Student loan payments: Actual numbers

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Anonymous User
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Re: Student loan payments: Actual numbers

Postby Anonymous User » Thu Dec 17, 2015 9:21 pm

bk1 wrote:
Anonymous User wrote:This might be a stupid question, but if an associate chooses not to contribute to their 401 k, their after tax income increases correct?

You're looking at it backwards. 401k contributions are optional so choosing not to contribute doesn't change your after-tax take home. If you contribute to a 401k, your after-tax take home goes down because your pre-tax take home goes down.


So in that case, does it make sense to contribute during stub year. seems like the smart play would be contributing to a roth ira instead during the stub year.

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Tiago Splitter
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Re: Student loan payments: Actual numbers

Postby Tiago Splitter » Thu Dec 17, 2015 9:23 pm

Anonymous User wrote:
bk1 wrote:
Anonymous User wrote:This might be a stupid question, but if an associate chooses not to contribute to their 401 k, their after tax income increases correct?

You're looking at it backwards. 401k contributions are optional so choosing not to contribute doesn't change your after-tax take home. If you contribute to a 401k, your after-tax take home goes down because your pre-tax take home goes down.


So in that case, does it make sense to contribute during stub year. seems like the smart play would be contributing to a roth ira instead during the stub year.

If you're only going to do one or the other then probably yes.

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jrthor10
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Re: Student loan payments: Actual numbers

Postby jrthor10 » Thu Dec 17, 2015 9:36 pm

Tiago Splitter wrote:
Anonymous User wrote:
bk1 wrote:
Anonymous User wrote:This might be a stupid question, but if an associate chooses not to contribute to their 401 k, their after tax income increases correct?

You're looking at it backwards. 401k contributions are optional so choosing not to contribute doesn't change your after-tax take home. If you contribute to a 401k, your after-tax take home goes down because your pre-tax take home goes down.


So in that case, does it make sense to contribute during stub year. seems like the smart play would be contributing to a roth ira instead during the stub year.

If you're only going to do one or the other then probably yes.


Don't understand this, but relevant to my interests, so can someone explain why roth over 401 in stub year?

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Tiago Splitter
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Re: Student loan payments: Actual numbers

Postby Tiago Splitter » Thu Dec 17, 2015 9:45 pm

jrthor10 wrote:Don't understand this, but relevant to my interests, so can someone explain why roth over 401 in stub year?

Roth makes more sense than pre-tax when your income is low. The deduction you get for contributing to the 401k isn't as valuable when you make 40k as it is when you make 160k.

Also all else equal the IRA is better than a 401k because of the flexibility it offers, particularly with regard to investment options. So even if you are going pre-tax I would use the traditional IRA (assuming you are eligible to take a deduction) before the 401k.

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bk1
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Re: Student loan payments: Actual numbers

Postby bk1 » Thu Dec 17, 2015 10:34 pm

Tiago Splitter wrote:Roth makes more sense than pre-tax when your income is low. The deduction you get for contributing to the 401k isn't as valuable when you make 40k as it is when you make 160k.

Also all else equal the IRA is better than a 401k because of the flexibility it offers, particularly with regard to investment options. So even if you are going pre-tax I would use the traditional IRA (assuming you are eligible to take a deduction) before the 401k.

To add: the reason that an IRA is more flexible is because you get to choose who the custodian of your account is (e.g., Vanguard, Fidelity, etc) and the good IRA custodians have plenty of low cost index funds to invest in. In contrast, your employer chooses the custodian for your 401k and often they have a shitty selection of funds, many with high fees. Because of this, it almost always makes sense to max out your IRA prior to contributing to your 401k (excluding the amount that your employer matches). On limited occasions, the funds in a 401k can be somewhat better than in an IRA (e.g., some 401k's have access to Vanguard Admiral funds which have low fees but typically require a 10k+ investment when done through an IRA but have no such requirement when in a 401k, thus making the 401k slightly beneficial because you can get the low fee Admiral fund even if you don't meet the minimum investment requirements if you were going through an IRA).

