Help Getting Started (Medical Student)

[Renaissance Man]

I was hoping for some advice/ideas for the next few years of my (our) investing life. I will be starting medical school next year and taking out an average amount of loans per year (roughly $30,000). My fiancé will be starting a dual-degree program and getting a yearly stipend of $24,000. I have suggested to her that she should try and put away $2-3,000 a year away into a Roth IRA at Vanguard. We will clearly be under the income limit for at least the next 7 years and after that time we should have a nice little tax-free retirement nest-egg. I would start maxing out contributions to my own Roth, and paying off student debt starting in my residency. Good idea or other thoughts? Which Vanguard fund would you recommend?

More info: No undergraduate debt, cars are paid off, currently rent and have no plans to buy housing anytime soon

Thanks!

[Ted Kan]

The ROTH seems like a great idea to me. I'd suggest a broad stock index fund such as Total Stock Market which she'll be dollar cost averaging into over the coming years so even with a market downturn you'll do very well in the long run. OTher more knowledagable prticipants here may make some better suggestions however.

Enjoy medical school. Hard work but worth it.

[Muchtolearn]

OP, if you both are going to medical school, 2-3K in a ROTH is peanuts down the road. You two will be severely cash strapped and need some pleasure. Use it.

[EmergDoc]

I wrote this for another blog on the subject.

http://www.theherocomplex.com/?p=510

While it is important to seek balance in your savings/spending lifecycle, early Roth contributions are pretty valuable for a future doc.

[Renaissance Man]

OP, if you both are going to medical school, 2-3K in a ROTH is peanuts down the road. You two will be severely cash strapped and need some pleasure. Use it.

I don't think it'd be "peanuts" as it would be tax free money growing for the future, but I do see your point. I just don't want to miss out on valuable years of growth for the portfolio, especially since we can use the ROTH. Knock on wood, I am hoping to be above the income threshold for using it in 7-10 years from now.

[letsgobobby]

I wrote this for another blog on the subject.

http://www.theherocomplex.com/?p=510

While it is important to seek balance in your savings/spending lifecycle, early Roth contributions are pretty valuable for a future doc.

I agree with this. By making all the IRA and Roth IRA contributions possible (not always the max, but whatever I could afford and sometimes the max) starting as a teenager, my Roth IRA is over $150k at age 38, and there is no workplace rollover money in there. Time is your friend - take advantage.

[yb]

Unless your fiancé is earning income, she won't be able to contribute to a Roth. In most cases, stipends do not count as earned income, unless they are paid for a specific service (like teaching). Do yourself a favor and take out as little as possible for living expenses. Then, when you are in residency, continue to live like a graduate/medical student. Also check out EmergDoc's blog:

http://whitecoatinvestor.com/


(once you are married, and you start earning income, she could contribute to a Roth without any earned income.)

[Renaissance Man]

Unless your fiancé is earning income, she won't be able to contribute to a Roth. In most cases, stipends do not count as earned income, unless they are paid for a specific service (like teaching). Do yourself a favor and take out as little as possible for living expenses. Then, when you are in residency, continue to live like a graduate/medical student. Also check out EmergDoc's blog:

http://whitecoatinvestor.com/


(once you are married, and you start earning income, she could contribute to a Roth without any earned income.)

I didn't know that a stipend didn't count as income, even for a PhD? The White Coat Investor is one of my favorites, and I will be taking out just enough loans to get by (tuition, car insurance, and rent). I have been saving money for living expenses for awhile now.

[staythecourse]

OP, if you both are going to medical school, 2-3K in a ROTH is peanuts down the road. You two will be severely cash strapped and need some pleasure. Use it.

I don't think it'd be "peanuts" as it would be tax free money growing for the future, but I do see your point. I just don't want to miss out on valuable years of growth for the portfolio, especially since we can use the ROTH. Knock on wood, I am hoping to be above the income threshold for using it in 7-10 years from now.

Actually I agree with the other poster. 2-3k is not a big deal even in 30 years for a physician. Now your quality of life is likely to be MUCH improved with the 2-3k now during med school. Your retirement will not make or break based on 2-3 k/ year for 4 years during med school.

Good luck.

[yb]

I didn't know that a stipend didn't count as income, even for a PhD?

Apparently, it is "income" and you have to pay tax on it, but it is not "earned income."

[Renaissance Man]

Apparently, it is "income" and you have to pay tax on it, but it is not "earned income."

That figures haha, a lose-lose situation if you will.

