Pay off part of loans w/ Inherited IRA while in school?

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meowfish6868

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I inherited a traditional IRA somewhat recently and need to begin taking my RMD soon, but I'm unsure how I should use the money. Right now, I could pay off nearly 80% of my loans if I withdrew all of the funds over the next two years. There is no penalty for withdrawing the money, except that however much I withdraw in a given year is considered income, so I'll have to pay taxes on it. I won't have any income for tax years 2017 and 2018, so withdrawals will put me in the 15% federal tax bracket and I'm certain I'll be able to pay the taxes I owe on them.

Other tidbits to consider:
  • Taking the RMD will only add to my income as a resident and as an attending.
  • I have a small traditional IRA from my job prior to medical school.
  • I have enough in a high yield savings account to cover emergency expenses and residency-related expenses (aways, applications/interviews, and moving). I'd be using these funds to pay taxes as well.
  • I plan on maxing out a Roth IRA throughout residency.
Would it be smarter to withdrawal as much as possible during these years and pay off some of my student loans, rather than invest the Inherited IRA? I'm sure it's theoretically possible to invest in a fund with returns > the interest rate on my loans, but I likely won't put any effort into making that happen. I'm going to try to talk with a financial advisor soon, but would appreciate some input!

Tl;dr: Use inherited IRA to pay off 80% of current student loan balance and pay ~12K maximum over the next two years OR invest some/all of the IRA while drawing RMD at higher tax brackets.

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I inherited a traditional IRA somewhat recently and need to begin taking my RMD soon, but I'm unsure how I should use the money. Right now, I could pay off nearly 80% of my loans if I withdrew all of the funds over the next two years. There is no penalty for withdrawing the money, except that however much I withdraw in a given year is considered income, so I'll have to pay taxes on it. I won't have any income for tax years 2017 and 2018, so withdrawals will put me in the 15% federal tax bracket and I'm certain I'll be able to pay the taxes I owe on them.

Other tidbits to consider:
  • Taking the RMD will only add to my income as a resident and as an attending.
  • I have a small traditional IRA from my job prior to medical school.
  • I have enough in a high yield savings account to cover emergency expenses and residency-related expenses (aways, applications/interviews, and moving). I'd be using these funds to pay taxes as well.
  • I plan on maxing out a Roth IRA throughout residency.
Would it be smarter to withdrawal as much as possible during these years and pay off some of my student loans, rather than invest the Inherited IRA? I'm sure it's theoretically possible to invest in a fund with returns > the interest rate on my loans, but I likely won't put any effort into making that happen. I'm going to try to talk with a financial advisor soon, but would appreciate some input!

Tl;dr: Use inherited IRA to pay off 80% of current student loan balance and pay ~12K maximum over the next two years OR invest some/all of the IRA while drawing RMD at higher tax brackets.

I think some of the considerations would need to include how much you have in the inherited IRA and how long it would last at yearly RMD. Also, what rates are your loans at currently. You could consider the payoff of the loans like a bond fund with a guaranteed return of that interest rate while you paid it off. As a resident you'd also qualify for some tax breaks for interest on your student loans that you won't get as an attending.
 
I think some of the considerations would need to include how much you have in the inherited IRA and how long it would last at yearly RMD. Also, what rates are your loans at currently. You could consider the payoff of the loans like a bond fund with a guaranteed return of that interest rate while you paid it off. As a resident you'd also qualify for some tax breaks for interest on your student loans that you won't get as an attending.

I think even with a really small return on the inherited IRA, it'd last till I'm in my sixties. My interest rate is around 6% and if I spend the IRA over the next two years, I'll start residency with <40k in student loan debt. I think my loan servicer applies payments towards my interest first, so I'd qualify for the tax break on interest this year. Being able to pay my loans off by the end residency is really enticing, but I'm worried that I'm overlooking how much the IRA could grow if I just took the RMD.
 
