ROTH IRA = Great Deal

Actually traditional IRAs might work out better for medical school expenses because you can withdraw from them without tax penalties for approved educational expenses.

Also, most people don't need to take out private loans anymore because of the GradPlus loan program. These are federal loans with a fixed interest rate of 8.5% (this usually winds up being lower based on lender incentives). I opted to go that route instead of withdrawing money from my retirement savings, but I don't think there's necessarily a right answer there.

I'm not sure exactly how educational withdrawals from your IRA work, but I'd guess you'd probably have to use them for tuition. The means more of your loans will go directly to your bank account instead of to the school, and you could use that for a down payment. You can also use a traditional IRA for purchasing your first home.

Also, be sure to check with your financial aid office to see if they'll increase your budget. $900 is pretty low to start out with -- my school gives around $1700/month for living expenses (this includes books and supplies but you can get by with spending maybe $300/year on those except for board expenses). They can't officially increase your budget to support your wife or kids, but they can increase it for daycare if your spouse works. They can also increase it for miscellaneous reasons, so it's worth a try to ask and see if you get anything.

Here is IRA info on educational withdrawal from your IRA.

http://www.irs.gov/publications/p970/ch09.html

I wouldn't jack around with a roth, traditional or any other retirement vehicle right now...congress can change the regs at any point, some even have sunset provision. Perhaps numberically its a good deal, but given the financial situations most of us are in the availability of the money trumps all. Unless your very organized, which i am not.

I cashed in my roth last year to payoff credit cards, even after the penalty and taxation it made sense. However, had i not contributed in the first place......

I wouldn't take money out of the retirement instruments. Once you start making the big bucks you won't qualify to save under a Roth IRA.

For instance the phase out for Roth IRA in 2008 is $101,000 for a single filer. As you can see it's pretty low compared to the average salaries that doctor's make.

To add to what I said above:

IRA phases out much earlier ($75k). So forget about being able to contribute to that. ROTH IRA married is higher (~$156k) but still a limit you could easily run over.

Is the measly $15.5k/yr you contribute to your 401k going to be enough for how you want to retire?

It's easier to put money in now (assuming you qualify), since we we won't be able to later.

Twitch said:

I wouldn't take money out of the retirement instruments. Once you start making the big bucks you won't qualify to save under a Roth IRA.

For instance the phase out for Roth IRA in 2008 is $101,000 for a single filer. As you can see it's pretty low compared to the average salaries that doctor's make.

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Absolutely agree with this. It makes much more sense to take money out of other types of retirement accounts before you take it out of a Roth because you pay no tax on the earnings of a Roth IRA. Distributions from Traditional IRAs can be used for educational expenses, and 401ks can be rolled into traditional IRAs.

elderjack21 said:

I have about 20k in ROTH IRAs now. The question really becomes: Do I want to own or rent during medical school? If I buy a home, I have to use the ROTH IRA as a down payment. If I rent I will throw away another 35k in rent over the next four years. So...taking 20k and turning it into 55k over four years (obviously very rough math not taking into consideration market flux, additional home owning fees, etc), isn't a bad short term plan.

The 20k in ROTH IRAs is pretty a pretty small amount to rely upon in retirement, so, I am not too worried about using it up for a home. Every situation would be different though.

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A couple of things. The housing market is pretty volatile right now. The next 4 years in housing is short term trading. IMHO, a pretty risky transaction, from an ROI perspective. If you're sure you want a house there are other ways (e.g. 80/20 loan) without tapping into retirement instruments.

The other thing - 20k might seem like a small amount now, but add the time value of money. Compounding interest is a beautiful thing. Use excel or one of the online calcs to see how much that would grow.

Think twice (then some more) about taking money out of retirement.

moving to finance forum where this discussion is more appropriate

lets say i start a vanguard roth IRA... over a period of 40 years, what is the average yearly return i will get? 8-10%?

ronaldo23 said:

lets say i start a vanguard roth IRA... over a period of 40 years, what is the average yearly return i will get? 8-10%?

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if you put the bulk of your money into the vanguard total stock market index fund, then probably yes.

is that my best bet? or there any other safe funds to get higher average returns?

Don't withdraw from a Roth to buy a house. A Roth is the single best retirement account (without a match) a med student/resident could ever have. On average buying a house as an investment is a break-even proposition over 3-4 years. Realtor fees and fix-up expenses usually cancel out any appreciation.

Regarding throwing away rent, bear in mind that home owners don't throw away money for rent....they throw it away for interest and for property taxes. While those are tax-deductible, most med students/residents are unable to actually get the deductions because they don't itemize, they take the standard deduction. In effect, we all throw away rent money. It is called paying for a place to stay. The only people who don't do it are those who have paid off their mortgage, and I doubt you'll do that during med school.

