invest in roth ira or pay student loans?

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psychopeful

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Hi everyone. This is my first post in finance section. I am a second yr resident and my question is wether to invest in roth ira or should I pay my student loans? I am a little finance naive, but can you invest your roth ira money in something other than stocks? I am little hesitant to get into stock market right now.
Another different question. I am doing my taxes right now (form 1040a). I made about 54000 last yr(including some moonlighting). I just noticed that I have to pay 8000 in taxes(that does not include social security or medicare taxes). That seems alittle high to me, am I forgetting to claim something (credits) on my taxes? thanks in advance.
 
What is the interest rate on your loans?

Yes, you can invest your Roth IRA funds in things other than stocks.
 
my student loan interest is 3.3 %.
How do I go about opening a roth IRA?
thanks.
 
At 3.3%, you're best dragging out your loan payments for as long as possible. For the next few years at least, inflation will likely be more than that.

As for the Roth, there is no shortage of banks that offer them. Google "Roth IRA" and you'll see lots of ads. I have mine with E*Trade and it's been fine.
 
psychopeful said:
Hi everyone. This is my first post in finance section. I am a second yr resident and my question is wether to invest in roth ira or should I pay my student loans? I am a little finance naive, but can you invest your roth ira money in something other than stocks? I am little hesitant to get into stock market right now.
Another different question. I am doing my taxes right now (form 1040a). I made about 54000 last yr(including some moonlighting). I just noticed that I have to pay 8000 in taxes(that does not include social security or medicare taxes). That seems alittle high to me, am I forgetting to claim something (credits) on my taxes? thanks in advance.
Click to expand...

Have you paid taxes at all during the year? That would be the only explanation for owing that much. Otherwise you messed something up.
 
Does your residency program offer a 401(k) or 403(b) or other pre-tax investment vehicle? Contributing to that (up to $15,500) would shave off some of your tax burden and might even knock you down a bracket, especially as a resident.

Back to your original question, if it were me and I were deciding between paying down loans at 3.3% or doing a Roth IRA (at > 3.3%), it'd be Roth IRA, hands down. It's true that both reducing your debts and adding to your assets both have a positive effect on your net worth, but which one increases your net worth faster? And which one is more efficient?

And honestly, on the average resident's salary in the 40's (and higher like in your case with moonlighting), I'd max out a Roth IRA (only $4000 for 2007 and $5000 for 2008) and pay down student loans, at least up to $2500 for the interest deduction.
 
I wanted to drop in a few things that I've discovered over the years here:

1) Be VERY careful which IRA type you choose. The supposed benefits can be quickly zapped out of a ROTH IRA if your investments aren't making a good clip of interest. Remember that you pay taxes on the front end of a ROTH IRA and you pay taxes on the back end of a traditional IRA. In some cases you can come out ahead on a traditional IRA because you have more money working for you inside the investment vehicle. You should really have a professional guide you in the right direction based on your investment risk tolerance. ROTH IRAs are not always the best choice.

Visit: http://www.finance.cch.com/sohoApplets/RothvsRegular.asp for a great calculator for which IRA is right. Adjust the numbers and see what happens.

2) You can truly "self-direct" your IRA into many other investments. I am currently invested in partnerships and companies directly from my IRA (not stocks, but private placements in companies directly). I even own some real estate in my IRA. Go to: www.trustetc.com for more information. If you don't like the stock market right now...this gives you more flexibility (they do also allow you to buy stocks and mutual funds).

Anyway, good luck...

Cheers from the Windy City,
Ryan
 
plauto said:
Have you paid taxes at all during the year? That would be the only explanation for owing that much. Otherwise you messed something up.
Click to expand...

Sorry for the confusion. I have been paying taxes. What I mean is that they have taken about 9000 in taxes and I will be getting like 900 in refund. I was hoping for a higher refund.

My residency does provide 401k but they wont match any figure (we have to be employee for 2 yrs then they will match our contribution). So if I put some money in 401k or 403b then that means I don't have to pay taxes on it now but pay taxes later, Right? What is the benefit then? sorry if I am asking stupid questions.

I got the roth IRA advice, I think I am going to contribute to that in the next few days.
 
psychopeful said:
Sorry for the confusion. I have been paying taxes. What I mean is that they have taken about 9000 in taxes and I will be getting like 900 in refund. I was hoping for a higher refund.

My residency does provide 401k but they wont match any figure (we have to be employee for 2 yrs then they will match our contribution). So if I put some money in 401k or 403b then that means I don't have to pay taxes on it now but pay taxes later, Right? What is the benefit then? sorry if I am asking stupid questions.

I got the roth IRA advice, I think I am going to contribute to that in the next few days.
Click to expand...

It's still a tax-sheltered account that can be used for retirement and not only is it not taxed up front but whatever you contribute is tax-deductible. So if you don't like spending $8100 in taxes, contributing to your 401(k) would lower how much you have to pay.

