Roth IRA available to USUHS students?

[xmsr3]

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I was hoping I could get two questions answered regarding Roth IRAs.

1. Are USUHS students eligible to get a Roth IRA?

2. Does a Roth IRA only allow investing in mutual funds, or does allow one to invest in individual stocks?

 

[SirGecko]

Dude. Google.

https://www.usaa.com/inet/ent_utils/McStaticPages?key=investments_iras_roth

 

[BigNavyPedsGuy]

Dude. Google.

https://www.usaa.com/inet/ent_utils/McStaticPages?key=investments_iras_roth

But why spend 10 minutes on google, when in a matter of seconds a friggin econ major who isn't even on active duty yet can start yet another thread on the military medicine forum?

 

[silverhorse84]

But why spend 10 minutes on google, when in a matter of seconds a friggin econ major who isn't even on active duty yet can start yet another thread on the military medicine forum?

 

[xmsr3]

But why spend 10 minutes on google, when in a matter of seconds a friggin econ major who isn't even on active duty yet can start yet another thread on the military medicine forum?

In all fairness econ majors aren't taught the ins and outs of retirement accounts, (that would be a finance majors).😀

 

[The White Coat Investor]

I was hoping I could get two questions answered regarding Roth IRAs.

1. Are USUHS students eligible to get a Roth IRA?

2. Does a Roth IRA only allow investing in mutual funds, or does allow one to invest in individual stocks?

Yes. The income is taxable so it counts for Roth IRAs (including a spousal.)

Roth IRAs can be opened at brokerage accounts where you can buy individual stocks. (I'd encourage you not to though. I suggest you open your accounts at Vanguard.com. It doesn't take an economics degree to figure out why, just an hour of your time on the website or with a good investing book.)

 

[The White Coat Investor]

But why spend 10 minutes on google, when in a matter of seconds a friggin econ major who isn't even on active duty yet can start yet another thread on the military medicine forum?

Cut the guy some slack. It's a lot more reasonable question than previous ones. Just cause the guy is a little anal about planning is no reason to rip him for asking questions that are a lot more interesting to answer than "I hate loans-Should I join the military to pay for med school?"

 

[DrMetal]

Cut the guy some slack. It's a lot more reasonable question than previous ones. Just cause the guy is a little anal about planning is no reason to rip him for asking questions that are a lot more interesting to answer than "I hate loans-Should I join the military to pay for med school?"

You just like showing off your financial mojo.

If we're going to start non-milmed threads, then I have a topic. Two-hand fret tapping: A cheap way of playing fast, or a legitimate technique that should be incorporated into every guitarist's style? Discuss amongst yourselves . . .

 

[a1qwerty55]

I was hoping I could get two questions answered regarding Roth IRAs.

1. Are USUHS students eligible to get a Roth IRA?

2. Does a Roth IRA only allow investing in mutual funds, or does allow one to invest in individual stocks?

I think it's a good question.

As answered above.

1. Yes

2. Yes

P.S. You can also do the TSP - (essentially a 401K without a match). Up to 15K/yr - pretax money. Do both if possible, Roth being first priority.

 

[xmsr3]

I think it's a good question.

As answered above.

1. Yes

2. Yes

P.S. You can also do the TSP - (essentially a 401K without a match). Up to 15K/yr - pretax money. Do both if possible, Roth being first priority.

Actually research into TSP is why I posted the question in the first place. I read many people say max out your Roth IRA then your TSP, so I did research into both.

Initially the tax deferral benefits of TSP aren't that great, (if all you can save is $1-2K after maxing out Roth, and tax bracket is 15%) but once you graduate and become a Resident then one makes enough money to max out the TSP, ($16500) and the tax benefits become pretty big, (25% tax bracket=$4125 in less taxes). This benefit rises to nearly $5500 when one becomes an attending and enters the second highest tax bracket, 33%.

Add up the total benefits over an entire career and you can save $200K in tax savings, (money that's invested in the S&P 500 index with .018% expense ratio).

While investing in the S&P 500 may not be as sexy as investing in small caps or other investment vehicles, the S&P 500, since its inception in 1926, has averaged 11% annual returns, and that's counting the great depression.

