Opening an IRA and withdraw while in med school?

[orangeblue]

So it's tax time:

I owe about $500 in tax to Uncle Same.

Option 1) I could just pay $500 and that's money "lost"
Option 2) Open an IRA, Contribute the Max amount ($5500) . Since the tax on $5500 is around $500(for me), it will waive the $500 tax that I owe. I will have to pay taxes on it when I withdraw but If I plan to withdraw in medschool when I have 0 income (education exception is allowed for early withdraw), the income tax percentage will be very low since I will have no income.


Anyone been in a similar boat or want to share a few cents?
PS: Do loans count as taxable income?

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[BombsAway]

if you put it in a roth IRA and withdraw it later (if I remember correctly) you would only pay capital gains on the amount your money earned. There are two scenarios that make me think this may be a waste of time.
1) Investing can be tricky for some people (thats why theres an Edward Jones in every town), you could very well lose more than your 500 over a short term investment.
2) I don't think your income tax bracket has any affect on your capital gains rate, i'm pretty sure it's a constant. You lose $5500 of liquidity right now with the hopes of saving $500 of liquidity later? I'd just pay the tax bill or find some weasley way to write things off.

 

[atomi]

Seems like a lot of effort for relatively little return. In the grand scheme of things when we are talking about going into medicine, $500 is nothing.

 

[esob]

Tax bracket does impact both short and long term capital gains rates. Also, if you put it in a roth you will get no tax benefit this year, so that's not really what you are looking for. Investing can be tricky but if you want relatively hands-off with decent returns you should try a robo investor. Schwab has one now, though the two pioneers are Wealthfront and Betterment. I personally deal with both. Wealthfront has lower fees if you don't have a high balance, but the fees even out at about 100k and then they start getting better with Betterment.

 

[GreenDuck12]

Just to be clear, you are talking about a traditional IRA and not a Roth. When you withdraw from a traditional IRA for qualified expenses (education is one of them) those funds will be counted as income and will be taxed accordingly. Loans are not considered income as you are not truly making money but will be expected to pay it back. Essentially, the strategy you are describing above is to lower your taxable income by putting it into a tax deferred account and withdrawing when your income is lower for medical school. This is not an uncommon strategy for aspiring graduate students to use with 401k, 403b, 457 accounts (it is one that I am planning on using). You will want to make sure that the benefits outweigh the headache it will cause later. If you are only looking to do this for one year, you stand to see a very limited financial gain.

 

[QofQuimica]

Just to be clear, you are talking about a traditional IRA and not a Roth. When you withdraw from a traditional IRA for qualified expenses (education is one of them) those funds will be counted as income and will be taxed accordingly. Loans are not considered income as you are not truly making money but will be expected to pay it back. Essentially, the strategy you are describing above is to lower your taxable income by putting it into a tax deferred account and withdrawing when your income is lower for medical school. This is not an uncommon strategy for aspiring graduate students to use with 401k, 403b, 457 accounts (it is one that I am planning on using). You will want to make sure that the benefits outweigh the headache it will cause later. If you are only looking to do this for one year, you stand to see a very limited financial gain.

Not to mention that, if the market crashes this year, you have no time to wait for it to recover, and then maybe you will see a very unlimited financial loss. As in, bye-bye $5000.

If I may be so bold as to suggest this, OP, please don't try to figure out how to avoid taxes without help. Your level of knowledge about this topic is just enough to get you into trouble. If you want to optimize your taxes (which is a worthwhile goal assuming you have the rest of your financial plan optimized also, and is especially worthwhile if you're paying a lot of taxes), then you should hire a CPA. However, if you're at a 10% marginal or even effective tax rate, while you may FEEL like you're paying a lot of taxes, trust me: you're not. Not to mention that if you have $5500 in cash lying around, then why on earth are you worrying about paying a $500 tax bill? Just pay the $500 you owe and save the other $5000 in an online bank account or money market so that you won't have to risk losing it and you can easily access it whenever you need it.

if you put it in a roth IRA and withdraw it later (if I remember correctly) you would only pay capital gains on the amount your money earned. There are two scenarios that make me think this may be a waste of time.
1) Investing can be tricky for some people (thats why theres an Edward Jones in every town), you could very well lose more than your 500 over a short term investment.
2) I don't think your income tax bracket has any affect on your capital gains rate, i'm pretty sure it's a constant. You lose $5500 of liquidity right now with the hopes of saving $500 of liquidity later? I'd just pay the tax bill or find some weasley way to write things off.

