Should I open a traditional or Roth IRA?

[Rollerbladdin]

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A little back story: Just accepted to medical school, and I want to open an IRA with $1,000 and contribute ~$20 a week during medical school and max it out during residency. Is a traditional or Roth the best for my situation? I have no undergraduate debt is that matters.

 

[TexasPhysician]

You need to have earned income to contribute. Will you hold a job during med school?

While your earnings are low, I'd strongly suggest paying taxes now and going with the Roth.

 

[QofQuimica]

A little back story: Just accepted to medical school, and I want to open an IRA with $1,000 and contribute ~$20 a week during medical school and max it out during residency. Is a traditional or Roth the best for my situation? I have no undergraduate debt is that matters.

Neither. You should park that $1000 into an online savings account and use it as an emergency fund. Continue adding the $20/week during med school until you reach an amount that will cover 3-6 months worth of living expenses. Then you can think about starting a Roth account (if, as TP pointed out, you will have earned income during med school; if not, you will not be able to contribute to an IRA of either type.)

In general, do not begin trying to invest until you have saved a *minimum* of three months' worth of expenses in your emergency fund. Establishing an emergency fund should be your first priority once you move out of your parents' house, start earning money, and have bills that you are responsible for paying. Otherwise, you're only one car breakdown or apartment move away from an unplanned need to cash out your retirement funds early (and pay the early withdrawal penalty for it).

 

[Silent Cool]

A little back story: Just accepted to medical school, and I want to open an IRA with $1,000 and contribute ~$20 a week during medical school and max it out during residency. Is a traditional or Roth the best for my situation? I have no undergraduate debt is that matters.

You can contribute only if you have earned income up the max contribution amount, which is $5500. *IF* you have earned income up to that, then a Roth is definitely the better option.

But the question is this: will you have any earned (ie, taxable) income in medical school? You cannot contribute money to either if you do not have earned/taxable income.

 

[meowfish6868]

Sorry to hijack the thread, but I have a related question. Would it be better to:
A) keep all of my current savings in my high yield account (~14k), which will be factored into my financial aid award.

or

B) open a Roth IRA and make max contribution ($5500) prior to applying for financial aid. I will be earning >5500 in income in 2015 before matriculating in the fall.

Given that I will only have my assets to use in meeting my family's expected contribution if I choose option A, would it be wiser to contribute some money to a Roth IRA while I still can? I know that paying for my tuition with as much cash as possible is better than taking the same amount in loans. However, I likely won't have much money left after paying for moving expenses, personal items, etc. at the end of the summer, despite this money being factored into my aid award.

Some background: Once I quit working,my financial need is going to increase drastically. My mom is very low income and has roughly 10k in school/medical/consumer debt, so she has no liquid assets to contribute to my education. Depending on the school I choose, my savings will likely be blown on moving expenses and paying my car insurance for the year. I have no debt at this point. Additionally, I plan on rolling roughly 10k in contributions to my employer's defined benefits plan into a traditional IRA when I leave for school this summer and hope to convert it to a Roth IRA in 2016 to minimize my tax burden.

tl;dr: would it be wiser to open a Roth now or keep that $5500 in my savings account so that I can pay part of my first year tuition? Thanks in advance

 

[ThoracicGuy]

Sorry to hijack the thread, but I have a related question. Would it be better to:
A) keep all of my current savings in my high yield account (~14k), which will be factored into my financial aid award.

or

B) open a Roth IRA and make max contribution ($5500) prior to applying for financial aid. I will be earning >5500 in income in 2015 before matriculating in the fall.

Given that I will only have my assets to use in meeting my family's expected contribution if I choose option A, would it be wiser to contribute some money to a Roth IRA while I still can? I know that paying for my tuition with as much cash as possible is better than taking the same amount in loans. However, I likely won't have much money left after paying for moving expenses, personal items, etc. at the end of the summer, despite this money being factored into my aid award.

