Best use of money?

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zoralsurgeon
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Best use of money?

Post by zoralsurgeon » Fri Jan 02, 2015 5:57 pm

Hey board! My wife and I are in a debate about the best use of some extra money we have. My wife has a full time job but a 1.5yr ago she started her own small business (consulting I guess you'd call it) and has about 30k sitting there in cash. The company is a S-corp and we have an accountant who is great and helps with all the tax filings from her company. Our question, and sort of debate between each other, is what is the best use of this money? She wants to open a 401k with Vanguard and fully fund it in addition to her Roth IRA. I feel we should use it to pay off the interest on my student loans because it's a guaranteed 6.8% return on our investment and changes our "net worth" the same as putting it into retirement accounts. Ultimately I'm very proud of her for starting this, esp since it's her second job, and couldn't be happier that she wants to save it :D so I'm having a hard time telling her that I think we should pull it all out of the S-corp, take the tax hit, and burn down the interest on my loans. What would y'all do?

Below is our "information"

Emergency funds: 4-5 months
Debt: 200k @ 6.8% (student loans from my professional degree) Approximately 30k is interest.
Tax Filing Status: Married Filing Jointly
Tax Rate: %15 federal
State of Residence: KY
Age: 28 and 26

Her income: ~ 55k (from her primary job)
His income: ~10k per year (working a job while being a medical student)

His Roth IRA at Vanguard: ~13k
Her Roth IRA at Vanguard: ~12k
House DP fund in HY savings account: ~10k

Also, our income will approx double come April when I begin getting paid as a surgery resident. Essentially I will be getting paid ~50k/year which we are planning on saving and using to continue funding our Roth's, house downpayment fund, and student loan repayment.

Short version in case I'm boring people: ~30k to spend, what's the best use of the money?
Option 1: Open 401k in my wife's business and fully fund her 401k.

Option 2: Take the 30k out of the s-corp and pay off my student loan interest so that all new money coming in from my job in April will start paying down principal.

Thanks for all this board has to offer! We're learning so much!
"Son stop fighting the fight it's already been won… I am redeemed, you set me free. No I'm not who I used to be… I am redeemed!" - Big Daddy Weave

chaz
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Re: Best use of money?

Post by chaz » Fri Jan 02, 2015 6:22 pm

Get rid of your debt ASAP.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

skjoldur
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Re: Best use of money?

Post by skjoldur » Fri Jan 02, 2015 6:48 pm

In this case I think the personal and practical considerations might outweigh the mathematically correct answer.

My instinct is this:

Do what your wife wants!

1) You appear to be on a path to a very high income, you will be able to attack your loans and manage them
2) Your wife earned the money through initiative and hard work. She will see that amount in her new 401K where it will grow for many years, and it will likely be a good incentive for her to continue growing her business and saving. That could be worth a lot more in the long run in both her personal satisfaction and even in future income and savings.

Good luck!

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BL
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Re: Best use of money?

Post by BL » Fri Jan 02, 2015 6:52 pm

skjoldur wrote:In this case I think the personal and practical considerations might outweigh the mathematically correct answer.

My instinct is this:

Do what your wife wants!

1) You appear to be on a path to a very high income, you will be able to attack your loans and manage them
2) Your wife earned the money through initiative and hard work. She will see that amount in her new 401K where it will grow for many years, and it will likely be a good incentive for her to continue growing her business and saving. That could be worth a lot more in the long run in both her personal satisfaction and even in future income and savings.

Good luck!
+1

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Toons
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Re: Best use of money?

Post by Toons » Fri Jan 02, 2015 6:55 pm

Eliminate Debt ,,Sooner than Later :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

z3r0c00l
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Re: Best use of money?

Post by z3r0c00l » Fri Jan 02, 2015 7:48 pm

Student loans.

DSInvestor
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Re: Best use of money?

Post by DSInvestor » Fri Jan 02, 2015 7:59 pm

Do a little of both. Your income will double in April. Why not let your wife do what she wants to do (i.e. make retirement contributions) and then when your income doubles (3-4 months from now), apply that extra income to the loans.

Is she considering a Solo 401k to defer some of that 2014 income? For solo 401k, the plan must have been established no later than Dec 31, 2014 to allow for 2014 contributions. If she missed that deadline, she may need to look into SEP-IRA or SIMPLE-IRA to defer 2014 income.
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CoAndy
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Re: Best use of money?

Post by CoAndy » Fri Jan 02, 2015 8:32 pm

How about allowing her to max out her 401(k) with $18k and throwing the remaining $12k to your student loans?

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MikeWillRetire
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Re: Best use of money?

Post by MikeWillRetire » Fri Jan 02, 2015 8:40 pm

Even though you are married, your debt probably feels like your debt to your wife. Psychologically, it may be better to let your wife do what she wants. As long as your marriage is strong, you will be ok.

GoldenFinch
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Re: Best use of money?

Post by GoldenFinch » Fri Jan 02, 2015 9:46 pm

Pay off student loans. Being free of debt is the best way to start building wealth.

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BL
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Re: Best use of money?

Post by BL » Fri Jan 02, 2015 10:06 pm

I would delay the house down payment funds and pay off the debt with your income. How much debt are you avoiding right now by her working?

zoralsurgeon
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Re: Best use of money?

Post by zoralsurgeon » Fri Jan 02, 2015 10:19 pm

Well sort of what I expected, about 50/50 on the opinions, ha! Thank you very much for all who commented. I didn't realize the Solo 401k had to be opened by Dec 31st... that sucks. I figured you could just open it until April since you could fund it until then. That may have solved the problem for us right there.

