Advice on saving as a OL

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Mr.Throwback
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Advice on saving as a OL

Postby Mr.Throwback » Sun May 19, 2013 3:48 pm

Hello all,

I have about $3500 sitting in a mutual fund from when my grandfather passed away. I plan on using this money to pay off my student loans 3 years from now. Being that i'm not the savviest person when it comes to financials, I was hoping to get some advice on the best way to keep this money. Obviously i'd like to gain as much interest as possible.

Should I let it sit in the mutual fund, open a savings or CD, or something else? Thanks for the help guys!

I should add that I plan on adding to it throughout my years in school.

rad lulz
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Re: Advice on saving as a OL

Postby rad lulz » Sun May 19, 2013 3:54 pm

,
Last edited by rad lulz on Thu Sep 22, 2016 1:03 am, edited 1 time in total.

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ManoftheHour
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Re: Advice on saving as a OL

Postby ManoftheHour » Sun May 19, 2013 3:56 pm

Are you going to be taking out loans to fund your education? If so, compare the interest rates that your mutual fund has been returning to the amount of interest that accumulates from the loans that you will take out. If you predict that your fund's returns in the future are small or even negative, you might be able to "earn" more money using the money in place of loans that accrue interest.

My advice: See which stocks your fund holds and you can decide whether it is worth keeping your money in the fund or not. Obviously, no one can predict the outcome of the rates 100%, so use your best judgment.

Savings and CDs are worthless. They barely return any interest at all.

Mr.Throwback
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Re: Advice on saving as a OL

Postby Mr.Throwback » Sun May 19, 2013 3:58 pm

rad lulz wrote:Instead of adding to your shitty fund you could, I dunno, take out less loans (unless you can somehow cop better than 7.9% on your investment)



So you're saying by the time I apply for loans I should calculate what I have saved and just subtract that off of the amount I want to borrow?

Mr.Throwback
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Re: Advice on saving as a OL

Postby Mr.Throwback » Sun May 19, 2013 4:00 pm

ManoftheHour wrote:Are you going to be taking out loans to fund your education? If so, compare the interest rates that your mutual fund has been returning to the amount of interest that accumulates from the loans that you will take out. If you predict that your fund's returns in the future are small or even negative, you might be able to "earn" more money using the money in place of loans that accrue interest.

My advice: See which stocks your fund holds and you can decide whether it is worth keeping your money in the fund or not. Obviously, no one can predict the outcome of the rates 100%, so use your best judgment.

Savings and CDs are worthless. They barely return any interest at all.



I think you're saying the same as the first poster.

And Yeah i've calculated that a savings or cd would pretty much earn me nothing over a 3 year period.

rad lulz
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Re: Advice on saving as a OL

Postby rad lulz » Sun May 19, 2013 4:02 pm

Mr.Throwback wrote:
ManoftheHour wrote:Are you going to be taking out loans to fund your education? If so, compare the interest rates that your mutual fund has been returning to the amount of interest that accumulates from the loans that you will take out. If you predict that your fund's returns in the future are small or even negative, you might be able to "earn" more money using the money in place of loans that accrue interest.

My advice: See which stocks your fund holds and you can decide whether it is worth keeping your money in the fund or not. Obviously, no one can predict the outcome of the rates 100%, so use your best judgment.

Savings and CDs are worthless. They barely return any interest at all.



I think you're saying the same as the first poster.

And Yeah i've calculated that a savings or cd would pretty much earn me nothing over a 3 year period.

Yeah that was basically a much better way of saying what I wanted to say

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ManoftheHour
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Re: Advice on saving as a OL

Postby ManoftheHour » Sun May 19, 2013 4:03 pm

If you want to gain as much interest as possible, stocks are the way to go. They're risky, even for a veteran investor. Do so at your own risk. I'd go with dependable companies with a lot of upside for growth. Keep in mind that if you are taking out loans, in order to actually make money, you'd have to invest in stocks that return more than 8% (I'm assuming that's the interest rate on the loans that you will take out). Also keep in mind that unless you hold your stocks for a certain amount of time, your profit, assuming you make any, will be taxed at 35%. In addition to that, keep in mind that there will be brokerage fees each time you make a transaction. Those will easily eat into your profits (assuming you make any).

The only way you could actually make this worthwhile is if you had invested in say Tesla a few weeks ago or Netflix two months ago. Both had +20% jumps.

Mr.Throwback
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Re: Advice on saving as a OL

Postby Mr.Throwback » Sun May 19, 2013 4:06 pm

Honestly, i'd like to avoid getting involved in the stock market. Can I just let it sit in the mutual fund? I'm thinking just taking out less loans is the way to go.

fluffythepenguin
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Re: Advice on saving as a OL

Postby fluffythepenguin » Sun May 19, 2013 4:09 pm

Stocks are likely in your mutual fund. Just take out fewer loans.