Some background: Once I quit working,my financial need is going to increase drastically. My mom is very low income and has roughly 10k in school/medical/consumer debt, so she has no liquid assets to contribute to my education. Depending on the school I choose, my savings will likely be blown on moving expenses and paying my car insurance for the year. I have no debt at this point. Additionally, I plan on rolling roughly 10k in contributions to my employer's defined benefits plan into a traditional IRA when I leave for school this summer and hope to convert it to a Roth IRA in 2016 to minimize my tax burden.

tl;dr: would it be wiser to open a Roth now or keep that $5500 in my savings account so that I can pay part of my first year tuition? Thanks in advance

I'm not sure that converting a traditional ira to a Roth in your situation makes to much sense. Keep it as traditional and then when you are an attending you can put that traditional IRA into your 401/403 and be able to do the backdoor Roth. Why add the taxes if you don't have to?

 

[meowfish6868]

I'm not sure that converting a traditional ira to a Roth in your situation makes to much sense. Keep it as traditional and then when you are an attending you can put that traditional IRA into your 401/403 and be able to do the backdoor Roth. Why add the taxes if you don't have to?

Thanks for your reply! I'm trying to get a bit more financially savvy, so I didn't know I could do that. I was thinking that converting the traditional IRA to a Roth while in school because I'll be in the lowest tax bracket possible in my career, but my logic is probably a bit warped. I'd love to roll the contributions from my employer's plan directly into a Roth, but it would put me at a much higher marginal tax rate than waiting until I'm no longer earning an income while in school.

 

[thesauce]

Neither. You should park that $1000 into an online savings account and use it as an emergency fund. Continue adding the $20/week during med school until you reach an amount that will cover 3-6 months worth of living expenses. Then you can think about starting a Roth account (if, as TP pointed out, you will have earned income during med school; if not, you will not be able to contribute to an IRA of either type.)

In general, do not begin trying to invest until you have saved a *minimum* of three months' worth of expenses in your emergency fund. Establishing an emergency fund should be your first priority once you move out of your parents' house, start earning money, and have bills that you are responsible for paying. Otherwise, you're only one car breakdown or apartment move away from an unplanned need to cash out your retirement funds early (and pay the early withdrawal penalty for it).

Why not just keep his emergency fund in a ROTH? If he doesn't need it, he leaves it in and it becomes his contribution for the year. If he does need it, he can pull it out (for a ROTH, you can always pull out what you put into it penalty-free).

 

[QofQuimica]

Why not just keep his emergency fund in a ROTH? If he doesn't need it, he leaves it in and it becomes his contribution for the year. If he does need it, he can pull it out (for a ROTH, you can always pull out what you put into it penalty-free).

Because if that $1000 is truly all the money he has to his name, he will need it. And because philosophically, I don't think it's a good thing for a new "investor" to get into the headspace of, "oh, well, worst case scenario, I'll just raid my retirement accounts." Having "unexpected expenses" of $1000 should not be unexpected by anyone. So it should be anticipated and planned for in advance, not hedged.

If you're a person with any financial management skills at all, it's hard sometimes to wrap your mind around the fact that lack of any budgeting or planning is a fact of life for many. People can rationalize just about any stupid financial decision imaginable, and they frequently do. I would argue that the lifetime benefit of being disciplined to make good money management decisions highly outweighs any likely benefit that would come from putting that $1000 of emergency money into a Roth.

 

[Stroganoff]

I'm not sure that converting a traditional ira to a Roth in your situation makes to much sense. Keep it as traditional and then when you are an attending you can put that traditional IRA into your 401/403 and be able to do the backdoor Roth. Why add the taxes if you don't have to?

A little backwards, man. meowfish6868's idea to do a Roth conversion in medical school in 2016 is the better option. The Standard Deduction in 2015 is $6300, and the Personal Exemption is $4000, giving $10,300 tax free for 2015, and 2016 will be slightly more than $10,300. If meowfish6868 converts up to that amount in 2016, it's completely tax free, so it's a cool way of converting the Traditional to the Roth without paying a penny in taxes.

Whereas, the Backdoor Roth characterization is more to do with non-deductible Traditional IRA contributions (post-tax). The $10k in meowfish6868's employer defined benefits plan is pre-tax.

