Advice on saving as a OL

Discuss various money matters here. Loans (federal and private), scholarships, lottery winnings, or other school finance related information and queries.
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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 » Wed May 22, 2013 7:15 pm

M458 wrote:
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.


Which is why I recommended the 2nd book for asset allocation. You wouldn't have all your money in one fund. I have easily trumped 8% return w/ a mix of domestic and international and a splatter of precious metals. At a young age you wouldn't need a conservative portfolio.

Sure past is not indicative of the future and who knows where the market will be in 3 years.

And if you would have kept that money in the fund in 2010, it would have more than doubled at todays prices in 2013.
https://personal.vanguard.com/us/FundsS ... IntExt=INT

If the OP NEEDED the money then yes, that is a different story. But I was advising to keep the fund to jump start their retirement plan and learn about how different funds work. But it depends on what plan it is in and with what company.

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RedGiant
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Re: Advice on saving as a OL

Postby RedGiant » Thu May 23, 2013 2:27 am

OP has only 3.5k, but others who have more substantial portfolios are completely shocking me with their intentions to roll 401ks to IRAs and then convert to Roth and withdraw. Why? Compound interest. 20k in your 20s in a tax-deferred account which is hard to touch will easily be worth six figures by retirement. Federal loans are not cheap, but...man, raiding retirement accounts which are pretax or even post tax, such as Roth IRAs, is just truly awful advice. Don't touch your retirement, kids.

Love, an Old who's is confident in her earning power and terrified to be old and penniless.

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Tiago Splitter
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Re: Advice on saving as a OL

Postby Tiago Splitter » Thu May 23, 2013 9:38 am

RedGiant wrote:OP has only 3.5k, but others who have more substantial portfolios are completely shocking me with their intentions to roll 401ks to IRAs and then convert to Roth and withdraw. Why? Compound interest. 20k in your 20s in a tax-deferred account which is hard to touch will easily be worth six figures by retirement. Federal loans are not cheap, but...man, raiding retirement accounts which are pretax or even post tax, such as Roth IRAs, is just truly awful advice. Don't touch your retirement, kids.

Love, an Old who's is confident in her earning power and terrified to be old and penniless.

Whether or not it's a good idea to use retirement funds to pay for law school has been debated numerous times on this forum and plenty of smart people have come down on either side. Anyone interested can find those discussions via the search function.

For those who do make the choice you noted (401-->IRA-->Roth) the second move is totally pointless. Just withdraw the funds from the traditional IRA. You'll pay the taxes either way.

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RedGiant
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Re: Advice on saving as a OL

Postby RedGiant » Thu May 23, 2013 8:47 pm

Apologies Tiago--I don't really troll the boards to look for past debates, you know, not having thousands of posts to my name.

However, I do have six figures in retirement accounts and am headed off to school. And I will happily take out low six figures in debt to attend school. I'd rather my retirement money stay put and compound (even if at a slightly lower rate than some GradPlus loans). Based on my background, I am confident about my post-school earnings power.

I'm willing to live in less fancy house and take less swank vacations than my non-law school friends because I chose to pursue a degree and have to push monthly cash flow toward loans. But I am not willing to live in a shack when I'm 70 or ask my (unborn) children to support me in old age. (Trust me--a number of my friends are supporting their parents--it's not great for family dynamics!)

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ph5354a
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Re: Advice on saving as a OL

Postby ph5354a » Thu May 23, 2013 8:56 pm

...that is not anywhere close to what Tiago's post meant.

20141023
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Re: Advice on saving as a OL

Postby 20141023 » Fri May 24, 2013 1:37 pm

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Last edited by 20141023 on Mon Feb 16, 2015 12:01 am, edited 1 time in total.

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francesfarmer
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Re: Advice on saving as a OL

Postby francesfarmer » Fri May 24, 2013 1:55 pm

Someone correct me if I'm wrong, but I am pretty sure I read the other day that you can't pull money out of a Roth IRA for school without the penalty if you opened the IRA within the past 5 years. So that might throw a wrench in the works if anyone is planning to do this.

Source: somewhere on the internet that I immortalized in a pros and cons chart.

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ph5354a
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Re: Advice on saving as a OL

Postby ph5354a » Fri May 24, 2013 1:57 pm

francesfarmer wrote:Someone correct me if I'm wrong, but I am pretty sure I read the other day that you can't pull money out of a Roth IRA for school without the penalty if you opened the IRA within the past 5 years. So that might throw a wrench in the works if anyone is planning to do this.

Source: somewhere on the internet that I immortalized in a pros and cons chart.


Hmmm interesting. I didn't see anything like that on the IRS website, but if you have a source, let me know. That would certainly throw a wrench into my plans, though it's not that much money anyways.

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Tiago Splitter
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Re: Advice on saving as a OL

Postby Tiago Splitter » Fri May 24, 2013 1:59 pm

francesfarmer wrote:Someone correct me if I'm wrong, but I am pretty sure I read the other day that you can't pull money out of a Roth IRA for school without the penalty if you opened the IRA within the past 5 years. So that might throw a wrench in the works if anyone is planning to do this.

Source: somewhere on the internet that I immortalized in a pros and cons chart.

The first money out of a Roth IRA is your contributions, which always come out tax and penalty free.

The next money out is earnings. Those are penalty free if you have a penalty exception, one of which is higher education expenses.

To avoid taxes on the earnings, you need to have had the money in there for five years and have one of the following: age 59.5, death, disability, or a first time home purchase. As you can see the five year rule has nothing to do with higher education expenses. It only deals with whether earnings will be taxed. That means that you will owe taxes on your earnings if you remove earnings for higher education.

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RedGiant
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Re: Advice on saving as a OL

Postby RedGiant » Fri May 24, 2013 4:14 pm

kappycaft1 wrote:
ph5354a wrote:...that is not anywhere close to what Tiago's post meant.

This. And also, what you, RedGiant, are missing in regards to the importance of compounding is that although money in a 401k or wherever you have it is likely compounding, so is your debt - at 6.8/7.9% annual interest rates. The difference, as I've explained before, is that the law school loans stop compounding once you've reached the capitalization cap of 10% of the principal balance. The savings will continue to grow exponentially, while the debt will eventually hit a limit of how much will accrue each month. If this cap hadn't been established by PAYE, I can hardly see how it would be advisable to not try to use savings to the extent possible to avoid loans unless you're putting your money into an account with additional risk that comes with increased rates.



Can you explain more about the cap limit? I've never heard this. My grad school loans are all from the Stafford/Unsub Stafford days, so there was no PAYE options (but there was IBR).

Also, I guess the difference with your analysis is that I do have enough cash flow to pay interest during school, so my loans won't be growing in school, aside from origination/orig principal balance. I totally agree that a >9.8% return is unlikely on IRA earnings. But I would prefer to leave the money there (bc I am the most risk-averse person ever--it's really a risk tolerance/can you sleep at night issue for me).

As I mentioned above, I worry about the very LT future (e.g. retirement). Less worry about near term earnings prospects and paying off debt. I don't expect to do IBR or PAYE--I want to put my loans on the fastest schedule possible and just pay them off/clear my balance sheet. Having debt lingering for a long time would make me worried. Again, that's just me.




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