Save for house or invest in Roth IRAs?

[Laker]

We have about 2 years left of residency and spouse is entering a ROAD specialty. Have about 7k in savings...and ability to get close to 20k in a savings account in 2 years if we keep maxing out roth ira contributions in each of our accounts.

Should we quit investing in roths to maximize our savings for a house downpayment in 2 years...or keep investing in the roths while we still qualify. In 2 years we won't qualify for roths anymore, and we wanted to maximize our tax free future income.

what do you all think?

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[mgdsh]

We have about 2 years left of residency and spouse is entering a ROAD specialty. Have about 7k in savings...and ability to get close to 20k in a savings account in 2 years if we keep maxing out roth ira contributions in each of our accounts.

Should we quit investing in roths to maximize our savings for a house downpayment in 2 years...or keep investing in the roths while we still qualify. In 2 years we won't qualify for roths anymore, and we wanted to maximize our tax free future income.

what do you all think?

Personally, in your shoes I'd keep contributing to the Roth IRA.

After you've completed residency, as long as you can 'live like a resident' for ~2 more months, you should be able to come up with a decent down payment in no time.

That's the best of both worlds IMO.

Another option is to moonlight a bit here and there in the next 2 years.

 

[xanthines]

Yeah, definitely keep the Roth IRA contributions going!

If you're really in pinch for money to buy a house (which I can't imagine given the combo of current housing market and a "ROAD" physician), you can withdraw from from IRA to put towards a house "penalty"-free. You will of course, lose value in your retirement fund which some may call a penalty.

http://www.bankrate.com/brm/itax/tax_adviser/20060217a1.asp

-X

 

[The White Coat Investor]

ROAD?

Roth IRAs will soon be unavailable to you due to income limits, but you can always save for a house. In a pinch, you can even raid Roth IRA contributions and under some circumstances earnings penalty and tax-free for a house purchase. I wouldn't...but you could. IMHO the two most important things a resident can do financially is 1) Insure against catastrophe (Life if you have dependents and disability insurance even if you don't) and 2) Max out personal and spouse Roth IRAs. It's tough to save more than $10K/year as a resident.

Edit: NM. Found it. Road is radiology ophthalmology anesthesia dermatology AKA the "lifestyle" specialties.

http://www.medschoolhell.com/2007/03/16/what-exactly-are-the-road-specialties/

 

[FruitFly]

Yeah, definitely keep the Roth IRA contributions going!

If you're really in pinch for money to buy a house (which I can't imagine given the combo of current housing market and a "ROAD" physician), you can withdraw from from IRA to put towards a house "penalty"-free. You will of course, lose value in your retirement fund which some may call a penalty.

http://www.bankrate.com/brm/itax/tax_adviser/20060217a1.asp

-X

Yep. Just what I was thinking when I read the topic. It's not an either-or with a Roth IRA for a first home. It's more of a balancing act.

You could also withdraw funds, if necessary, for major medical expenses, and other issues.

 

[Laker]

thanks for all the advice...basically just confirms my initial thoughts..we tentatively planned on maxing roths while we can...and saving everything else...barring any major hiccups over the next 2 years...we could max the roths and manage to save close to our goal of 20k...it will take luck and dicipline...as I make about as much as my spouse who is the resident.

 

[perilou]

I thought I read somewhere that the income limit for Roth IRA's was going to be removed in 2010. Did anyone else hear this?

 

[Laker]

I thought I read somewhere that the income limit for Roth IRA's was going to be removed in 2010. Did anyone else hear this?

If I am not mistaken, I think that applies to rollovers from traditional IRAs to Roth IRAs. I think that donald trump could rollover his traditional IRA to a roth IRA without problems. Also, I think you can spread out the tax liablity over 2 years. Please correct me if I am incorrect.

 

[Stroganoff]

If I am not mistaken, I think that applies to rollovers from traditional IRAs to Roth IRAs. I think that donald trump could rollover his traditional IRA to a roth IRA without problems. Also, I think you can spread out the tax liablity over 2 years. Please correct me if I am incorrect.