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I think even with a really small return on the inherited IRA, it'd last till I'm in my sixties. My interest rate is around 6% and if I spend the IRA over the next two years, I'll start residency with <40k in student loan debt. I think my loan servicer applies payments towards my interest first, so I'd qualify for the tax break on interest this year. Being able to pay my loans off by the end residency is really enticing, but I'm worried that I'm overlooking how much the IRA could grow if I just took the RMD.

A guaranteed 6% isn't bad. That would free up more money to put into a Roth during residency as well as when you are an attending.

You should also look at the asset allocation in the ira. If it's primarily bonds, you might want to consider a stock heavy portfolio to grow, especially if you just take rmds. Those rmds will also hurt the growth potential of the ira.
 
You say you won't have income for calendar years 2017 and 2018. Definitely take advantage of that in whatever ways possible. I'd convert your small traditional IRA to a Roth IRA and "get away with" a tax-free conversion. :horns: The standard deduction for 2017 is $6350, and the personal exemption is $4050 = $10,400. With no/low income, you can also take advantage of the entire student loan interest deduction of $2500. So that's $12,900 of tax-free income to play with in some combination of your inherited IRA's RMD as well as Roth IRA conversion. (You can do partial Roth IRA conversions and split it over multiple years.)

So, at the very least -- and double check my math and all the tax magic foo -- I'd pay at least $2500 towards student loan interest for 2017 and 2018 as well as convert $10,400 of your traditional IRA. (And obviously you'd have to figure the RMD in those numbers). So all of this is tax free.

Anything above that is up to you. Surely there's a "sweet spot" where the amount of taxes you pay on the IRA income is offset by the return of paying down student loans. And if you withdraw too much, it'll obviously bump you up into the 10%, 15%, 25% tax brackets. I'm sure some algebra that many have forgotten +/- Excel can give you the "sweet spot" of exactly how much is worth it.

Emotionally speaking, nothing wrong with destroying some ~6% loans and building that momentum through residency. By the time your first attending paycheck hits, you'll have a much smaller mountain to climb and destroy. It's up to your comfort level on debt.
 
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You say you won't have income for calendar years 2017 and 2018. Definitely take advantage of that in whatever ways possible. I'd convert your small traditional IRA to a Roth IRA and "get away with" a tax-free conversion. :horns: The standard deduction for 2017 is $6350, and the personal exemption is $4050 = $10,400. With no/low income, you can also take advantage of the entire student loan interest deduction of $2500. So that's $12,900 of tax-free income to play with in some combination of your inherited IRA's RMD as well as Roth IRA conversion. (You can do partial Roth IRA conversions and split it over multiple years.)

So, at the very least -- and double check my math and all the tax magic foo -- I'd pay at least $2500 towards student loan interest for 2017 and 2018 as well as convert $10,400 of your traditional IRA. (And obviously you'd have to figure the RMD in those numbers). So all of this is tax free.

Anything above that is up to you. Surely there's a "sweet spot" where the amount of taxes you pay on the IRA income is offset by the return of paying down student loans. And if you withdraw too much, it'll obviously bump you up into the 10%, 15%, 25% tax brackets. I'm sure some algebra that many have forgotten +/- Excel can give you the "sweet spot" of exactly how much is worth it.

Emotionally speaking, nothing wrong with destroying some ~6% loans and building that momentum through residency. By the time your first attending paycheck hits, you'll have a much smaller mountain to climb and destroy. It's up to your comfort level on debt.

Pretty sure you can't do that conversion on an inherited IRA, but rather only on a traditional IRA or a spousal beneficiary IRA (im assuming a resident didn't have a spouse over age 59.5, given the rmds).
 
Pretty sure you can't do that conversion on an inherited IRA, but rather only on a traditional IRA or a spousal beneficiary IRA (im assuming a resident didn't have a spouse over age 59.5, given the rmds).
Yep, you're right. I was referring to the regular traditional IRA, not the inherited traditional IRA:
meowfish6868 said:
  • I have a small traditional IRA from my job prior to medical school.
 
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