Personal Finance 101 for Young Lawyers Forum

[zot1]

My FICO score went up. Time to use my credit again.

[North]

Is the "private banking" that law firms list as a benefit on their NALP page basically just higher fees to be told to invest in index funds or is it like relationship rates on mortgages and savings accounts and stuff?

My firm's turned out to be the bank trying to sell you slightly discounted financial advising.

[Porkypots]

quick question, i'm in a special situation. i have a full time job but I'm in law school. my job doesn't offer a 401(k) until you've been there one year. should I start saving into an IRA or continue to pay my debt (college/CC) considering that I plan on working part-time by mid 2018.

[Tiago Splitter]

quick question, i'm in a special situation. i have a full time job but I'm in law school. my job doesn't offer a 401(k) until you've been there one year. should I start saving into an IRA or continue to pay my debt (college/CC) considering that I plan on working part-time by mid 2018.

There's no one right answer but I'm a fan of using your tax-advantaged space while you can. You can save $5500 in an IRA now and $5500 again next year, but if you miss this year you can't just put 11k in next year to make up for it. So I'd fund the IRA.

That said the analysis doesn't change between the IRA and the 401k unless they offer a 401k match. Without a match a 401k is basically just an IRA with higher contribution limits.

[swampthang]

quick question, i'm in a special situation. i have a full time job but I'm in law school. my job doesn't offer a 401(k) until you've been there one year. should I start saving into an IRA or continue to pay my debt (college/CC) considering that I plan on working part-time by mid 2018.

There's no one right answer but I'm a fan of using your tax-advantaged space while you can. You can save $5500 in an IRA now and $5500 again next year, but if you miss this year you can't just put 11k in next year to make up for it. So I'd fund the IRA.

That said the analysis doesn't change between the IRA and the 401k unless they offer a 401k match. Without a match a 401k is basically just an IRA with higher contribution limits.

All of this is credited. Whenever you do get around to paying off debt, make sure to pay the HIGHEST INTEREST RATE loans off first!

[airwrecka]

thank you for this!

[Mickfromgm]

Can someone offer some insight? 60k in debt so far, have a 2L SA lined up. With my 30k from the summer I will make, I am thinking of using 25k (blowing other 5k I presume) toward fall semester tuition. That way I won't have to take out loans for fall, but rather only spring of 3L. Does this make sense? Using my SA money for tuition, so I don't have loans gaining interest on me while I would have 30k in the bank? [Or is it better to reduce my already accruing 60k loans??]

Thank you in advance!!! (fyi loan interest is 6%)

Be careful, some law schools would definitely include your estimated summer earnings in the calculus of your 3L financial aid (grant/loan). I was so bummed.

[nunumaster]

OP this was great. Can you or someone speak to how to do a back-door roth IRA? Since big law attorney's are making 180k, above the income limit, we can't just fund $5500 into our roth IRA. I've hear that there's a way to open a traditional IRA, which doesn't have income limits, and then converting/rolling that over into the ROTH on a yearly basis. I understand that the income will be taxed in the year of conversion, but once in the ROTH, earnings on it won't be taxed at withdrawl in the future. Is there a yearly cap on the amount? What's the mechanical process?

This is of course after maxing out the company provided 401k at 18k, HSA, etc.

[Jchance]

^ how to backdoor Roth IRA:
https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Yes, you are still restricted on the yearly contribution limit on the traditional IRA amount.

[kalvano]

OP this was great. Can you or someone speak to how to do a back-door roth IRA? Since big law attorney's are making 180k, above the income limit, we can't just fund $5500 into our roth IRA. I've hear that there's a way to open a traditional IRA, which doesn't have income limits, and then converting/rolling that over into the ROTH on a yearly basis. I understand that the income will be taxed in the year of conversion, but once in the ROTH, earnings on it won't be taxed at withdrawl in the future. Is there a yearly cap on the amount? What's the mechanical process?

This is of course after maxing out the company provided 401k at 18k, HSA, etc.