Anonymous User wrote:So in that case, does it make sense to contribute during stub year. seems like the smart play would be contributing to a roth ira instead during the stub year.

And another add to what Tiago said: there are multiple considerations for contributing to an IRA during your stub year. For example, once you are making an associate's salary for the year, you will no longer be able to contribute to pre-tax money to a traditional IRA and will only be able to do a backdoor Roth IRA. As a stub year, your income may be low enough to allow you to contribute to a traditional IRA and claim a deduction. Additionally, some firms may not allow you to contribute to a 401k until you've been with them for a long enough period of time. You should also note that you can make contributions to an IRA for the 2015 tax year through April ~15 of 2016 (when you make contributions in January through April you can select that they apply for the previous tax year).

Personally, I tend to think the roth vs traditional calculation is mostly a wash because it is difficult to know what the tax rates will be when you retire.

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Re: Student loan payments: Actual numbers

Postby ballouttacontrol » Thu Dec 17, 2015 10:43 pm

bk1 wrote:Personally, I tend to think the roth vs traditional calculation is mostly a wash because it is difficult to know what the tax rates will be when you retire.



I mean... with the USA and world becoming more and more liberal every day what are the chances tax rates ever actually go down

I feel like it would take some kind of catastrophic worldwide revolt for the US to not be as socialist as current Europe in another 20 years

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Re: Student loan payments: Actual numbers

Postby bk1 » Thu Dec 17, 2015 10:48 pm

Tiago Splitter wrote:But it's not like you are going to be able to take the lower paying job under standard repayment. In either case you're in a lot of trouble.

For me this is more specific to biglaw. In a different industry where you expected to be around a while at a fairly stable pay level paying down the loans makes more sense. You'd just assume you will have everything paid off after 10-15 and then you're in good shape. The problem with biglaw is you may need flexibility much sooner and paying down loans aggressively really limits that flexibility.

Paying down federal loans aggressively doesn't really limit flexibility in my mind. Once you've paid them low enough, you can take a lower paying job that can afford that payment. Worst case scenario, you can always fall back to IBR/PAYE/etc levels of repayment. If you're just doing IBR/PAYE/etc payments, you're going to pay more money over the life of the loan and thus need to have a high paying job for a longer period of time (compared to aggressive payments) to cover the total of the payments plus the tax bomb which is why I look at it as being less flexible over the course of 20 years.

I'm not sure that biglaw retention rates really change the calculus. If you leave biglaw after 3 years for a lower paying job (e.g., 50k) and have the 200k debt you were suggesting, you will still have a large tax bomb at the end (someone who averages 100k in income for the remaining 17 years will barely cover the interest each year under PAYE and thus the tax will be on nearly 200k).

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Re: Student loan payments: Actual numbers

Postby AVBucks4239 » Fri Dec 18, 2015 12:23 am

ballouttacontrol wrote:
bk1 wrote:Personally, I tend to think the roth vs traditional calculation is mostly a wash because it is difficult to know what the tax rates will be when you retire.



I mean... with the USA and world becoming more and more liberal every day what are the chances tax rates ever actually go down

I feel like it would take some kind of catastrophic worldwide revolt for the US to not be as socialist as current Europe in another 20 years


And on that same note, don't you see all the liberal complainypants getting rid of the tax bomb entirely?

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Re: Student loan payments: Actual numbers

Postby Tiago Splitter » Fri Dec 18, 2015 12:27 am

bk1 wrote:
Tiago Splitter wrote:But it's not like you are going to be able to take the lower paying job under standard repayment. In either case you're in a lot of trouble.

For me this is more specific to biglaw. In a different industry where you expected to be around a while at a fairly stable pay level paying down the loans makes more sense. You'd just assume you will have everything paid off after 10-15 and then you're in good shape. The problem with biglaw is you may need flexibility much sooner and paying down loans aggressively really limits that flexibility.