Even if there's no match, sometimes it could still be worth it.
 
Thanks guys for the feedback and please bear with me. So if I contribute $7000 to 401k, is that mean that my final taxes will be $8100-$7000? That just seems too good to be true.
Another question that I had was, can I contribute to 401k now and claim it on my 2007 tax forms?
 
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psychopeful said:
Thanks guys for the feedback and please bear with me. So if I contribute $7000 to 401k, is that mean that my final taxes will be $8100-$7000? That just seems too good to be true.
Click to expand...

No, your taxes will be based on your income minus your 401k contribution. So if your income is 50K, you will be taxed as if you made 43K.

Another question that I had was, can I contribute to 401k now and claim it on my 2007 tax forms?
Click to expand...

I don't think so, but I'm not sure. However, you can contribute to an IRA for 2007 until April 15.
 
lord_jeebus said:
No, your taxes will be based on your income minus your 401k contribution. So if your income is 50K, you will be taxed as if you made 43K.



I don't think so, but I'm not sure. However, you can contribute to an IRA for 2007 until April 15.
Click to expand...

Ok, you cannot make 401K contributions in the next tax year like you can for an IRA, so that's a no-go for 2007. I ran your information through turbo tax: income 54000 with 9000 paid in taxes, single, no itemized deductions. The refund comes to about $1200.

Are you missing anything? I don't know. Did you put in the student loan interest deduction? Do you own your house? What other professional/educational or other expenses do you have? Are you married? Do you have kids? All of these questions are important.

You can contribute to and IRA, but if you have a qualified plan at work, your options are limited for getting tax benefits from you contribution THIS YEAR. Based on the prior assumptions, putting 4000K into a traditional IRA would boost the tax refund to 2000. Of course, it ties the money up for the next 30+ years, but it increases the refund by $800.
 
psychopeful said:
Sorry for the confusion. I have been paying taxes. What I mean is that they have taken about 9000 in taxes and I will be getting like 900 in refund. I was hoping for a higher refund.
Click to expand...

a lot of people think this way, but you don't want to try to get a bigger refund. Planning to get a big refund is like loaning your money to the government interest free. Instead, try to pay less in taxes, and if you get a smaller refund you're doing it right. It just means you get more of your money when you earn it, instead of letting the government borrow it all year at no benefit to you.
 
thanks guys for yours help.
I have one more question. Can I deduct health related expensis (doctor visits etc)? and if yes, can i do so using form 1040A or do I have to fill out a different form? Thanks.
 
sorry guys, I have one more question.
I paid X amount of my student loans back in 2007 (because I did not apply for economic hardship on time). I have been charged Y amount of interest by my student loan lender in 2007. X>Y. Can I still claim the Y amount on my 1040A, even though I have not specifically paid the Y amount (interest on the loans)?
I will really appreciate if someone responds to this.
 
psychopeful said:
sorry guys, I have one more question.
I paid X amount of my student loans back in 2007 (because I did not apply for economic hardship on time). I have been charged Y amount of interest by my student loan lender in 2007. X>Y. Can I still claim the Y amount on my 1040A, even though I have not specifically paid the Y amount (interest on the loans)?
I will really appreciate if someone responds to this.
Click to expand...
Your loan provider should have mailed you (or made the form available on their website) a 1098-E "Student Loan Interest Statement," which has the info you're looking for.

Edit: I think I misread your question. I don't officially know the answer, but if you're asking if you can claim X + Y instead of just X, I'm leaning towards no. Box 1 states "Student loan interest received by lender," and in my case it is just X in that box. And from what I've read, the maximum adjustment is $2500 even if X is more than that.
 
psychopeful said:
thanks guys for yours help.
I have one more question. Can I deduct health related expensis (doctor visits etc)? and if yes, can i do so using form 1040A or do I have to fill out a different form? Thanks.
Click to expand...

you can deduct them only if they are over a certain amount. If they are a couple hundred bucks...not. Usually it'a about a certain % of your income, in the order of thousands of $. If you use turbotax or taxcut they'll tell you whether you qualify or not. That deduction is mostly meant for people who pay their own health insurance out of pocket. sorry!
 
plauto said:
you can deduct them only if they are over a certain amount. If they are a couple hundred bucks...not. Usually it'a about a certain % of your income, in the order of thousands of $. If you use turbotax or taxcut they'll tell you whether you qualify or not. That deduction is mostly meant for people who pay their own health insurance out of pocket. sorry!
Click to expand...
There's no minimum. It's an above-the-line adjustment. I had $100 in Citibank ThankYou Points for my credit card rewards in 2007 that I converted to a student loan payment. I deducted $100 off my AGI on my 1040A.

No minimum. If it's $1, it's $1. There is, however, a maximum of $2500 and there's also some income phase-outs where you won't be able to deduct any of it if your income is too high.
 
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