Just to clarify: you pay ORDINARY INCOME TAX on an a tIRA withdrawal, NOT capital gains tax. And capital gains tax rates, while flatter than ordinary income tax rates, DO have a few brackets that DO depend on your overall income. There's still an advantage for high-income people since capital gains rates are lower than ordinary income tax rates.

 

[GreenDuck12]

QofQuimica brings up two excellent points. The first is that if you don't fully understand what you are doing you really run the risk of incurring unintended taxes / penalties / fees if you do not manage the withdrawal process correctly. Another point is that if you invest your $5500 tIRA contribution in equities and bonds, with such a short time horizon, you stand a higher risk of seeing a loss (the SP 500 was down roughly 15% this year) losing any potential savings and possibly costing you more money than your original tax bill. If you do decide to go this route, I would encourage you to look at putting funds in a stable money market account within a tIRA that are designed to preserve the value of your contribution. Ultimately, I would not recommend doing this unless you are prepared to learn more about the rules and/or are years away from using the funds. Personally, I would prefer having the $5000 in a savings account available to be used.

 

[QofQuimica]

QofQuimica brings up two excellent points. The first is that if you don't fully understand what you are doing you really run the risk of incurring unintended taxes / penalties / fees if you do not manage the withdrawal process correctly. Another point is that if you invest your $5500 tIRA contribution in equities and bonds, with such a short time horizon, you stand a higher risk of seeing a loss (the SP 500 was down roughly 15% this year) losing any potential savings and possibly costing you more money than your original tax bill. If you do decide to go this route, I would encourage you to look at putting funds in a stable money market account within a tIRA that are designed to preserve the value of your contribution. Ultimately, I would not recommend doing this unless you are prepared to learn more about the rules and/or are years away from using the funds. Personally, I would prefer having the $5000 in a savings account available to be used.

Let me put it this way: I max out all my retirement accounts every year. Over a few decades, I expect to see some serious appreciation, and I even have enough diversification that I could avoid drawing down those accounts for years when it would mean locking in a loss. But the money I intend to use as a cushion for my transition to (and during) fellowship over the next couple of years? I have that in an online savings account earning ~1% interest right now. You don't f*** with the market using the money you need right now.

 

[GreenDuck12]

I'm not disagreeing with you...

Let me put it this way: I max out all my retirement accounts every year. Over a few decades, I expect to see some serious appreciation, and I even have enough diversification that I could avoid drawing down those accounts for years when it would mean locking in a loss. But the money I intend to use as a cushion for my transition to (and during) fellowship over the next couple of years? I have that in an online savings account earning ~1% interest right now. You don't f*** with the market using the money you need right now.

 

[QofQuimica]

I'm not disagreeing with you...

I know. I'm doing a CFP certification (though the only account I manage is my own), and I get a little passionate about this stuff if you couldn't tell. 🙂

 

[GreenDuck12]

That's fantastic; we need more CFPs who can help pre-meds and post-med sift through everything that's out there. Personal finance, particularly tax efficiency and investing theory, are my hobbies, but as a pre-med I really only get to use the former and not the latter.