Paying down federal loans aggressively doesn't really limit flexibility in my mind. Once you've paid them low enough, you can take a lower paying job that can afford that payment. Worst case scenario, you can always fall back to IBR/PAYE/etc levels of repayment. If you're just doing IBR/PAYE/etc payments, you're going to pay more money over the life of the loan and thus need to have a high paying job for a longer period of time (compared to aggressive payments) to cover the total of the payments plus the tax bomb which is why I look at it as being less flexible over the course of 20 years.

I'm not sure that biglaw retention rates really change the calculus. If you leave biglaw after 3 years for a lower paying job (e.g., 50k) and have the 200k debt you were suggesting, you will still have a large tax bomb at the end (someone who averages 100k in income for the remaining 17 years will barely cover the interest each year under PAYE and thus the tax will be on nearly 200k).

I guess the thought is that after 3 years of biglaw you'll have the tax bomb saved. Now go do what you want.

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Re: Student loan payments: Actual numbers

Postby JohannDeMann » Fri Dec 18, 2015 12:42 am

bk1 wrote:
Tiago Splitter wrote:I'd go all in on PAYE for just this reason. If you dedicate most of your income to loans you won't have any flexibility for many, many years. Even if you pay 50k a year towards loans your loan balance will be up around 200k after three years.

But I feel like PAYE is somewhat false flexibility because if you do go with a low paying job, you may need to save more to cover the tax bomb (which will likely be larger because of the lower paying job). I mean it's definitely flexibility in the moment, but there is an accounting for that flexibility after 20 years.


also tax bomb is only up to the assets you have. so if you make dog shit and spend it on kids/college then you can essentially get off the hook on the tax bomb too. so saving for the tax bomb is flame. if you have savings and assets, then you have to pay the tax bomb.

also, its going to be legislated away.

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Re: Student loan payments: Actual numbers

Postby bk1 » Fri Dec 18, 2015 1:43 am

Tiago Splitter wrote:I guess the thought is that after 3 years of biglaw you'll have the tax bomb saved. Now go do what you want.

It seems unlikely that someone is paying 50k a year in payments and also able to save for the tax bomb.

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Re: Student loan payments: Actual numbers

Postby bk1 » Fri Dec 18, 2015 1:45 am

JohannDeMann wrote:also tax bomb is only up to the assets you have. so if you make dog shit and spend it on kids/college then you can essentially get off the hook on the tax bomb too. so saving for the tax bomb is flame. if you have savings and assets, then you have to pay the tax bomb.

also, its going to be legislated away.

1. If serious, I'd rather not have 0 assets in my mid to late 40s.

2. Possibly, but that's a big gamble to take.

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Re: Student loan payments: Actual numbers

Postby Tiago Splitter » Fri Dec 18, 2015 1:53 am

bk1 wrote:
Tiago Splitter wrote:I guess the thought is that after 3 years of biglaw you'll have the tax bomb saved. Now go do what you want.

It seems unlikely that someone is paying 50k a year in payments and also able to save for the tax bomb.

I think you're confusing things here. I'm saying don't pay 50k a year. Pay as little as possible. Instead of paying 50k a year towards loans you pay 50k a year towards savings.

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Re: Student loan payments: Actual numbers

Postby bk1 » Fri Dec 18, 2015 2:05 am

Tiago Splitter wrote:I think you're confusing things here. I'm saying don't pay 50k a year. Pay as little as possible. Instead of paying 50k a year towards loans you pay 50k a year towards savings.

We ended up talking past each other because I had started with the numbers you were referencing when talking to other guy (290k initial debt, 50k/year in payments, 200k debt after 3 years).

If you pay the PAYE minimum (e.g., ~1300/month on a first year associate's salary), you are barely going to make a dent in the loan (even if we use the ~260k starting debt for sticker price law school rather than 290k). You will seriously not be able to come close to saving for the tax bomb on 3 years of salary (assuming you transition to a significantly lower paying job in a reasonable amount of time).