I do it every year for myself and my wife. USAA maintains an no-balance Traditional IRA for me, and I fund it every year with $5500 for me, and my wife does the same in her name. The funds clear in 2-3 days, and then USAA automatically does a rollover to my Roth (same for my wife). The funds clear in 2-3 days and then I invest. My accountant just doesn't claim the deduction for funding a Traditional IRA on my taxes, and there is no taxable event in the rollover because of the short timeline.

Pretty much any decent brokerage can do it for you.

[HangingAround]

This is probably a dumb question - for the Roth earned income requirement does earned income have to be past-tense "earned", or can you just know it will be earned that tax year (I assume, if the second, that there's some mechanism if you don't end up earning the required amount)? So, could I, as a summer associate, go ahead and fund 5500 in a Roth before starting/earning anything?

[Mickfromgm]

Just to address an above post, be aware that when a law firm recommends a financial institution (particularly a financial adviser) it is usually SOLELY because such institution/adviser has a relationship (i.e., client) with the firm. A recommendation doesn't mean an endorsement of their abilities or performance.

[ponderingmeerkat]

This is probably a dumb question - for the Roth earned income requirement does earned income have to be past-tense "earned", or can you just know it will be earned that tax year (I assume, if the second, that there's some mechanism if you don't end up earning the required amount)? So, could I, as a summer associate, go ahead and fund 5500 in a Roth before starting/earning anything?

You're fine to contribute that 5500 even though you haven't yet "earned" it (as long as you anticipate earning it). Keep in mind though, if you don't earn 5.5K this year (maybe you get sick and can't complete your summer associate position--I dunno) then you'll have to pull your contribution. But, as long as you expect to clear 5500, you're fine putting it in now.

As a data point, we max our IRAs on Jan 2. We get paid well, but I guarantee we similarly haven't yet "earned" 11K in the 30 seconds it takes for our contributions to hit the account. We will earn it and that's good enough. Similar situation to yours.

[ballouttacontrol]

PSA: max out your HSA.

You can accrue qualified health expenses over the years forever, and then just withdraw whenever in retirement (including in early retirement) when you need the actual $$. Net effect is tax-free contribution and tax-free withdrawals. Just make sure you save your receipts over the years lol

If you don't manage to spend the balance of your HSA on qualified medical expenses for your family over the course of your life, the HSA just becomes the same as a tIRA at age 65. That is, your withdrawals will just be tax deferred. Penalty free.

Moreover, if you contribute to your HSA via payroll deduction rather than pay it yourself, it is exempt from FICA taxes. Small saving (like $50 if you're salary is btwn 120k and 200k, or like $80 if you're above $200k), but a saving nonetheless.

[Wipfelder]

PSA: max out your HSA.

You can accrue qualified health expenses over the years forever, and then just withdraw whenever in retirement (including in early retirement) when you need the actual $$. Net effect is tax-free contribution and tax-free withdrawals. Just make sure you save your receipts over the years lol

If you don't manage to spend the balance of your HSA on qualified medical expenses for your family over the course of your life, the HSA just becomes the same as a tIRA at age 65. That is, your withdrawals will just be tax deferred. Penalty free.

Moreover, if you contribute to your HSA via payroll deduction rather than pay it yourself, it is exempt from FICA taxes. Small saving (like $50 if you're salary is btwn 120k and 200k, or like $80 if you're above $200k), but a saving nonetheless.

That is awesome advice!

[Mickfromgm]

PSA: max out your HSA.

You can accrue qualified health expenses over the years forever, and then just withdraw whenever in retirement (including in early retirement) when you need the actual $$. Net effect is tax-free contribution and tax-free withdrawals. Just make sure you save your receipts over the years lol

If you don't manage to spend the balance of your HSA on qualified medical expenses for your family over the course of your life, the HSA just becomes the same as a tIRA at age 65. That is, your withdrawals will just be tax deferred. Penalty free.

Moreover, if you contribute to your HSA via payroll deduction rather than pay it yourself, it is exempt from FICA taxes. Small saving (like $50 if you're salary is btwn 120k and 200k, or like $80 if you're above $200k), but a saving nonetheless.

That is awesome advice!

Yup, very nicely explained, too.

[ponderingmeerkat]

As I recall, you have to have a qualifying high deductible health plan to be eligible for an health savings account. So, for those of you on an "all expenses paid" platinum health plan, you will not qualify.