I know. I'm doing a CFP certification (though the only account I manage is my own), and I get a little passionate about this stuff if you couldn't tell. 🙂

 

[velua]

This sounds like a bad idea. Just pay your taxes. Btw, you need to have the right type of income to contribute to an IRA (e.g., wages, not investment income). I do recommend opening a Roth IRA while your taxes are low. You leave the money in there and never pay taxes (this is money you invest after paying taxes on your income this year). Even if you don't have an emergency fund, you can put money in there in cash (money market fund) or short term bond funds. If you never need the money, great, save more money for your emergency fund in a traditional savings account and exchange your Roth money to a stock/bond fund. If you do need the money, you can withdraw contributions (but not earnings) penalty-free. If you don't put money into the Roth, those are contributions you'll never be able to make.

The downside is rates at online savings accounts are better than rates on money-market funds available in an IRA at an institution like Fidelity or Vanguard.

 

[Ad2b]

Btw, you need to have the right type of income to contribute to an IRA .

Please stop giving bad advice. That is also tacitly wrong. Anyone with any type of income can open an IRA.

 

[velua]

Open or contribute to?

https://www.irahelp.com/slottreport/what-compensation-making-ira-contribution

You can't contribute to an IRA if your only source of income is dividends/capital gains from mutual funds/stocks in a taxable investment account, or interest from a savings account.

 

[QofQuimica]

Odds are good that the OP is not living on dividend income from his/her trust fund. Especially since s/he is trying to devise ways to save $500 on taxes. 😉

Ultimately, it comes down to this: there is no such thing as a free lunch. Uncle Sam wants your money; if you have earned income of any type, he usually gets his share. And while avoiding paying taxes is a reasonable consideration for those with high incomes, it shouldn't be the driving consideration in *anyone's* overall financial plan. Focus on the larger goal here, whether it's financial independence (my case), paying for medical school (OP's case), or some other goal. The minimization of taxes is just a sideshow, not the main act. I mean, the easiest way to avoid paying income taxes is to be unemployed. But personally, I'd rather work enough to have a decent standard of living, and just pay the darn income tax.

 

[velua]

I completely agree. But I think you should know what you're getting into before investing. Plus, plenty of med students come from wealthy backgrounds, so you never know. (And if this is the case, low tax years are a fantastic time to sell and rebuy some of your taxable investments for a reset on your cost basis.) That said, if you already have an IRA and you make $50 in a taxable account, it's good to know you can't just move that $50 over to your IRA.

I like your other point. The purpose of investing is not to minimize taxes. It's to maximize post-tax gain. Keeping taxes low is typically a good plan, but it's not the only consideration. I'd rather turn $100k into $1m and pay 50% taxes than turn $100k into $200k and pay no taxes, for example.

 

[QofQuimica]

I'd rather turn $100k into $1m and pay 50% taxes than turn $100k into $200k and pay no taxes, for example.

Sign me up as well. 🙂

 

[BluMist]

... going to medical school? 🙄

Sign me up as well. 🙂

 

[Citron]

Just a caution, it's not unusual for an investment to lose 10% or more within a year (i.e. $550 out of $5,500). That's said, it's just a matter of paying $500 now, or risking losing that same amount at any point when you're not looking. I'd highly recommend you at least read a retirement book and/or speak to a professional. Invest when you're informed and ready. You still have until April 15 to make your decision.
I think a pre-med forum is quite the wrong place to ask for financial advice. Frankly, any financial advice is pretty much similar to a medical advice (no one can/should tell you what drug to take and how much without knowing your history, allergies, etc.); no one can tell you how much and what to invest in unless they know your income level, risk appetite, goals, and investment horizon. And, even if there are some finance professionals wandering in this forum, they are not supposed to give you specific advice without due diligence, in accordance to professional ethical standards.

 

[QofQuimica]

... going to medical school? 🙄

Been there, done that. I'm talking about netting half a mill after taxes.

 

[velua]

You can still put money in an IRA and just put it in cash and not worry about losing 10% or more. This expands your tax-advantaged space. Once you get more money saved in cash, you take the money in an IRA and exchange it for stocks or bonds. See more here: https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund

I am not suggesting you "invest" the money, just put it in tax-advantaged space. The only drawback is a money market fund at an investment firm will net you around 0.1% interest, as compared to the 1% from taxable online savings accounts.

