Financial Planning for Dummies

[ThePlockIsHot]

One of my favorite parts of this forum are the discussions on money handling and making smart investments, and I wanted to throw a question out there. (I actually just opened a USAA bank account after reading an earlier thread).

Just graduated med school and have matched into my dream program out in the bay area and can't wait to start in a year, but I'm still back east about to start my med prelim.

My question is this: I've just been given about $6,000 in monetary gifts from family and friends for graduating. Though it is awesome, I wanted some advice on what you guys thought the best thing to do with it would be. I have about 180k in loans at a fixed 6.5% interest rate which I'll either forbear or start paying back in 6 months. Is the best move to just pay it in a lump to loans? Save it and use it to pay loans monthly? Open an IRA? Buy a bunch of gold? (and by bunch I mean 3 oz)

Not sure what your thoughts are, but I appreciate any advice very much. I'd love to make my money work for me a little bit, and don't want to be one of those docs who seems to have no clue what is going on with his/her money.

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[pgg]

Unless you have other cash savings you might want to just stick it in a basic savings account so it'll be there when your transmission falls out on the freeway next year. Most financial advisors agree that a small emergency fund is needed before anything else.

 

[proman]

Agree with PGG. You'll also need cash to move and get a place to live.

 

[imfrankie]

Agree with PGG. You'll also need cash to move and get a place to live.

I'd put it in a Roth IRA. You can only contribute so much each year to these vehicles. And until recently folks that made above a certain limit could not contribute at all. Roth has tremendous tax and many other advantages. Hit it every year you can, cause when US federal taxes go up to pay for all our spending...your income on those instruments will be tax free baby.

Solid dividend earning stocks, basic sage of Omaha investing. Gold could crater.

My two.

 

[proman]

I'd put it in a Roth IRA.

Not a bad idea, and what I personally did (but I had more cash to work with). Since you can withdraw Roth contributions without penalty, one approach would be to put it in a Roth and keep it as cash.

 

[pgg]

I'd put it in a Roth IRA. You can only contribute so much each year to these vehicles. And until recently folks that made above a certain limit could not contribute at all.

Until recently - what's changed? AFAIK after your income passes $179K (married filing jointly) you can't contribute to a Roth at all.

 

[deleted307836]

In 2010 Congress removed the income limits for CONVERSIONS to Roth IRAs from Traditional IRAs. So anyone can now convert to a Roth IRA and pay all taxes upon conversion. The salary caps are still in effect for contributions to Roth IRAs however. So I believe to take advantage of this you would need to start a traditional IRA every year and convert to a Roth the next. Someone please correct me if I'm wrong on this last point.

Also agree that putting it in savings for emergencies is probably your best option depending on how much savings you have currently.

 

[Arch Guillotti]

In 2010 Congress removed the income limits for CONVERSIONS to Roth IRAs from Traditional IRAs. So anyone can now convert to a Roth IRA and pay all taxes upon conversion. The salary caps are still in effect for contributions to Roth IRAs however. So I believe to take advantage of this you would need to start a traditional IRA every year and convert to a Roth the next. Someone please correct me if I'm wrong on this last point.]

This is correct. I would contribute to the traditional, let it sit for a little while for the dust to settle, then roll it over. Worked for me.

Link

 

[pgg]

In 2010 Congress removed the income limits for CONVERSIONS to Roth IRAs from Traditional IRAs. So anyone can now convert to a Roth IRA and pay all taxes upon conversion. The salary caps are still in effect for contributions to Roth IRAs however. So I believe to take advantage of this you would need to start a traditional IRA every year and convert to a Roth the next. Someone please correct me if I'm wrong on this last point.

I also thought that if you make over $179K/year, contributions to a traditional IRA aren't tax deductable.

If you then convert that to a Roth the next year, is that money taxed twice?

 

[proman]

I also thought that if you make over $179K/year, contributions to a traditional IRA aren't tax deductable.

If you then convert that to a Roth the next year, is that money taxed twice?

No, since you've paid income tax prior to putting it in the traditional IRA. It's a loophole that everyone should utilize until it gets closed.

 

[RabbMD]

PPG,

Correct. You contribute every year to a non-deductible IRA and immediately convert that to a roth before any earnings can accumilate. You can do this yearly until they change the laws for both yourself and a spouse if you have one. There is a catch however. If you have any other typer of pretax IRA (traditional, rollover, sep-IRA) in your name already the conversion is taxed accoring to form 8086 in a prorata fasion. Basically it means that if you have a $95,000 in a sep IRA and you contribute $5,000 to a nondectible IRA when you do the conversion of that $5,000 your total IRA is aggregated to $100,000 of which you have a basis of $5,000 that in effect makes 95% of that $5000 converted taxable. The solution is to either pay that tax each year and keep ironclad records of each years basis, or to have no other pretax IRAs as of Dec 31st of each year.

Some 401k plans accept rollovers from IRAs, so that is one option, as the IRS does not consider 401k money in the IRA prorata conversion rule.

Read thefinancebuff.com for the best explanation I have seen on this manuever.

 

[pgg]

Interesting.

I'll have to look into whether or not makes sense to convert my SEP. I'm not sure it does, since my 1099 income is taxed at an incredibly high tax rate today. Might be best to defer those taxes to the very distant future.


Thanks for the reference to thefinancebuff.com

http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html

 

[RabbMD]

Ppg, yes a large sep would make it more difficult/less beneficial. However, if you are eligable to open a solo 401k, you could roll your sep into it and be in the clear. Something to cobsider.