 

[Stroganoff]

B) open a Roth IRA and make max contribution ($5500) prior to applying for financial aid. I will be earning >5500 in income in 2015 before matriculating in the fall.

I'd totally do this, and whatever left is your emergency fund (unless you already have one). It might also lower your EFC for 2016-2017 year.

 

[Mad Jack]

Neither. You should park that $1000 into an online savings account and use it as an emergency fund. Continue adding the $20/week during med school until you reach an amount that will cover 3-6 months worth of living expenses. Then you can think about starting a Roth account (if, as TP pointed out, you will have earned income during med school; if not, you will not be able to contribute to an IRA of either type.)

In general, do not begin trying to invest until you have saved a *minimum* of three months' worth of expenses in your emergency fund. Establishing an emergency fund should be your first priority once you move out of your parents' house, start earning money, and have bills that you are responsible for paying. Otherwise, you're only one car breakdown or apartment move away from an unplanned need to cash out your retirement funds early (and pay the early withdrawal penalty for it).

Many may not agree with me in this respect, but I usually borrow against my 401k in the instance of emergencies. It is tax-free, doesn't hit my credit score, and my money grows with the market until such time as an emergency arises. Sure, I may get hit with a 10% early withdrawal penalty if I need to do a hardship withdrawal rather than a loan, but if my money had been in my 401k for 3 years and I averaged an 8% return each year, I'm still coming out ahead post-penalty.

My 401k provider (Fidelity) is remarkably good about making your money liquid if need be though. Some might not be so simple to work with.

 

[thesauce]

Because if that $1000 is truly all the money he has to his name, he will need it. And because philosophically, I don't think it's a good thing for a new "investor" to get into the headspace of, "oh, well, worst case scenario, I'll just raid my retirement accounts." Having "unexpected expenses" of $1000 should not be unexpected by anyone. So it should be anticipated and planned for in advance, not hedged.

If you're a person with any financial management skills at all, it's hard sometimes to wrap your mind around the fact that lack of any budgeting or planning is a fact of life for many. People can rationalize just about any stupid financial decision imaginable, and they frequently do. I would argue that the lifetime benefit of being disciplined to make good money management decisions highly outweighs any likely benefit that would come from putting that $1000 of emergency money into a Roth.

I didn't assume that $1k is all he has to his name. Even so, if the OP is the kind of person that will fall into this trap, then this $1k is going to be least of their problems.

The OP has until April 15 to make the contribution for the year. After that, the window for 2014 contributions is lost forever. From a purely financial perspective, there is no question that he/she should keep his emergency money in the ROTH.

I don't disagree with your point about the "psychological issues," but we are not privy to the OP's money management habits aside from the fact that they got out of undergrad with no debt (a great feat nowadays, IMO). He must have at least some level of discretion when it comes to budgeting.

 

[meowfish6868]

I'd totally do this, and whatever left is your emergency fund (unless you already have one). It might also lower your EFC for 2016-2017 year.

That's what I was thinking. Thanks for your input!!

 

[sazerac]

Sorry to hijack the thread, but I have a related question. Would it be better to:
A) keep all of my current savings in my high yield account (~14k), which will be factored into my financial aid award.

or

B) open a Roth IRA and make max contribution ($5500) prior to applying for financial aid. I will be earning >5500 in income in 2015 before matriculating in the fall.

Given that I will only have my assets to use in meeting my family's expected contribution if I choose option A, would it be wiser to contribute some money to a Roth IRA while I still can? I know that paying for my tuition with as much cash as possible is better than taking the same amount in loans. However, I likely won't have much money left after paying for moving expenses, personal items, etc. at the end of the summer, despite this money being factored into my aid award.