 

[tai9588]

I know. I'm doing a CFP certification (though the only account I manage is my own), and I get a little passionate about this stuff if you couldn't tell. 🙂

Awesome and sorry for stealing the thread: What is your thought then on using saving money to pay for part of medical school at least versus taking out 100% loan and the loan forgiveness program after? (My estimated cost for medical school is 360K )

 

[GreenDuck12]

Federal graduate school loans the annual interest rate about 6.8%. This is significantly more than any savings, money market or CD will earn. If you have savings it would be in your interest to use it instead of taking out loans. When it comes to loans, the power of compounding works against. I would do everything in your power to minimize the amount of loans you need to take out.

Awesome and sorry for stealing the thread: What is your thought then on using saving money to pay for part of medical school at least versus taking out 100% loan and the loan forgiveness program after? (My estimated cost for medical school is 360K )

 

[QofQuimica]

I think tai may be asking about using retirement funds to pay for med school, not just regular savings. Unless s/he has a six figure bank account just lying around, in which case, um, hi there. 😀

Awesome and sorry for stealing the thread: What is your thought then on using saving money to pay for part of medical school at least versus taking out 100% loan and the loan forgiveness program after? (My estimated cost for medical school is 360K )

This is an individual question where the "right" answer will depend on your goals and circumstances. The problem, especially if you're a young nontrad in your 20s, is that you probably don't have much money saved up, and any money you take out of your retirement accounts loses the major advantage you get from allowing it to compound tax-deferred (in a traditional retirement account) or tax-free (in a Roth) over a period of 3-4 decades. Whereas, if you're already in your 40s like I am, and you already have six figures saved up, neither of those issues is as big of a concern. But in that case, you have other concerns, namely a much shorter amount of time to rebuild your next egg/pay off the loans, and less time to give the savings to compound. You will need a much higher savings rate if you start saving for retirement in your 30s or 40s than you will if you start saving in your 20s. Other factors (ex. do you have a spouse who will be working while you're in school to help pay living expenses, kids' college funds/house down payment/other large financial goals to save up for, etc.) can also affect your decision.

I would suggest that if you have't ever sat down with a financial planner to discuss your options that you consider doing this. Look for a fee-only planner, meaning this person will charge only by the hour and will not receive any commissions for selling you anything. Here's a place to start looking for one: http://www.garrettplanningnetwork.com For the record, I have no affiliation with them and no one in particular that I'm recommending. As I said above, I've decided to invest the time into taking all the CFP courses, so I do my own planning. And my situation is different than most other people's since I have no family and no loans.

I will also say that good, reliable advice is not cheap. But nothing about this med school process is; you're already talking about spending over a third of a million dollars over the next several years. In the interest of being pound wise and not penny wise, it may be worth paying a few hundred or even a few thousand dollars now to set a good financial plan into place for accomplishing this.

Sorry if this seems like a non-answer, but no one can really tell you what you "should" do without knowing all the details of your situation. And there is likely more than one reasonable option you could consider to pay for medical school.

 

[velua]

I would recommend saving the money from paying an advisor and just buying a book. I can recommend The Bogleheads' Guide to Investing. (They have a similar book regarding retirement planning.) You can get it for under $10 on Amazon. Alternatively, you can go to the Bogleheads forum/wiki page and find basically all the relevant information for free. (I have read this book, but I have no affiliation with the authors.)

A financial planner will try to make you a regular client. S/he will likely recommend overly complicated portfolios so you feel dependent when in reality, investing is quite simple (not necessarily easy). S/he will also push you for further meetings and to take 2% of your portfolio every year. Unless you're actually wealthy and do have a very complex financial situation (multiple properties, large family, whatever), I wouldn't pay them. They're sort of like personal trainers: try to get you to stick with them by giving you a ridiculously complicated routine instead of just sticking with the basics.