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Re: Student loan payments: Actual numbers

Postby Tiago Splitter » Fri Dec 18, 2015 2:48 am

bk1 wrote:
Tiago Splitter wrote:I think you're confusing things here. I'm saying don't pay 50k a year. Pay as little as possible. Instead of paying 50k a year towards loans you pay 50k a year towards savings.

We ended up talking past each other because I had started with the numbers you were referencing when talking to other guy (290k initial debt, 50k/year in payments, 200k debt after 3 years).

If you pay the PAYE minimum (e.g., ~1300/month on a first year associate's salary), you are barely going to make a dent in the loan (even if we use the ~260k starting debt for sticker price law school rather than 290k). You will seriously not be able to come close to saving for the tax bomb on 3 years of salary (assuming you transition to a significantly lower paying job in a reasonable amount of time).

If you save 150k and get 4% for the next 17 years you'll be around 300k. That's more than enough.

I mean the dream scenario is to pay nothing and have the government forgive all of your loans after 20 years. For some reason people hear "tax bomb" and flip their shit like it's some huge penalty. The "tax bomb" is the government letting you pay off your loans at 40 cents on the dollar. With simple interest, someone who starts with 290k and pays nothing on their 7% loans would pay 278k if they get taxed at 40% at the end of 20 years. The problem is when they earn sort of a middle income which causes them to have to contribute a bunch of money during the course of their 20 years.

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Re: Student loan payments: Actual numbers

Postby bk1 » Fri Dec 18, 2015 2:59 am

Fair enough adding interest on the saved amount, though your estimate does assume current tax rates on the capital gains. I don't think the tax bomb is a penalty, but I do think it is an expense that has to be budgeted.

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Re: Student loan payments: Actual numbers

Postby lacrossebrother » Fri Dec 18, 2015 3:09 am

bk1 wrote:
JohannDeMann wrote:also tax bomb is only up to the assets you have. so if you make dog shit and spend it on kids/college then you can essentially get off the hook on the tax bomb too. so saving for the tax bomb is flame. if you have savings and assets, then you have to pay the tax bomb.

also, its going to be legislated away.

1. If serious, I'd rather not have 0 assets in my mid to late 40s.

2. Possibly, but that's a big gamble to take.

Pretty obvious that you should be saving everything in bitcoin

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Re: Student loan payments: Actual numbers

Postby ballouttacontrol » Fri Dec 18, 2015 5:43 am

TCR, if somehow the libs don't manage to get the taxbomb removed, is upon time for tax bomb, reduce AGI for 3 months so that you don't have to a Chapter 13, put all assets into a house in a State with a large homestead exemption, and file for a Chapter 7 bankruptcy.

Poof, debt gone.

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Re: Student loan payments: Actual numbers

Postby lacrossebrother » Fri Dec 18, 2015 9:45 am

What the hell are you talking about

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Re: Student loan payments: Actual numbers

Postby ballouttacontrol » Fri Dec 18, 2015 9:51 am

lacrossebrother wrote:What the hell are you talking about


how file bankruptcy on forgiveness taxbomb without losing anything except hurting ur credit score. which part was confusing?

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Re: Student loan payments: Actual numbers

Postby Old Gregg » Fri Dec 18, 2015 11:32 am

you sound almost as retarded as johanndumbass. and that's saying something

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Re: Student loan payments: Actual numbers

Postby AVBucks4239 » Fri Dec 18, 2015 11:54 am

ballouttacontrol wrote:TCR, if somehow the libs don't manage to get the taxbomb removed, is upon time for tax bomb, reduce AGI for 3 months so that you don't have to a Chapter 13, put all assets into a house in a State with a large homestead exemption, and file for a Chapter 7 bankruptcy.

Poof, debt gone.

I'm too lazy to look it up, but if this involved selling your home and buying another home in another state, I'm 90% sure this would qualify as a fraudulent conveyance in my state.