You're correct, but one can spread it out for as many years as one wants, but only do one conversion per year.

So consider this scenario as applied to SDN:

Person is in undergrad or in the work force and will enter full-time medical school soon but has $25,000 in a traditional IRA. Person would like to convert to a Roth IRA while in medical school, but if done in one year, would be taxed on all of the $25,000.

So say this person will not have ANY income during medical school. This person is independent and qualifies for the full $5450 (as of 2008) standard deduction + $3500 (as of 2008) personal exemption -- none of which would be taxed. So that means that if he/she converts up to $8950 of the traditional IRA to Roth IRA per year of medical school, that the conversion would be tax free! No taxes going in [to the traditional IRA], and no taxes going out [of the Roth IRA].

Someone correct me if I'm wrong.

 

[TJames]

I agree - the Roth IRA is the way to go.

 

[Richard B]

Don't do Either!

Something that many doctors don't think about are the expenses associated with opening a practice. I would wholeheartedly suggest you save your money. Try to save for a down-payment on buying a small building or, as they become more popular, a medical condo.

The money you invest into your property can easily lead to your retirement, either in the form of rent paid to you or simply selling the property. Do everything you can to buy an office space.

The biggest mistake doctors make is they lease when they could have purchased space, and I'm talking about otherwise very successful doctors.

 

[nu2004]

Don't do Either!

Something that many doctors don't think about are the expenses associated with opening a practice. I would wholeheartedly suggest you save your money. Try to save for a down-payment on buying a small building or, as they become more popular, a medical condo.

The money you invest into your property can easily lead to your retirement, either in the form of rent paid to you or simply selling the property. Do everything you can to buy an office space.

The biggest mistake doctors make is they lease when they could have purchased space, and I'm talking about otherwise very successful doctors.

Sounds like you know what you're talking about, but in this case it may not apply. It's less and less common for doctors fresh-out-of-residency to open their own practices... and the ROAD specialties are particularly conducive to physician groups. The OP's spouse will likely join a group, and thus the issue of lease/buy medical workspace will be moot.

That said, I would echo the idea to max out the Roth. There are always tricks to minimize your down payment, and occasionally there are incentives such as down payment assistance available, depending on where you buy (as I just posted in the "buying real estate while in med school" thread).

What would your other option (besides contributing to the Roth) be, anyway? If you just put that income into a savings account you will still be paying tax on it, just as with the Roth, and you will lose out on the long-term tax protection that the Roth offers. I suppose this would be more of a "sure bet" for saving up since it would shield you from the market volatility that your Roth would experience. However, after a few years of watching my investments do relatively poorly, I am hopeful that we have a couple of good years coming.

 

[Richard B]

I believe that even if you aren't going to have your own practice, which is still possible after three years, you should still consider real estate. Work your three years and go out on your own if you choose. You only need 10% for an SBA 504 loan so it could very much be in financial range in a few years.

The problem with any IRA is you can't touch it again until you retire. The great thing about having your money in real estate is you can get it out whenever you want without penalty.

Think of it this way...when you are ready to retire and all your money is in your IRA and you start pulling money out to cover your living expenses your principle will continue to drop and you will accrue less and less interest as your draw more and more money. This is of course assuming your interest alone isn't enough to cover your living expenses. I have watched too many people play the stock market game and lose. Guess where everyone goes when the stock market tanks? Real Estate. I love it when the market is all over the place, like it has been for the past several months.

On the other hand, if you own medical space and retire, you can rent your space or practice to a doctor. Now not only is your equity continuing to increase, but you are hopefully pulling in enough money to cover your expenses. I was talking with a doctor last week who has done this 6 times. Not what I'm suggesting, but it is done.