That said, don't make any rash financial decisions until you fully understand everything.

 

[GreenDuck12]

Ahh, in that case, I'll defer to your response. It gives a good summary of some of the many considerations that should be considered. I may have to PM you for advice one of these days...

I think tai may be asking about using retirement funds to pay for med school, not just regular savings. Unless s/he has a six figure bank account just lying around, in which case, um, hi there. 😀


This is an individual question where the "right" answer will depend on your goals and circumstances. The problem, especially if you're a young nontrad in your 20s, is that you probably don't have much money saved up, and any money you take out of your retirement accounts loses the major advantage you get from allowing it to compound tax-deferred (in a traditional retirement account) or tax-free (in a Roth) over a period of 3-4 decades. Whereas, if you're already in your 40s like I am, and you already have six figures saved up, neither of those issues is as big of a concern. But in that case, you have other concerns, namely a much shorter amount of time to rebuild your next egg/pay off the loans, and less time to give the savings to compound. You will need a much higher savings rate if you start saving for retirement in your 30s or 40s than you will if you start saving in your 20s. Other factors (ex. do you have a spouse who will be working while you're in school to help pay living expenses, kids' college funds/house down payment/other large financial goals to save up for, etc.) can also affect your decision.

I would suggest that if you have't ever sat down with a financial planner to discuss your options that you consider doing this. Look for a fee-only planner, meaning this person will charge only by the hour and will not receive any commissions for selling you anything. Here's a place to start looking for one: http://www.garrettplanningnetwork.com For the record, I have no affiliation with them and no one in particular that I'm recommending. As I said above, I've decided to invest the time into taking all the CFP courses, so I do my own planning. And my situation is different than most other people's since I have no family and no loans.

I will also say that good, reliable advice is not cheap. But nothing about this med school process is; you're already talking about spending over a third of a million dollars over the next several years. In the interest of being pound wise and not penny wise, it may be worth paying a few hundred or even a few thousand dollars now to set a good financial plan into place for accomplishing this.

Sorry if this seems like a non-answer, but no one can really tell you what you "should" do without knowing all the details of your situation. And there is likely more than one reasonable option you could consider to pay for medical school.

 

[New_Slang]

It isn't money "lost" when it's taxes - it was what you should have paid throughout your employment and your employer didn't withhold enough from your paycheck.

Messing with IRAs can have unforeseen consequences. When you put money in one, don't treat it like a short term investment and don't go into it knowing you're going to withdraw. Open a (free) account with Fidelity and you can call and talk to an advisor.

 

[QofQuimica]

I would recommend saving the money from paying an advisor and just buying a book. I can recommend The Bogleheads' Guide to Investing. (They have a similar book regarding retirement planning.) You can get it for under $10 on Amazon. Alternatively, you can go to the Bogleheads forum/wiki page and find basically all the relevant information for free. (I have read this book, but I have no affiliation with the authors.)

A financial planner will try to make you a regular client. S/he will likely recommend overly complicated portfolios so you feel dependent when in reality, investing is quite simple (not necessarily easy). S/he will also push you for further meetings and to take 2% of your portfolio every year. Unless you're actually wealthy and do have a very complex financial situation (multiple properties, large family, whatever), I wouldn't pay them. They're sort of like personal trainers: try to get you to stick with them by giving you a ridiculously complicated routine instead of just sticking with the basics.

That said, don't make any rash financial decisions until you fully understand everything.

1) There is more to financial planning than just investing. Prioritizing different financial goals and coming up with realistic plans to reach them is the most important part of the process. No book can tell you what your life's priorities are, nor how you should rank achieving them.

2) Many so-called planners do charge a percentage of assets under management and/or get paid by commission. The former group are ridiculously expensive (and the expense is worse the more assets you have), while the latter group are essentially salespeople. That's why I recommended a fee-only planner to develop an overall comprehensive financial plan. Basically, these are people you pay by the hour for their advice. Using a planner requires a more significant initial investment, but once developed, the plan should require only minor updating unless your life goals change significantly.