Some background: Once I quit working,my financial need is going to increase drastically. My mom is very low income and has roughly 10k in school/medical/consumer debt, so she has no liquid assets to contribute to my education. Depending on the school I choose, my savings will likely be blown on moving expenses and paying my car insurance for the year. I have no debt at this point. Additionally, I plan on rolling roughly 10k in contributions to my employer's defined benefits plan into a traditional IRA when I leave for school this summer and hope to convert it to a Roth IRA in 2016 to minimize my tax burden.

tl;dr: would it be wiser to open a Roth now or keep that $5500 in my savings account so that I can pay part of my first year tuition? Thanks in advance

What sort of financial aid do you anticipate will factor in your 2014 or 2015 income? I only ask because the rules for professional school aid are a lot different than undergrad. Income and/or asset hiding rarely makes sense at the professional level.

 

[dpmd]

What sort of financial aid do you anticipate will factor in your 2014 or 2015 income? I only ask because the rules for professional school aid are a lot different than undergrad. Income and/or asset hiding rarely makes sense at the professional level.

I was going to make this point. It isn't like the school is going to come up with a grant or something now that the guy has 1k or 14k less factored into his efc. For undergrad it might have more impact, but still not enough to make it the main reason to do stuff with your money. Really, what you need to do is decide whether your money will do more for you if you invest it (in this case in a retirement account) or use it for avoid taking loans (the interest rates and origination fees would them become really important for the decision).

 

[ThoracicGuy]

A little backwards, man. meowfish6868's idea to do a Roth conversion in medical school in 2016 is the better option. The Standard Deduction in 2015 is $6300, and the Personal Exemption is $4000, giving $10,300 tax free for 2015, and 2016 will be slightly more than $10,300. If meowfish6868 converts up to that amount in 2016, it's completely tax free, so it's a cool way of converting the Traditional to the Roth without paying a penny in taxes.

Whereas, the Backdoor Roth characterization is more to do with non-deductible Traditional IRA contributions (post-tax). The $10k in meowfish6868's employer defined benefits plan is pre-tax.

The OP stated that this would bump up his tax bracket to do the conversion. I assuming that he has significant enough income prior to starting med school that would cause him to pay taxes. If he can get it tax free, that's a win, but he will need to research that.

I just brought up the backdoor Roth as a reason to want to hide your tIRA monies when the income level gets high enough for it to matter, likely the year after finishing residency. It has nothing to do with his current money or conversion.

 

[Stroganoff]

The OP stated that this would bump up his tax bracket to do the conversion. I assuming that he has significant enough income prior to starting med school that would cause him to pay taxes. If he can get it tax free, that's a win, but he will need to research that.

I read this as the OP wishing to do the Roth conversion in 2016 as a med student with probably $0 income:

Additionally, I plan on rolling roughly 10k in contributions to my employer's defined benefits plan into a traditional IRA when I leave for school this summer and hope to convert it to a Roth IRA in 2016 to minimize my tax burden.

 

[meowfish6868]

I read this as the OP wishing to do the Roth conversion in 2016 as a med student with probably $0 income:

Yes, that's correct. I'll be doing the direct rollover in June this summer to a traditional IRA. I'll be making roughly ~20k more in income during tax year 2015, whereas I'll have no income in 2016. It might not bump my tax bracket to convert to a Roth in 2015, but I can't guarantee that I'll have the cash to pay the tax for it that spring.

What sort of financial aid do you anticipate will factor in your 2014 or 2015 income? I only ask because the rules for professional school aid are a lot different than undergrad. Income and/or asset hiding rarely makes sense at the professional level.

I was going to make this point. It isn't like the school is going to come up with a grant or something now that the guy has 1k or 14k less factored into his efc. For undergrad it might have more impact, but still not enough to make it the main reason to do stuff with your money. Really, what you need to do is decide whether your money will do more for you if you invest it (in this case in a retirement account) or use it for avoid taking loans (the interest rates and origination fees would them become really important for the decision).

I was thinking that I might qualify for need-based grants/scholarships or low-interest institutional loans at the schools I've been accepted to, but I probably won't until MS2 because my income from 2014 and 2015 will be too high. My understanding is that I'll be able to borrow up to the COA in unsubsidized Perkins and gradplus loans regardless of my EFC, right?