[beareconomy]

I worked on the side in med school so I could max the roth ira. I think it was 4k/year at the time. Not it is 5k/year.

I really didn't have a problem with Ramon noodle every night. Actually, there were drug rep dinners every night, so I had nice restaurants to go to.

[semperlux]

Definitely max out your Roth IRAs if possible. You will thank yourself later when you become an attending and the only way to get more Roth IRA space is via non-deductible IRA then back door'ing into a Roth. When I was a resident, the hospital also had a 401K with a match on the first $5k contribution which I maxed every year up to the match.

When you finish residency, subspecialty training, or fellowship, you will already have a nice start to your retirement nest egg rather than starting as an attending and being so many years behind.

Last piece of advice: many of my classmates blew most of their 1st year's attending salary on an exotic car. Even if you have the inclination, I would wait a year and think long and hard before taking the plunge. I know at least one guy who got so sick of the maintenance costs that he sold his exotic for a loss after owning it for 2 years. It did get him a lot of dates though

[Renaissance Man]

Just going to give this a quick bump to ask about the PhD stipend....I have heard that is has to be taxed but you can't use it for a Roth? Do most Universities have a retirement program for students to put some of their stipend into?

[yb]

Just going to give this a quick bump to ask about the PhD stipend....I have heard that is has to be taxed but you can't use it for a Roth? Do most Universities have a retirement program for students to put some of their stipend into?

I do not think so. In my case, the university does not consider the stipend wages and so they do not take out anything from it, but they do report the income on a 1099 MISC. It is then up to the students to pay taxes. If you and your fiance are able to save money on a $24,000 stipend, it might make sense to reduce the amount of loans you are planning to take out by a similar amount. Aim for a below average amount in loans.

[DVMResident]

I didn't know that a stipend didn't count as income, even for a PhD?

Apparently, it is "income" and you have to pay tax on it, but it is not "earned income."

It depends. If the school reports it on a W-2, it's earned income that can be contributed to an (Roth) IRA. If it's under box 6 of 1099-T form, it's a taxable "award" and can not be used to fund an (Roth) IRA (super lame...I just got blind sided by this quirky tax rule).

------------------------

Anyways, I'm normally all for funding Roth IRAs while your income is very low, but student loan rates are 7~8% and there are no more subsidized loans, meaning they start incurring interest right away.

If I'm doing my math right, you'll squeak out a small benefit from the Roth between the future tax benefits (assuming 33% marginal, pre-tax ~$7500 --> $5000) vs interest for 4 years (assuming 8% at 33% marginal, $400/yr --> after tax deduction $268/yr), but you've taken on the risk of the market. (someone double check my math) You're basically going into debt to invest.

Great idea, but if it were my life I wouldn't put my self in more debt (another monthly bill, dealing with annoying companies calling you, the risk of not being able to pay them back, and having added pressure to pick a high paying specialty because I have more loans to pay) to fund a Roth. The math is slightly in your favor to fund the Roth, I personally believe the freedom of being debt free is more important. Either choice is a fine.

BTW, congrats on thinking of this stuff now. You're ahead of vast majority of your peers and I'm sure you'll end up fine.

[BigOilTexan]

We're in a similar situation. My wife was in medical school taking out $50k/yr loans @ 6.8%-8.6%, 80% unsubsidised Stafford loans. I was in grad school with a similar stipend (which I only had to pay like $24 tax on, not sure how that number came out). I mainly wanted to comment on the quality of life comments...I had fights with my wife (then fiancee) about how we were going to deal with her loans. I've never been in debt and was scared to death of ~$220k @ ~7% loans and wanted to pay them off asap. She wanted to "live comfortably" and not worry about the loans, because apparently in med school they drill into your head that you're going to be paying loans off the rest of your life so dont worry about it.

Turns out you can do both. I'm very happy I fully funded my Roth IRA for the 3 years I was in school before I got a job and no longer qualified, it gives me a nice chunk of tax-advantaged space for investment choice flexibility that I can't get with my 401(k). We're also on pace to pay off the loans in ~30 months total and my wife has been very suprised about how little money it really takes to "live comfortable." Obviously this is GREATLY subject to individual personalities, but when you've just spent 4 years living on -$50,000 a year, you can have a lot of fun for very little.

Don't be afraid to contribute to your Roth IRA now with however much you can, pay off the loans asap, but most importantly talk about your plans early and often. My gf/fiancee/wife talked about our plans for 2-3 years before we were actually married (out of ~4 that we knew each other) and that probably saved our marriage from spontaneously combusting in the first few months.