3) Most people don't fully understand anything about finances, let alone everything. While it is possible to be a complete do-it-yourselfer (and I am), most people will not or cannot invest the time needed to become competent in any area of financial planning, let alone in every area. And the problem with piecemealing it is that, unless somebody tells you, you do not know what you do not know. For example, one of the absolute most important considerations for a young physician should be to mitigate the catastrophic risk of early disability that would prevent you from working in your occupation. Protecting your ability to earn future income is vastly more important in most cases than choosing specific investments. And yet, how many of you have read books about or otherwise given much thought to optimizing your disability insurance?

 

[orangeblue]

You can still put money in an IRA and just put it in cash and not worry about losing 10% or more. This expands your tax-advantaged space. Once you get more money saved in cash, you take the money in an IRA and exchange it for stocks or bonds. See more here: https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund

I am not suggesting you "invest" the money, just put it in tax-advantaged space. The only drawback is a money market fund at an investment firm will net you around 0.1% interest, as compared to the 1% from taxable online savings accounts.

Could you clarify this for me? IRA account could be cash or investments (like money market, bonds, stocks)?

 

[velua]

It's true there's more to financial planning than investing. I don't expect most med students to be in a position to invest anyway. But if they're saving money for an emergency, I was just recommending sticking that money in a money market fund inside a Roth IRA. If they need the money, they can withdraw it penalty-free. If they don't, then that increases their tax-advantaged space (which otherwise can't be made up later). Once they get a job and save cash in a taxable account (i.e., a bank account) for a rainy day, they can exchange the cash within the IRA for stocks (or bonds).

Could you clarify this for me? IRA account could be cash or investments (like money market, bonds, stocks)?

If you open a Roth IRA at a financial firm, you'll need to invest in certain funds within the account. These can be mutual funds that invest in stocks or bonds. These can be risky and should only be done if you have a long-term time frame. But you can also "invest" in a money market fund, which is cash. You won't lose your principal, but you won't be making 1% interest either. (Actually this differs from firm to firm a little bit. At Vanguard, cash is their money market fund. At Fidelity, you can just transfer cash to the account and let it sit there without investing it in any type of fund.)

I think it's also possible to open an IRA at a place like Ally, but I wouldn't recommend that. Their options are awfully limited. Btw, if you open an account from Fidelity, you'll get a phone call and they'll try to sell you on their expensive managed funds. They're sales people, though they do have good low cost index funds too.

 

[orangeblue]

It's true there's more to financial planning than investing. I don't expect most med students to be in a position to invest anyway. But if they're saving money for an emergency, I was just recommending sticking that money in a money market fund inside a Roth IRA. If they need the money, they can withdraw it penalty-free. If they don't, then that increases their tax-advantaged space (which otherwise can't be made up later). Once they get a job and save cash in a taxable account (i.e., a bank account) for a rainy day, they can exchange the cash within the IRA for stocks (or bonds).


At Fidelity, you can just transfer cash to the account and let it sit there without investing it in any type of fund.)

Yes, I have more saving that just the amount that will go into the IRA ($5K) but either way, it will be mostly sitting in a saving account anyways. So why not just put in a Roth-IRA, get the tax-advantage (it's still $500, vs. $0) , ya know?

 

[velua]

You don't get the tax advantage now from putting into a Roth IRA, only traditional IRA. But a Roth IRA grows tax free, meaning when you withdraw in several decades, you pay no taxes (unlike tIRA). You will pay taxes when you withdraw from a traditional IRA. So a traditional makes sense if you're in a high tax bracket, Roth if you're in a low tax bracket (unless finances are tight and you really need the tax break). You can withdraw contributions (but not earnings) penalty-free from a Roth, but not from a tIRA (so only a Roth makes sense for an emergency fund). You also need to make sure you make money to contribute to an IRA, and aren't just dumping in savings that you've held forever if you didn't have a job.