So what's the real value of deferring $200K in taxes over your career? Well the average annual tax savings is $5200, (including one's 4 years at USUHS and lower tax bracket as a resident) so plugging that into the TSP account balance calculator, 11% expected returns and taking the time horizon out to age 62, (mandatory retirement) one finds that the actual value of that $200K is $6 million!

Now of course that is assuming one stays in that long, but as has been pointed out here, even if you leave earlier than that, (most do) the benefits of TSP are fantastic!

Heck, lets say it turns out you absolutely hate the military and don't want to stick around until retirement, (8-9 years away after commitment at USUHS is up), your TSP is still yours to keep!

And if you maxed it out every year you could, then you have about $46K in tax savings over 15 years, which should be worth about $170K, if the S&P500 continues to grow at its historical norm.

Of course these 2 above scenarios are extremes, most people don't seperate as soon as possible and most don't stay until 62.

If you choose to stay only until retirement, (20 years=24 counting USUHS) your TSP would be worth $636K.

Thanks everyone for the great info. It seems that everyone on these forums was right, Roth IRA first, then TSP to the max is the road to riches!😀

P.S
The above numbers are just the actual value of the tax savings provided by TSP should one invest them in the S&P 500. They represent the "gift" uncle sam is giving you by allowing you to shelter income.

The actual value of the TSP account (which represents the growth of the $16500 contributed each year), after the time periods discussed above would be the following:

Seperation as soon as possible: (maxing out TSP for 10 years): $598K
Seperation as 20 years are up, (earliest retirment, maxing out TSP for 20 years): $2.39 Million
Seperation at mandotory retirement: (Max out TSP for 34 years): $12.14 Million

P.S.S
Yes, I do realize I have too much time on my hands😀

 

[notdeadyet]

Of course these 2 above scenarios are extremes, most people don't seperate as soon as possible and most don't stay until 62.

The first is the norm, the second is the extreme.

 

[jarsab89]

Bah never mind, not worth arguing about.

 

[JenaC]

xmsr3,

This may help you: http://www.rothirarules.net

Remember, contributions rules are changing for the 2010.

I was hoping I could get two questions answered regarding Roth IRAs.

1. Are USUHS students eligible to get a Roth IRA?

2. Does a Roth IRA only allow investing in mutual funds, or does allow one to invest in individual stocks?

 

[xmsr3]

xmsr3,

This may help you: http://www.rothirarules.net

Remember, contributions rules are changing for the 2010.

Thanks for the link. Aren't the contribution limits still $5K for 2010, (they then increase each year based on inflation)? I looked up changes in roth IRA and it appears that the only major change was the rules about converting an IRA into a Roth IRA.

 

[dwb8p]

Initially the tax deferral benefits of TSP aren't that great, (if all you can save is $1-2K after maxing out Roth, and tax bracket is 15%)

You can still manage to max your Roth & TSP during school. O1 gross income is $54k/year with $22.5k being nontaxable (BAH, BAS). I'm maxing my Roth and TSP = $21.5k/year, because my annual expenses are only $18.5k. This is possible mainly because I'm single, debtless, and share a residence with 3 others. And I have plenty of spending money left over.

Add up the total benefits over an entire career and you can save $200K in tax savings, (money that's invested in the S&P 500 index with .018% expense ratio).

Where are you finding an S&P500 fund with 0.018% expense ratio? Do you mean 0.18%?

So what's the real value of deferring $200K in taxes over your career? Well the average annual tax savings is $5200, (including one's 4 years at USUHS and lower tax bracket as a resident) so plugging that into the TSP account balance calculator, 11% expected returns and taking the time horizon out to age 62, (mandatory retirement) one finds that the actual value of that $200K is $6 million!

Not really. You aren't considering taxes on dividends and capital gains.


Also, starting in 2011 there will be a Roth option in TSP that will function as a Roth 401k, which will be great for us as future physicians. It is much more advantageous for us to pay taxes now while in an incredibly low tax bracket as compared to when we retire as established civilian physicians. It will have the same $16.5k limit, but consist of post-tax money, and we can contribute during our entire military career even if we become ineligible for Roth IRA contributions (due to exceeding the income limits as an attending).
http://www.tsp.gov/forms/oc06-5.pdf

 

[xmsr3]

You can still manage to max your Roth & TSP during school. O1 gross income is $54k/year with $22.5k being nontaxable (BAH, BAS). I'm maxing my Roth and TSP = $21.5k/year, because my annual expenses are only $18.5k. This is possible mainly because I'm single, debtless, and share a residence with 3 others. And I have plenty of spending money left over.




