Financial considerations

[anthoncr]

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This is a repost from years back. I'm graduating and off to residency this July but to my knowledge non of this has changed. Mad props to all you non-trads, I can tell you it's worth it, don't get discouraged.

~T

Just a heads-up of a financial strategy to pay for school and legally minimize your tax burden BEFORE you start medical school.

The idea is to spread out your income earned during your pre-MD years to include the time you are in school. This works exceptionally well if you own a home. This is 100% legal according to my conservative accountant who has done my taxes for the last ten years.

Here's the plan. While you are working and going through the application process MAX OUT YOUR 401k, (currently about $13,000/year). If you are not working and married I think, (check with your tax advisor), your wife can contribute to your IRA, thereby lowering her tax burden. Either way, the idea is to store pre-tax dollars in a retirement fund. Roth IRAs don't count since they are after-tax.

Now, once you start school you can take a distribution from your retirement account. At our school a typical 1098-T is $25,000. This means I can "earn" $25,000 just to get to zero income. It turns out I can take a distribution from my 401k for school and it counts as "earned" income AND I don't pay the 10% penalty. That's $25,000 tax free.

Now the beauty is you still qualify for student loans, since you have zero income, (retirement funds and home values do not affect your student loan eligibility).

Disclaimer: I have no vested interest in your financial well-being. I am also not a tax consultant so talk to your adviser before making any decisions about tax burden. I have researched this to the best of my ability and have no reason to believe this is illegal, unethical or just plain wrong.

One other thing: Medical school is even better than I imagined. Please don't get discouraged, medicine needs folks who have had a taste of freedom and nonetheless decided to pursue the caretaking of humanity.

~Tony

 

[etf]

i've got a question, probably for your accountant, but also for anyone else who has been through the student loan process - do your assets (such as non-retirement brokerage accounts) affect the amount of aid you can receive? or is it strictly based on income?

 

[The White Coat Investor]

i've got a question, probably for your accountant, but also for anyone else who has been through the student loan process - do your assets (such as non-retirement brokerage accounts) affect the amount of aid you can receive? or is it strictly based on income?

Yes, your assets count against you in the FAFSA equations. I do not believe your retirement accounts count against you though.

 

[Doctor Bagel]

Yes, your assets count against you in the FAFSA equations. I do not believe your retirement accounts count against you though.

That's right. Also, I believe your primary residence isn't included either. And if your income is below a certain level (around $49k for a single person) and you are eligible to file an EZ or A tax form, assets aren't included in calculating your need.

 

[Twitch]

To OP: If you took out $25k from 401k you should have had to pay 15% tax on it (assuming single tax payer status).

Yes it is true that it wouldn't affect your student loans, however, in general it is not a good idea to withdraw money from retirement instruments. It gets harder to put money into it later on.

But if you must, an alternative strategy is to take out just enough so as to pay nothing in federal taxes. So let's say you take out $10k. Take away your personal exemption, and standard deduction and you should end up in the 0% tax bracket.

If you're married and your spouse works, the ball game changes completely. Yes it is true that you can invest in retirement instruments even if you don't work but your wife does. If your spouse doesn't make a whole lot, I'd suggest considering Roth IRA since you're contributing at an advantaged tax rate.


Since someone mentioned it - these are the tax shelters that are not penalized for EFC purposes on your student loans:

1) Primary Residence
2) Retirement savings (however income earned during the tax year to contribute to retirement does hurt your EFC despite it's non-taxable income status). Nevertheless, after the year in which you earned it, it won't effect EFC since at that point it is in sheltered status.
3) Anymore anyone know?

Non-retirement instruments need to be sheltered and it's hard to do if you have sizable account(s) from a prior career. IIRC, capital assets hurt your EFC to a lesser degree than straight up income.


Here is another strategy. If you have a sizable IRA holding and are a fulltime student with no income (or spousal income), well say hello to rollover (tax free) into Roth. The trick is to trickle money into the Roth instrument over time so as not to trigger any federal taxes.