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ManoftheHour
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Re: Advice on saving as a OL

Postby ManoftheHour » Sun May 19, 2013 4:10 pm

Mr.Throwback wrote:I'm thinking just taking out less loans is the way to go.


Unless you have a knack for this, have good advisers, or have inside information, I would go with this.

Rad pretty much summarized your best option in one sentence.

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ManoftheHour
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Re: Advice on saving as a OL

Postby ManoftheHour » Sun May 19, 2013 4:17 pm

It might actually be in your best interest to just cash out the fund and use the $3500 towards law school. That way you save yourself from taking out a $3500 loan (+8% interest each year for over three years).

I'm not sure if this needs to be said, but stocks and funds have no feelings. Don't get emotionally attached just because your grandfather gave them to you. I'd say if you're not market savvy, it'd probably be in your best interest to save yourself some cash by taking out fewer loans, and thus, saving money on the interest.

I only say this because I know people who hold onto worthless stocks because "mom gave them to me before she passed away."

I'm not a financial expert, so take this with a grain of salt. I obviously don't know which fund you hold and I cannot predict the future. If the fund jumps double digit points, I would feel like shit if you took my advice because I screwed you out of some serious cash.

Mr.Throwback
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Re: Advice on saving as a OL

Postby Mr.Throwback » Sun May 19, 2013 4:19 pm

ManoftheHour wrote:It might actually be in your best interest to just cash out the fund and use the $3500 towards law school. That way you save yourself from taking out a $3500 loan (+8% interest each year for over three years).

I'm not sure if this needs to be said, but stocks and funds have no feelings. Don't get emotionally attached just because your grandfather gave them to you. I'd say if you're not market savvy, it'd probably be in your best interest to save yourself some cash by taking out fewer loans, and thus, saving money on the interest.

I only say this because I know people who hold onto worthless stocks because "mom gave them to me before she passed away."

I'm not a financial expert, so take this with a grain of salt. I obviously don't know which fund you hold and I cannot predict the future. If the fund jumps double digit points, I would feel like shit if you took my advice because I screwed you out of some serious cash.



Trust me i'm not emotionally attached. I've already spent about $7,000 of what I had haha. Yeah, i'm just going to take out less loans. Sounds good to me!

09042014
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Re: Advice on saving as a OL

Postby 09042014 » Sun May 19, 2013 4:32 pm

I found that I spent more money than student loans gave me. I had about 10k, and after three years, I've basically used it all up. I know plenty of others who have maxed out credit cards. You think the tyranny of 8% is bad, consider the genocide of 18%.

20141023
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Re: Advice on saving as a OL

Postby 20141023 » Sun May 19, 2013 10:01 pm

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Last edited by 20141023 on Mon Feb 16, 2015 12:08 am, edited 1 time in total.

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jbagelboy
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Re: Advice on saving as a OL

Postby jbagelboy » Mon May 20, 2013 2:44 pm

Question on a related topic:

What do people do about 401k's when they go to LS? I have about $2000 in my 401K from my current job. Should I flush it out and use it to lower my loan request? Then I know it will be hit with fed taxes. I might be able to leave it with my current employer, but since it won't make any real dent on my retirement in 40 years, would that be worthwhile? Typically I would just transfer it to a roth or a new employer 401K, but obviously that isn't an option here. Also, since its <5K, they could ask me to withdraw it lump sum at any time, so I have to figure this out pretty soon.

Thanks in advance

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beepboopbeep
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Re: Advice on saving as a OL

Postby beepboopbeep » Mon May 20, 2013 2:58 pm

jbagelboy wrote:Question on a related topic:

What do people do about 401k's when they go to LS? I have about $2000 in my 401K from my current job. Should I flush it out and use it to lower my loan request? Then I know it will be hit with fed taxes. I might be able to leave it with my current employer, but since it won't make any real dent on my retirement in 40 years, would that be worthwhile? Typically I would just transfer it to a roth or a new employer 401K, but obviously that isn't an option here. Also, since its <5K, they could ask me to withdraw it lump sum at any time, so I have to figure this out pretty soon.

Thanks in advance


I've been trying to figure this out as well - my employer will probably let me leave it, but if there's a smarter thing to do I want to do it, obviously. Was thinking about a roth - why do you say it's not an option?