Where are you finding an S&P500 fund with 0.018% expense ratio? Do you mean 0.18%?



Not really. You aren't considering taxes on dividends and capital gains.

dwb89, your frugality is astonishing! Kudos for setting a gold standard for savings! Do you mind telling us the specifics of your housing, (most expensive budget item) arrangement? Do you rent a house with 3 other people? Or is there some other arrangement you worked out?

Regarding the S&P fund expense ratio, no that was not a typo, it really is .019%, which is 19 cents/$1000. Here's the link proving it:

http://www.tsp.gov/rates/fundsheet-cfund.pdf

In terms of capital gains and taxes on dividends, I didn't think of that, but typically index funds like this don't have a lot of turnover, (since they S&P 500 doesn't change all that often) so the amount of capital gains should be minimal. As for dividend taxation, I don't know just how much that will decrease the value of the tax savings, but lowering your AGI with it is still a great way to save cash, especially for you, the master of frugality.😀

 

[dwb8p]

dwb89, your frugality is astonishing! Kudos for setting a gold standard for savings! Do you mind telling us the specifics of your housing, (most expensive budget item) arrangement? Do you rent a house with 3 other people? Or is there some other arrangement you worked out?

Yes, rent a house in Bethesda with 3 others. I know several others with similar arrangements. I pay ~800/mo including utilities and cable.

Regarding the S&P fund expense ratio, no that was not a typo, it really is .019%, which is 19 cents/$1000. Here's the link proving it:

http://www.tsp.gov/rates/fundsheet-cfund.pdf

In terms of capital gains and taxes on dividends, I didn't think of that, but typically index funds like this don't have a lot of turnover, (since they S&P 500 doesn't change all that often) so the amount of capital gains should be minimal. As for dividend taxation, I don't know just how much that will decrease the value of the tax savings, but lowering your AGI with it is still a great way to save cash, especially for you, the master of frugality.😀

Oh, you're referring to the TSP C-Fund, not an outside fund. Okay; however, I am still incredibly confused by your calculation.

 

[xmsr3]

Yes, rent a house in Bethesda with 3 others. I know several others with similar arrangements. I pay ~800/mo including utilities and cable.




Oh, you're referring to the TSP C-Fund, not an outside fund. Okay; however, I am still incredibly confused by your calculation.

I take it you mean my calculation stating that the $200K in tax savings is worth $6 million. Well it turns out I was wrong about that. I mistakenly put $4776/year, (the 38 year average of the total career tax savings of $181,500, into the catchup box.

The real value of the tax savings over the longest possible career is $2.75 million dollars. This basically means that, over the longest possible career in the military,(starting at USUSH and lasting 38 years) a person would save an average of $4776 per year in taxes they don't have to pay, (if they max out TSP every year).

If you invested $4776 per year into the S&P 500 for 38 years and it averaged its historic annualized returns, you would have $2.75 million at the end.

My basic point was that Saving a lot on taxes is a very good thing, especially if you invest it and let the investment grow over several decades.


I wanted to show just how good those invested savings where, that the invested value of these tax savings would be enough to make you a millionaire in their own right. Thus, this is the true power and value of the TSP.

Sorry for all the math, as I said before, I got too much time on my hands😀

P.S
thanks for the info regarding room mates and house sharing, it sounds like a pretty smart way of minimizing living expenses.

 

[NavyFP]

I won't dispute the math of how much you would save blah, blah, blah, blah, blah. Should you do TSP? Yes.

The question to ask is if you have to do one, which is more important?

For the Roth, your after tax money grows tax free, so when you take it out after age 59 1/2, there are no tax consequences.

For the TSP you lower your taxes this year and pay when you withdraw the (hopefully) larger amount sometime after age 59 1/2.

I would suggest that taking the tax deduction now is more valuable than the promise of tax benefits later. We all know that taxes are certain to rise and the temptation of Congress to allow all of those untaxed earnings go untaxed will prove just too tempting. And it will tax those who have saved (the rich) and leave those who have not (the poor) alone.

Just something to consider.