I too was tricked into believing that owning a house was the American dream. But I can tell you that owning a house can happen at any time. When you commit to a business lease or contract you are usually tied in for 5 to 10 years. While there are ways to get out of it, they are not easy. It is easy to get in and out of a house.

Even if you don't move into your own practice. I would still suggest you invest your money in a practice. At least buy ownership in the group you join! I often have doctors who buy condos with existing practices from me as an investment. I've just closed two deals in the past month exactly as I just described.

I don't mind being the lone voice here. I really do think this is the way to go.

 

[xanthines]

Ha! Aside from the penalty of falling market prices you mean!
(yeah yeah, I know personal real estate is different...)

You are right, though, you should definitely think about what kind of practicing environment you want to be in. If you know you're going into private practice (I am not, FYI), then buying into a partnership or owning the building/practice is the way to go.

Then again, some people just aren't business savvy and would rather just draw a paycheck than deal with more administrative stuff. Seems weird, given how driven med students are, but the world is a strange a place.

-X

The problem with any IRA is you can't touch it again until you retire. The great thing about having your money in real estate is you can get it out whenever you want without penalty.

 

[Richard B]

Yes, you are right, commercial property is completely different. For instance, I had the best quarter in two years this past quarter.

 

[nu2004]

The problem with any IRA is you can't touch it again until you retire. The great thing about having your money in real estate is you can get it out whenever you want without penalty.

...


It is easy to get in and out of a house.

As "right" as everything else you say is, this is dead wrong.

Roth IRAs only have penalties for withdrawals under certain circumstances. First-time home purchases and educational expenses are exempt, I believe.

The value of real estate fluctuates greatly - personal, commercial, or otherwise. I'm unable to sell my condo here in Chicago, and when I do I am going to have lost A LOT of money. That's not exactly "getting my money out" whenever I want, because I want to get it out now, but nobody wants to give it to me

 

[Richard B]

That is unfortunate that your condo has gone down in value. Are you talking about a residential condo?

Here are some current prices for medical condos in the Southern California Area (per square foot):

Beverly Hills: $800s
Irvine: $500s
Foothill Ranch: $300s
San Marcos: $400s

These are all higher than they were 5 years ago, even 2 years ago.

Home prices fluctuate greatly for many reasons I won't get into, but well chosen commercial property is not going to decrease in price.

This is true because of supply and demand. There are hundreds to several thousands of students graduating from medical school every year and they will ultimately need office space.

Since you have a lot of experience with residential I will use that as an example:

Home prices in Southern California have dropped approximately 20% from last year. However, in downtown Los Angeles they have not dropped because there is no more land to build in downtown Los Angeles and there are people who need to live downtown for their jobs. So the price stays the same.

In Beverly Hills they have created a moratorium on converting or building medical office buildings in the city. This caused prices to jumped $200/sft over the last year.

I am not a financial advisor. I am a medical real estate developer. I've put hundreds of doctors into my buildings over the last 10 years and not one of them has failed and not one of them has lost their money, even right now. Why? (There is no magic and there are several other successful developers that can make the same claim) Because I build medical offices where doctors want to be, not where I want them to be, so the value increases. Whether you can pull money out of a Roth IRA to by a first home or for educational expenses is not really the point, in my opinion.

The point is that you can't buy medical office space with your Roth IRA. I have watched many people lose a lot of money on stock investments, which is about the only chance you have of keeping up with real estate.

This is why I love it when the stock market gets loopy like it has over the past several months: it keeps my cap rates low because every investor is unsure of what the stock market is doing comes running over to real estate.

BTW, you can do a 1031 exchange into a investment property. Instead of selling your residential condo and buying a new one, I would suggest you think about selling your residential condo and buying a small medical condo with an existing tenant who is making good income. In your case a 1031 exchange wouldn't be helpful if it is true you are upside-down. A 1031 exchange is meant to protect your taxable profits. Nonetheless, I would still suggest you think about it.

And that is what I would again, recommend Laker thinks about. Medical office space is far more stable than any home investment.