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Re: Student loan payments: Actual numbers

Postby ballouttacontrol » Fri Dec 18, 2015 1:13 pm

AVBucks4239 wrote:
ballouttacontrol wrote:TCR, if somehow the libs don't manage to get the taxbomb removed, is upon time for tax bomb, reduce AGI for 3 months so that you don't have to a Chapter 13, put all assets into a house in a State with a large homestead exemption, and file for a Chapter 7 bankruptcy.

Poof, debt gone.

I'm too lazy to look it up, but if this involved selling your home and buying another home in another state, I'm 90% sure this would qualify as a fraudulent conveyance in my state.


I mean, you could just like, legitimately move, if you think your lender is gonna try to argue that. That part was mostly in jest tho

Realistically, unless you have a pretty significant amount of $$$, you usually don't need to worry about actually losing property in a Ch. 7. Most states give you at the bare minimum like $100k between homestead exemption and other crap, and a lot of states a lot more than that. Also your retirement funds and all are protected. The key part would just be to have your equity in your house+retirement+possessions and not just have $100k in a random investment account

Only real down side is you're not gonna be qualifying for that mortgage in the next 7 years.

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Re: Student loan payments: Actual numbers

Postby AVBucks4239 » Fri Dec 18, 2015 1:27 pm

ballouttacontrol wrote:
AVBucks4239 wrote:
ballouttacontrol wrote:TCR, if somehow the libs don't manage to get the taxbomb removed, is upon time for tax bomb, reduce AGI for 3 months so that you don't have to a Chapter 13, put all assets into a house in a State with a large homestead exemption, and file for a Chapter 7 bankruptcy.

Poof, debt gone.

I'm too lazy to look it up, but if this involved selling your home and buying another home in another state, I'm 90% sure this would qualify as a fraudulent conveyance in my state.


I mean, you could just like, legitimately move, if you think your lender is gonna try to argue that. That part was mostly in jest tho

Realistically, unless you have a pretty significant amount of $$$, you usually don't need to worry about actually losing property in a Ch. 7. Most states give you at the bare minimum like $100k between homestead exemption and other crap, and a lot of states a lot more than that. Also your retirement funds and all are protected. The key part would just be to have your equity in your house+retirement+possessions and not just have $100k in a random investment account

Only real down side is you're not gonna be qualifying for that mortgage in the next 7 years.


Aside from the fact that your plan is complete bullshit, I'd rather just pay my tax liability.

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Re: Student loan payments: Actual numbers

Postby ballouttacontrol » Fri Dec 18, 2015 1:33 pm

AVBucks4239 wrote:
ballouttacontrol wrote:
AVBucks4239 wrote:
ballouttacontrol wrote:TCR, if somehow the libs don't manage to get the taxbomb removed, is upon time for tax bomb, reduce AGI for 3 months so that you don't have to a Chapter 13, put all assets into a house in a State with a large homestead exemption, and file for a Chapter 7 bankruptcy.

Poof, debt gone.

I'm too lazy to look it up, but if this involved selling your home and buying another home in another state, I'm 90% sure this would qualify as a fraudulent conveyance in my state.


I mean, you could just like, legitimately move, if you think your lender is gonna try to argue that. That part was mostly in jest tho

Realistically, unless you have a pretty significant amount of $$$, you usually don't need to worry about actually losing property in a Ch. 7. Most states give you at the bare minimum like $100k between homestead exemption and other crap, and a lot of states a lot more than that. Also your retirement funds and all are protected. The key part would just be to have your equity in your house+retirement+possessions and not just have $100k in a random investment account

Only real down side is you're not gonna be qualifying for that mortgage in the next 7 years.


Aside from the fact that your plan is complete bullshit, I'd rather just pay my tax liability.


how is it bullshit? Other than reducing your AGI to below the Ch. 13 means test limit, my "plan" is to simply file bankruptcy lol

And, I mean, if you're one of the PAYE sticker debt people and you're gonna have $400k income tax liability dumped on you, that's like $150k tax bill. I'd for sure move to Florida (unlimited homestead exemption there) for a one-time payment of $150k




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