To the last poster, I'm not sure what you mean by how much debt am I avoiding by her working..? Can you clarify?
"Son stop fighting the fight it's already been won… I am redeemed, you set me free. No I'm not who I used to be… I am redeemed!" - Big Daddy Weave

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BL
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Re: Best use of money?

Post by BL » Fri Jan 02, 2015 10:26 pm

zoralsurgeon wrote:Well sort of what I expected, about 50/50 on the opinions, ha! Thank you very much for all who commented. I didn't realize the Solo 401k had to be opened by Dec 31st... that sucks. I figured you could just open it until April since you could fund it until then. That may have solved the problem for us right there.

To the last poster, I'm not sure what you mean by how much debt am I avoiding by her working..? Can you clarify?
Is she working to pay for some of what you would have had to borrow for? Without her, would you have to borrow to go to school? We used to call it the PHT degree (Putting Hubby Through).

WL2034
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Re: Best use of money?

Post by WL2034 » Fri Jan 02, 2015 10:34 pm

You probably can do some of both since you can't put all 30k into a solo 401k anyway depending on what the 2014 earnings were. Mathematically probably better off paying down the loans because tax bracket is low so not saving that much on the front end by deferring taxes now with solo 401k but agree with others that it's not going to make much difference in the long run and I'd do what your wife wants. The fact that you both want to save the money or pay off loans and not spend it tells me you will be fine either way.

zoralsurgeon
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Re: Best use of money?

Post by zoralsurgeon » Fri Jan 02, 2015 10:44 pm

BL wrote:
zoralsurgeon wrote:Well sort of what I expected, about 50/50 on the opinions, ha! Thank you very much for all who commented. I didn't realize the Solo 401k had to be opened by Dec 31st... that sucks. I figured you could just open it until April since you could fund it until then. That may have solved the problem for us right there.

To the last poster, I'm not sure what you mean by how much debt am I avoiding by her working..? Can you clarify?
Is she working to pay for some of what you would have had to borrow for? Without her, would you have to borrow to go to school? We used to call it the PHT degree (Putting Hubby Through).

Oh I see.. ha, I like the name. I suppose I would have to take out loans for living expenses if she wasn't working but I'm working also to pay for my tuition. Thanks for all the responses and votes of confidence that we're in the right frame of mind about starting our Boglehead ways!
"Son stop fighting the fight it's already been won… I am redeemed, you set me free. No I'm not who I used to be… I am redeemed!" - Big Daddy Weave

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bottlecap
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Re: Best use of money?

Post by bottlecap » Sat Jan 03, 2015 12:04 am

I think your wife's correct here. First, it's "her" money and she should put at least a significant portion of it for her future. Obviously, everyone hopes it will be a future with you, but you're young, likely with no kids and you personally have significant income potential down the road. Give her some assurance that money will be there for her while she's supporting you. Second, you've got to tax a tax hit on this money if you use it to pay down the loans? Even in the 10% bracket, you've lost all the benefit of paying down the 6.8% rate loans. If you really insisted, you could do a bit of both as a compromise, as well.

I'm all for paying down debt, but these issues make me think your wife is right.

Good luck,

JT

MathWizard
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Re: Best use of money?

Post by MathWizard » Sat Jan 03, 2015 1:19 am

Solo401K. You can start it for this year. If you are both working, you should both be funding retirement and both have
life/disability insurance.

Depending upon your income, student loans could even be deductible.
The savings from tax deferral will offset some of the 6.8% interest.

zoralsurgeon
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Re: Best use of money?

Post by zoralsurgeon » Sat Jan 03, 2015 10:40 am

This board has so many level headed people, it's refreshing to hear when compared to my day to day life conversations. Thanks for all the help and happy new year to you all
"Son stop fighting the fight it's already been won… I am redeemed, you set me free. No I'm not who I used to be… I am redeemed!" - Big Daddy Weave

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obgyn65
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Re: Best use of money?

Post by obgyn65 » Sat Jan 03, 2015 10:57 am

To the OP - I would put 50% of the 30k in option 1 and the other 50% in option 2. Keeping everyone happy.
"The two most important days in someone's life are the day that they are born and the day they discover why." -John Maxwell

pinecone
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Re: Best use of money?

Post by pinecone » Sat Jan 03, 2015 11:15 am

bottlecap wrote:I think your wife's correct here. First, it's "her" money and she should put at least a significant portion of it for her future. Obviously, everyone hopes it will be a future with you, but you're young, likely with no kids and you personally have significant income potential down the road. Give her some assurance that money will be there for her while she's supporting you. Second, you've got to tax a tax hit on this money if you use it to pay down the loans? Even in the 10% bracket, you've lost all the benefit of paying down the 6.8% rate loans. If you really insisted, you could do a bit of both as a compromise, as well.

I'm all for paying down debt, but these issues make me think your wife is right.

Good luck,

JT
I like this answer the best. It will pay great dividends in the future.
It takes a lot of work and initiative to work full-time, start a business, and end up with an extra 30K, not to mention being married to a med student. :happy
She should fully fund her retirement and invest the rest back into the business to help it grow.

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StevieG72
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Re: Best use of money?

Post by StevieG72 » Sun Jan 04, 2015 2:48 am

You are not taking a tax hit by taking this money out. Her S-Corp is a pass through entity and any income or loss passes directly to your personal returns each year.

Your wife made the money, let her do with it as she pleases.

Praise her for her efforts earing extra income and desire to save it for retirement!
Fools think their own way is right, but the wise listen to others.

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