A Roth IRA and a "vanguard roth IRA" aren't guaranteed to return anything. A reasonable expectation for the overall stock market annual return is 3-7%+ inflation over the long term. Over the last 70 years stocks have returned ~10%/year BUT THERE IS NO GUARANTEE. If there was a guarantee, they wouldn't have paid nearly as much. Keep in mind that a Roth IRA (or a 401K or a traditional IRA or whatever) is a type of account with its own special rules and then inside of that account you have to select an investment to put your money in, like a mutual fund, individual stocks, bonds etc.

Roth IRAs are nice because there are no mandatory distributions when you get old, you can withdraw contributions at any time, you can withdraw earnings for first house, medical expenses, or education expenses, they grow tax-free and after age 59 1/2 you can withdraw all of it for anything without any penalties or taxes. But I think it would be stupid for most med students/residents to actually withdraw the money for anything but retirement.

No Ronaldo...there are no safer funds that give higher returns. Investing, in general, is a trade-off of safety for EXPECTED return. Higher risk USUALLY equals higher reward OVER THE LONG TERM.

Retirement accounts are for retirement. It's a bad idea to use them for any reason other than that, no matter how "small" the account may be and no matter how high our incomes might be as attendings. Physicians, I believe, are among the top (if not the top) group of high-earning people who are -- on average -- financially clueless. If you want a first house down payment, save up for it in a separate savings account for that goal. If you want to pay off consumer debt, aggressively chip away on it with income. And for educational expenses? Use GradPLUS or even private loans.

Twitch said:

I wouldn't take money out of the retirement instruments. Once you start making the big bucks you won't qualify to save under a Roth IRA.

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QFT. It's possible Congress will raise the ceiling so that high income earners will be able to contribute to a Roth, but until/if that happens, it makes sense to take full advantage while one is a student/resident.

elderjack21 said:

The 20k in ROTH IRAs is pretty a pretty small amount to rely upon in retirement, so, I am not too worried about using it up for a home. Every situation would be different though.

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$20k is HUGE in a Roth.

At 10% average annualized growth, $20k will turn into $348k after 30 years. After 40 years, it will be $905k.

As future/current professionals, maybe a good goal would be aggregate retirement balances of $2-3M minimum in our account, and ideally a high amount in our spouse's account as well. And honestly, much higher can easily be done.

But having a "mere" $20k in our 20's can grow tremendously by the time we're in our 60's. Even after inflation, it's still well worth leaving funds where they are.

Twitch said:

A couple of things. The housing market is pretty volatile right now. The next 4 years in housing is short term trading. IMHO, a pretty risky transaction, from an ROI perspective. If you're sure you want a house there are other ways (e.g. 80/20 loan) without tapping into retirement instruments.

The other thing - 20k might seem like a small amount now, but add the time value of money. Compounding interest is a beautiful thing. Use excel or one of the online calcs to see how much that would grow.

Think twice (then some more) about taking money out of retirement.

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Agreed.

ActiveDutyMD said:

Don't withdraw from a Roth to buy a house. A Roth is the single best retirement account (without a match) a med student/resident could ever have. On average buying a house as an investment is a break-even proposition over 3-4 years. Realtor fees and fix-up expenses usually cancel out any appreciation.

But I think it would be stupid for most med students/residents to actually withdraw the money for anything but retirement.

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QFT.

I have about $15k in a 401(k) from my current job. I'll be starting med school next year and I was wondering how much I can take out to pay for tuition. I know a lot of people have said it's a bad idea to withdraw from retirement funds to pay for medical school, but, in my opinion, taking out from a 401(k) that is only earning about 10% interest rather than taking out a private loan at about the same rate makes sense.

adigiorgio said:

I have about $15k in a 401(k) from my current job. I'll be starting med school next year and I was wondering how much I can take out to pay for tuition. I know a lot of people have said it's a bad idea to withdraw from retirement funds to pay for medical school, but, in my opinion, taking out from a 401(k) that is only earning about 10% interest rather than taking out a private loan at about the same rate makes sense.

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Unless you roll the 401K to a Traditional IRA first, you will be charged a 10% early withdrawal fee and still have to pay taxes on the withdrawal.

So, roll the 401K to a TIRA, then pull out qualified withdrawals (read above)

adigiorgio said:

I have about $15k in a 401(k) from my current job. I'll be starting med school next year and I was wondering how much I can take out to pay for tuition. I know a lot of people have said it's a bad idea to withdraw from retirement funds to pay for medical school, but, in my opinion, taking out from a 401(k) that is only earning about 10% interest rather than taking out a private loan at about the same rate makes sense.

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i personally wouldn't withdraw from my 401k to pay for school, but i guess it all depends on your circumstances. money in my 403(b) is pretty much all in a stock index - it could be up 10% this year, up 30% next year, and down 50% the year after that, but over decades it'll probably be a lot more than i put in now. plus, like suze orman say's (i know, i hate her too, but right is right) "people will give you loans for your education, but no one will give you loans for your retirement" (unless of course you count reverse mortgages - i don't...)