I'm worrying about having to spend my all of my savings down for tuition and not having any liquid assets in case of an emergency. I also thought starting a Roth this year would be a good idea because 2015 is the last year I will earn enough income to make the maximum contribution until residency. I'm only 22, so I thought that allowing the IRA to compound tax-free for at least 3 years would be more beneficial in the long run.

I still have a bunch of research to do on this, but I really appreciate all of your input!

 

[ThoracicGuy]

Yes, that's correct. I'll be doing the direct rollover in June this summer to a traditional IRA. I'll be making roughly ~20k more in income during tax year 2015, whereas I'll have no income in 2016. It might not bump my tax bracket to convert to a Roth in 2015, but I can't guarantee that I'll have the cash to pay the tax for it that spring.

You wouldn't have to convert it all at once. You could convert a portion that would keep you under the taxable rate each year if you wanted.

I'm worrying about having to spend my all of my savings down for tuition and not having any liquid assets in case of an emergency. I also thought starting a Roth this year would be a good idea because 2015 is the last year I will earn enough income to make the maximum contribution until residency. I'm only 22, so I thought that allowing the IRA to compound tax-free for at least 3 years would be more beneficial in the long run.

I still have a bunch of research to do on this, but I really appreciate all of your input!

You can pull your principle out of the Roth at any time without penalty. That would put $5500 saved for you for this year. In the end, an extra $5500 in loans won't really matter much, but you'll lose the IRA space after tax day forever.

 

[dpmd]

Yes, that's correct. I'll be doing the direct rollover in June this summer to a traditional IRA. I'll be making roughly ~20k more in income during tax year 2015, whereas I'll have no income in 2016. It might not bump my tax bracket to convert to a Roth in 2015, but I can't guarantee that I'll have the cash to pay the tax for it that spring.




I was thinking that I might qualify for need-based grants/scholarships or low-interest institutional loans at the schools I've been accepted to, but I probably won't until MS2 because my income from 2014 and 2015 will be too high. My understanding is that I'll be able to borrow up to the COA in unsubsidized Perkins and gradplus loans regardless of my EFC, right?

I'm worrying about having to spend my all of my savings down for tuition and not having any liquid assets in case of an emergency. I also thought starting a Roth this year would be a good idea because 2015 is the last year I will earn enough income to make the maximum contribution until residency. I'm only 22, so I thought that allowing the IRA to compound tax-free for at least 3 years would be more beneficial in the long run.

I still have a bunch of research to do on this, but I really appreciate all of your input!

Are your parents broke? I think schools usually include parental income/assets when deciding if you qualify for low income status. Letting things compound in the ira is good, if your rate of return is high enough. Otherwise you will end up losing money by having taken those extra loans. But the idea of factoring in your roth to your emergency fund (and using other cash to not get as many loans) is interesting, particularly if you have credit cards that you could use if needed while you are moving money.

 

[meowfish6868]

Are your parents broke? I think schools usually include parental income/assets when deciding if you qualify for low income status. Letting things compound in the ira is good, if your rate of return is high enough. Otherwise you will end up losing money by having taken those extra loans. But the idea of factoring in your roth to your emergency fund (and using other cash to not get as many loans) is interesting, particularly if you have credit cards that you could use if needed while you are moving money.

My mother is widowed and pretty much dead broke (low income, a sizable amount of consumer/educational debt, and no assets). Excluding my savings, we'll only have ~25k in combined income and assets once I stop working. I'm hoping that I can get a return of at least 7%, but I feel like that might be overly optimistic right now.

I do currently have a charge card that I use for nearly all of my purchases. However, I'm not sure if it'll be as good as a credit card while moving the money because I have to pay the balance off monthly.

 

[dpmd]

My mother is widowed and pretty much dead broke (low income, a sizable amount of consumer/educational debt, and no assets). Excluding my savings, we'll only have ~25k in combined income and assets once I stop working. I'm hoping that I can get a return of at least 7%, but I feel like that might be overly optimistic right now.

I do currently have a charge card that I use for nearly all of my purchases. However, I'm not sure if it'll be as good as a credit card while moving the money because I have to pay the balance off monthly.

Depends on where you keep the roth. Moving money shouldn't take longer than a week though.