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ph5354a
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Re: Advice on saving as a OL

Postby ph5354a » Mon May 20, 2013 3:02 pm

beepboopbeep wrote:
jbagelboy wrote:Question on a related topic:

What do people do about 401k's when they go to LS? I have about $2000 in my 401K from my current job. Should I flush it out and use it to lower my loan request? Then I know it will be hit with fed taxes. I might be able to leave it with my current employer, but since it won't make any real dent on my retirement in 40 years, would that be worthwhile? Typically I would just transfer it to a roth or a new employer 401K, but obviously that isn't an option here. Also, since its <5K, they could ask me to withdraw it lump sum at any time, so I have to figure this out pretty soon.

Thanks in advance


I've been trying to figure this out as well - my employer will probably let me leave it, but if there's a smarter thing to do I want to do it, obviously. Was thinking about a roth - why do you say it's not an option?


My plan is this: transfer it to a Roth IRA in 2014 (lower tax bracket), then either leave it there or withdraw it and use it for educational expenses in 2014, which will exempt me from the tax penalty.

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AllDangle
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Re: Advice on saving as a OL

Postby AllDangle » Mon May 20, 2013 3:20 pm

ph5354a wrote:
beepboopbeep wrote:
jbagelboy wrote:Question on a related topic:

What do people do about 401k's when they go to LS? I have about $2000 in my 401K from my current job. Should I flush it out and use it to lower my loan request? Then I know it will be hit with fed taxes. I might be able to leave it with my current employer, but since it won't make any real dent on my retirement in 40 years, would that be worthwhile? Typically I would just transfer it to a roth or a new employer 401K, but obviously that isn't an option here. Also, since its <5K, they could ask me to withdraw it lump sum at any time, so I have to figure this out pretty soon.

Thanks in advance


I've been trying to figure this out as well - my employer will probably let me leave it, but if there's a smarter thing to do I want to do it, obviously. Was thinking about a roth - why do you say it's not an option?


My plan is this: transfer it to a Roth IRA in 2014 (lower tax bracket), then either leave it there or withdraw it and use it for educational expenses in 2014, which will exempt me from the tax penalty.

How do you go about doing a Roth IRA withdrawal for educational expenses?

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ph5354a
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Re: Advice on saving as a OL

Postby ph5354a » Mon May 20, 2013 3:24 pm

AllDangle wrote:How do you go about doing a Roth IRA withdrawal for educational expenses?


Well you withdraw it the same way regardless, the tax issue doesn't come up until you file your returns. The phrasing on the IRS website is that it can't exceed educational expenses, which are measured by the 1098T form. You probably got that form in undergrad; it details how much money you spent on educational expenses in a given year, so as long as your withdrawal doesn't exceed that amount, you are exempt from the 10% tax penalty.

I haven't actually done this yet, so I'll be looking into it a bit further before I do it, but that's what I've learned so far.

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jbagelboy
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Re: Advice on saving as a OL

Postby jbagelboy » Mon May 20, 2013 3:26 pm

ph5354a wrote:
beepboopbeep wrote:
jbagelboy wrote:Question on a related topic:

What do people do about 401k's when they go to LS? I have about $2000 in my 401K from my current job. Should I flush it out and use it to lower my loan request? Then I know it will be hit with fed taxes. I might be able to leave it with my current employer, but since it won't make any real dent on my retirement in 40 years, would that be worthwhile? Typically I would just transfer it to a roth or a new employer 401K, but obviously that isn't an option here. Also, since its <5K, they could ask me to withdraw it lump sum at any time, so I have to figure this out pretty soon.

Thanks in advance


I've been trying to figure this out as well - my employer will probably let me leave it, but if there's a smarter thing to do I want to do it, obviously. Was thinking about a roth - why do you say it's not an option?


My plan is this: transfer it to a Roth IRA in 2014 (lower tax bracket), then either leave it there or withdraw it and use it for educational expenses in 2014, which will exempt me from the tax penalty.


okay. this sounds like a good idea i'll look into it too

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Tiago Splitter
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Re: Advice on saving as a OL

Postby Tiago Splitter » Mon May 20, 2013 4:52 pm

ph5354a wrote:
AllDangle wrote:How do you go about doing a Roth IRA withdrawal for educational expenses?


Well you withdraw it the same way regardless, the tax issue doesn't come up until you file your returns. The phrasing on the IRS website is that it can't exceed educational expenses, which are measured by the 1098T form. You probably got that form in undergrad; it details how much money you spent on educational expenses in a given year, so as long as your withdrawal doesn't exceed that amount, you are exempt from the 10% tax penalty.

I haven't actually done this yet, so I'll be looking into it a bit further before I do it, but that's what I've learned so far.

This is correct. Unfortunately the exception doesn't exist for 401k withdrawals so you have to move to a traditional or Roth IRA first and then take the distribution from there. I just withdrew all of my retirement money in January to pay for second semester 1L because I figure 2013 will be my lowest earning year and therefore the one where I'll face the lowest tax burden.