Before doing anything, you should really read as much as possible on IRAs.

 

[QofQuimica]

Yes, I have more saving that just the amount that will go into the IRA ($5K) but either way, it will be mostly sitting in a saving account anyways. So why not just put in a Roth-IRA, get the tax-advantage (it's still $500, vs. $0) , ya know?

Because you don't get a current tax advantage by putting money into a Roth IRA. That is post-tax money. The benefit of using a Roth IRA is that your contribution grows tax free while in the IRA, and that is advantageous for money that you want to invest over the long term or leave to your heirs. It is not advantageous for money that you plan to use for medical school or some other large purchase in the next few years. Just because the market increases in value over time doesn't mean it's a smooth uphill ride. Market returns swing up and down. There is no law saying that the market must be up at the time that you're starting med school and need the money. If you put $5000 into a Roth now and your investment is worth $2500 when you go to take it out in a year or two, you'll definitely be wishing you'd left well enough alone.

 

[orangeblue]

Yes I have a full time job at the average salary for a college grad. I will be contributing money I made.
@QofQuimica I'll be putting it in a traditional IRA not Roth,(TYPO!) I wouldn't be necessary needing /counting to take that 5000k out to pay medschool bills. but I just wanted to know , if I did take them out for some holiday or w/e, why would I not be taxed on it in a lower income tax rate since that year when Im in school, I'll be making very little money?

 

[velua]

If you pull money out of a tIRA, you'll be penalized 10% I believe. If you pull money (contributions, not earnings) out of a Roth IRA, you won't. But a Roth is for the long haul. Don't do it unless it's an emergency fund and you're "investing" in cash. If you plan to use the money before retirement, just keep it in a bank account.

 

[GreenDuck12]

Pulling money out of a tIRA will trigger federal and state income taxes and a 10% penalty IF the money is not used for a qualified expense.

If you pull money out of a tIRA, you'll be penalized 10% I believe. If you pull money (contributions, not earnings) out of a Roth IRA, you won't. But a Roth is for the long haul. Don't do it unless it's an emergency fund and you're "investing" in cash. If you plan to use the money before retirement, just keep it in a bank account.

 

[GreenDuck12]

As a disclaimer I am not a tax professional.

You most likely would be taxed at a lower income rate as your income will most likely have dropped.. For example if you are currently earning 50k per year, you will find yourself in the 25% federal tax bracket. If you save $5500 per year in a tIRA, you are reducing your taxable income and reduce your tax liability by $1375 (+ state taxes if applicable). During medical school, if you are not earning money but withdraw money from an tIRA, that money would be taxed at the state and federal level. Education expenses are "qualified expenses" meaning they are not subject to a 10% penalty imposed by the IRS for withdrawals before the age of 59 and 1/2. Up to $6300 is exempt from federal income taxes due to the standard deduction (thank you IRS). This means that you may be able pull $6300 per year from without owing taxes (assuming single filer and no state income tax). An addition $9225 can be pulled from a tIRA at the 10% federal income tax bracket, for a total of $15525 in withdrawals and have a tax liability of $922.5 in federal taxes (+ state income taxes). This is roughly a 5% rate. You could pull an additional $28225 at the 15% federal income tax rate, for a grand total of $43750 with a federal tax liability of $5156 (+state taxes). This is a federal tax rate of 11.7%. This a strategy for deferring your tax liability in the present till a later time when you are able to be taxed at a more favorable rate.

Yes I have a full time job at the average salary for a college grad. I will be contributing money I made.
@QofQuimica I'll be putting it in a traditional IRA not Roth,(TYPO!) I wouldn't be necessary needing /counting to take that 5000k out to pay medschool bills. but I just wanted to know , if I did take them out for some holiday or w/e, why would I not be taxed on it in a lower income tax rate since that year when Im in school, I'll be making very little money?