

    "(Income restrictions on conversions were lifted starting Jan. 1, 2010, so anyone&#8212;regardless of income&#8212;can convert a traditional IRA to a Roth.)"

    This seems to be why everyone doesn't know about it.

    Based on what I understood from the article, there is a tax bite for conversion.


    "The audience for backdoor Roths is a niche, appealing to those earning too much to contribute to Roths directly but not so much that the extra tax savings doesn't seem worth the effort."

    What do you suppose they meant by this?

    "(Ideally you want a mix of taxable, tax-deferred and tax-free accounts to draw from in retirement.)"

    Why not all tax-free accounts?


    "There's one big caveat to the backdoor Roth: the pro rata rule. When you calculate the taxes due on a conversion, you have to take into account all your IRA assets, not just the new $5,000 nondeductible IRA. For example, if you have a traditional IRA with $95,000 of money from a 401(k) rollover (the $95,000 contributions were made on a pre-tax basis), and you make a $5,000 nondeductible contribution to a new IRA, the conversion would be 95% taxable."

    Not sure how this would apply if you only have a RIRA and use the TIRA just for this conversion.
    Last edited: 04.22.12
  13. winkleweizen

    winkleweizen

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    Yup if you have a TIRA you could roll those over to a 401k (if your company allows it), otherwise it might not be worth it, but i think most 401ks allow the roll over.
  14. Stroganoff

    Stroganoff Brown Recluse Protocol

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    Never seen an individual account (IRA) moved to a group account (401k). :confused: Maybe the other way around when leaving a job and transferring the 401k into the IRA.
  15. Heather33Hu

    Heather33Hu

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    Yeah, Agree with you. I have also read this book. No doubt this is crapy book.
  16. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD Partner Organization

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    Nice first post. Your sarcasm meter must be completely broken ya spammer.
  17. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD Partner Organization

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    Ahhh, the backdoor Roth IRA. One of my favorite subjects (and investment accounts.) In fact, if you google "Backdoor Roth IRA" the 5th article in the list is written by me. Here's a link:

    http://whitecoatinvestor.com/retirement-accounts/backdoor-roth-ira/

    Winkleweizen gave a good explanation. You certainly can roll IRAs into 401Ks. I've done it myself. It isn't necessarily always a good idea, but if it then allows you to do backdoor Roths, then it probably is.

    Dumb, the reason you don't want all tax-free accounts is that it costs you too much in current taxes to do it. Why pay taxes now at say 40% when you can pay taxes later at say, 15%? If you convert all of your traditional, SEP, and SIMPLE IRAs, then you don't have to worry about the pro-rata rule.
  18. Dumb

    Dumb USMLE Tutor - PM me for info

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    Still not sure I follow you.
    Ok...on a resident salary, it always makes sense to use tax-free accounts, not only because of the low tax bracket but also the large duration of tax-free compound growth. Right?

    On an attending salary, say you want to do a backdoor Roth. So the point of a backdoor Roth is to "game" the income limit. So we already know that if you are considering a backdoor, you are necessarily in a high tax bracket. Where does the 40% tax come into play? You're above the income limit to contribute to the Roth directly, anyway, so when would you ever pay 40% tax upfront? I still don't see the issue because any time you are considering a backdoor, you will necessarily be in a high tax bracket.

    Bottom line: (my understanding is that) you contribute to a TIRA and then immediately convert to a Roth (as long as you are not holding other pre-tax IRAs). If you do have other pre-tax IRAs, try to roll them into the 401k. If you can't, backdoor doesn't make sense since the conversion tax is pro-rated.
    Last edited: 04.24.12
  19. cincincyreds

    cincincyreds

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    So I should write a book on my advice. Basically the two things that will make you poorer are taxes and inflation, so how do you invest money? The best place to do your outside investing is Vanguard.com as they have the LOWEST FEES! They have a fan following on the internet called bogleheads.

    What you do with your allocation is put your age in the s and p 500 and the rest in bonds. So if you are 30, you would have 70% in stocks and 30% in bonds. Now the interesting part with taxes. You pay 15% capitol gains with stocks and your tax bracket of 36% with bonds, so you want bonds in your tax deferred accounts as it is much cheaper to pay 15% tax versus 36% tax. Now you have to watch taxes each year and reallocate as things change.

    I prefer TIPS bonds over traditional treasurys as they are indexed to inflation.

    Let me show you how taxes are really bad. If you double $1 20 times, you will have $1 million bucks. If you have to pay 30% tax at each double, you only end up with 70,000 bucks. Thus taxes are bad.


    1. Setup a treasurydirect.gov account so you can buy 10k in i bonds and your wife also can get 10k in i bonds for a total of 20k in i bonds. i bonds are linked to cpi inflation and will grow tax free for up to 30 years until you cash them out. Last year CPI inflation was about 3.3%. Hopefully you will be retired in a lower tax bracket when you go to cash out.

    2. This next concept is very confusin, but it is called the backdoor roth ira. I would recommend using Vanguard. Basically put $5k of after tax dollars in a nondeductible ira, then the next day call vanguard and convert it to a roth ira.

    3. max the 401k, if you can have it under umbrella of roth, then do it.

    4. buy s and p 500 through vanguard in you taxable account. Just so you know, since 2000, s and p has returned about 2.5% on average per year, so stocks have been a rather poor performer for the past 12 years. Since 1926 is has been about 8.4%

    5. if you plan kids but don't have then yet, use ohio college advantage for 529 plan as money you put into this will grow tax free and can be used tax free for college.

    6. get a disability policy.

    best of luck with everything.
  20. cincincyreds

    cincincyreds

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    Taxes may not be 15% later, they probably will be higher, so I suggest a better strategy to maybe do a 50:50 as far as paying half the taxes now and half later to decrease risk.
  21. cincincyreds

    cincincyreds

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    By the way, after paying taxes, it is not a total guarantee that you will beat 3.75%. But you can get pretty close. But say you can do 3%, even on 200k of a student loan, .75% is like $1500 bucks. I think $1500 bucks is a small price to pay to be liquid. God forbid you get disabled, I believe the student loans are dischargable.

    Remember, once you pay off that student loan, you can never get that money back.
  22. freaker

    freaker Senior Member

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    The other interesting scenario is that a flat tax could be implemented, essentially making ROTH IRAs useless aside from growing tax free for a period of time. I use ROTHs, but I tend to like IRAs and 401Ks for the guaranteed pay-off on the front end.
  23. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD Partner Organization

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    This is a really important concept to understand. Even if the tax brackets go up, it doesn't mean your personal effective tax rate will (since you get to fill each bracket before moving on to the next one). Attendings are almost always better taking the tax break now (at their marginal rate), especially since they can get some Roth accounts for tax diversification via either backdoor Roths now and via Roth conversions later (especially in the years between retirement and taking social security.)
  24. OMSohyes

    OMSohyes

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    I'm confused. So you're talking about rolling all existing traditional IRA funds into a 401k so you can then deposit into the traditional IRA and roll it right away into a Roth IRA, right? What's the advantage of doing that first part (IRA->401k) before doing the backdoor Roth?

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