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jbagelboy
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Re: Advice on saving as a OL

Postby jbagelboy » Mon May 20, 2013 8:50 pm

Tiago Splitter wrote:
ph5354a wrote:
AllDangle wrote:How do you go about doing a Roth IRA withdrawal for educational expenses?


Well you withdraw it the same way regardless, the tax issue doesn't come up until you file your returns. The phrasing on the IRS website is that it can't exceed educational expenses, which are measured by the 1098T form. You probably got that form in undergrad; it details how much money you spent on educational expenses in a given year, so as long as your withdrawal doesn't exceed that amount, you are exempt from the 10% tax penalty.

I haven't actually done this yet, so I'll be looking into it a bit further before I do it, but that's what I've learned so far.

This is correct. Unfortunately the exception doesn't exist for 401k withdrawals so you have to move to a traditional or Roth IRA first and then take the distribution from there. I just withdrew all of my retirement money in January to pay for second semester 1L because I figure 2013 will be my lowest earning year and therefore the one where I'll face the lowest tax burden.


Okay. Thanks for the tip. Hope to see you at CLS tiaggo

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J-e-L-L-o
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Re: Advice on saving as a OL

Postby J-e-L-L-o » Tue May 21, 2013 7:28 am

I've done this. If you have an account with a major firm (Vanguard, Charles Schwabb, Fidelity...) you can automatically download the information into Turbo Tax at the end of the year. The program will ask you a few qualifying questions and if you pass all of them, it will do the work for you.

You have to be able to do a rollover into a Roth IRA though. The Roth is more forgiving w/ using your money for purposes other than retirement IF you have too.

Check your performance of your mutual fund. If returns are greater than your loan rate, keep it in there. It's not that difficult to beat 8% return. It's all about asset allocation. If you want to start learning how to put away money for retirement all you need are two books: The Boglehead Guide to Investing (keeping with John Bogle's philosophy of low cost index funds. The founder of the lowest cost mutual funds out there, Vanguard) and All About Asset Allocation.


http://www.amazon.com/Bogleheads-Guide- ... +investing
http://www.amazon.com/All-About-Asset-A ... 0071700781

Served me well with picking my IRA options. I say keep the fund and learn how to choose mutual funds for your retirement with it.

Or you can just cash it out. If you need to take out 60k in loans, take out 56.5k instead.

M458
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Re: Advice on saving as a OL

Postby M458 » Wed May 22, 2013 11:49 am

J-e-L-L-o wrote:I've done this. If you have an account with a major firm (Vanguard, Charles Schwabb, Fidelity...) you can automatically download the information into Turbo Tax at the end of the year. The program will ask you a few qualifying questions and if you pass all of them, it will do the work for you.

You have to be able to do a rollover into a Roth IRA though. The Roth is more forgiving w/ using your money for purposes other than retirement IF you have too.

Check your performance of your mutual fund. If returns are greater than your loan rate, keep it in there. It's not that difficult to beat 8% return. It's all about asset allocation. If you want to start learning how to put away money for retirement all you need are two books: The Boglehead Guide to Investing (keeping with John Bogle's philosophy of low cost index funds. The founder of the lowest cost mutual funds out there, Vanguard) and All About Asset Allocation.


http://www.amazon.com/Bogleheads-Guide- ... +investing
http://www.amazon.com/All-About-Asset-A ... 0071700781

Served me well with picking my IRA options. I say keep the fund and learn how to choose mutual funds for your retirement with it.

Or you can just cash it out. If you need to take out 60k in loans, take out 56.5k instead.



I totally agree that the Boglehead's Guide is incredibly valuable, but "not that difficult to beat an 8% return"...seriously? Maybe you mean in the long-term, but definitely not in the short-term. And when I say long-term, I'm talking 10+ year time periods. If it were easy to beat an 8% return in the short-term, it would follow that you can consistently produce returns above that level each year...and that's simply not true.

If you had invested $10,000 in Vanguard's Total Stock Market fund on January 1, 2000, 10 years later on January 1, 2010 you'd have a whopping $9,732.51. Oops.

If there's any chance you'll need the money within the next 3-5 years, you'll need to invest with a pretty conservative asset allocation. And a pretty conservative asset allocation is most likely not going to beat the 8% loan rates.

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Rory19
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Re: Advice on saving as a OL

Postby Rory19 » Wed May 22, 2013 5:07 pm

I liquidated my IRA because this upcoming tax year I will receive educational write-offs that will balance with the tax burden from liquidation. This way I take out less loans and don't feel the tax impact. Just my choice though.




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