So, it behooves the folks in here to double check with their HR reps whether or not their current insurance qualifies them for an HSA contribution. If yes, it's absolutely the single best tax-advantaged vehicle for savings. If no, do the napkin-math and see if switching to an HDHP makes sense once the HSA's benefits are factored in.

[abogadesq]

PSA: max out your HSA.

You can accrue qualified health expenses over the years forever, and then just withdraw whenever in retirement (including in early retirement) when you need the actual $$. Net effect is tax-free contribution and tax-free withdrawals. Just make sure you save your receipts over the years lol

If you don't manage to spend the balance of your HSA on qualified medical expenses for your family over the course of your life, the HSA just becomes the same as a tIRA at age 65. That is, your withdrawals will just be tax deferred. Penalty free.

Moreover, if you contribute to your HSA via payroll deduction rather than pay it yourself, it is exempt from FICA taxes. Small saving (like $50 if you're salary is btwn 120k and 200k, or like $80 if you're above $200k), but a saving nonetheless.

This may be a dumb question, but are HSA's only available for people enrolled in HDHP's?

[ballouttacontrol]

PSA: max out your HSA.

You can accrue qualified health expenses over the years forever, and then just withdraw whenever in retirement (including in early retirement) when you need the actual $$. Net effect is tax-free contribution and tax-free withdrawals. Just make sure you save your receipts over the years lol

If you don't manage to spend the balance of your HSA on qualified medical expenses for your family over the course of your life, the HSA just becomes the same as a tIRA at age 65. That is, your withdrawals will just be tax deferred. Penalty free.

Moreover, if you contribute to your HSA via payroll deduction rather than pay it yourself, it is exempt from FICA taxes. Small saving (like $50 if you're salary is btwn 120k and 200k, or like $80 if you're above $200k), but a saving nonetheless.

This may be a dumb question, but are HSA's only available for people enrolled in HDHP's?

idk if there's any legal requirement, but yea HSAs are usually offered with high deductible plans

[polareagle]

PSA: max out your HSA.

You can accrue qualified health expenses over the years forever, and then just withdraw whenever in retirement (including in early retirement) when you need the actual $$. Net effect is tax-free contribution and tax-free withdrawals. Just make sure you save your receipts over the years lol

If you don't manage to spend the balance of your HSA on qualified medical expenses for your family over the course of your life, the HSA just becomes the same as a tIRA at age 65. That is, your withdrawals will just be tax deferred. Penalty free.

Moreover, if you contribute to your HSA via payroll deduction rather than pay it yourself, it is exempt from FICA taxes. Small saving (like $50 if you're salary is btwn 120k and 200k, or like $80 if you're above $200k), but a saving nonetheless.

This may be a dumb question, but are HSA's only available for people enrolled in HDHP's?

idk if there's any legal requirement, but yea HSAs are usually offered with high deductible plans

Yes, HSA's are only available with a HDHP.

https://www.irs.gov/publications/p969/ar02.html

[Pokemon]

Any point to putting money on a Roth IRA after tax account if I plan on using it before retirement.

[Danger Zone]

Any point to putting money on a Roth IRA after tax account if I plan on using it before retirement.

Absolutely, the roth is the only retirement account you can withdraw contributions from without taking a penalty (after its been open five years).

[Pokemon]

Any point to putting money on a Roth IRA after tax account if I plan on using it before retirement.

Absolutely, the roth is the only retirement account you can withdraw contributions from without taking a penalty (after its been open five years).

Yes, but if I do not keep money until retirement I get 0 tax benefit. Am I missing something? Why lose liquidity for those 5 years for no benefit since I plan on using prior to retirement

[Danger Zone]

Any point to putting money on a Roth IRA after tax account if I plan on using it before retirement.

Absolutely, the roth is the only retirement account you can withdraw contributions from without taking a penalty (after its been open five years).

Yes, but if I do not keep money until retirement I get 0 tax benefit. Am I missing something? Why lose liquidity for those 5 years for no benefit since I plan on using prior to retirement

Because plans change. Are you certain you will use all of it? If you know with 100% certainty you're going to use all of it, then yeah there's no point at all to putting it in a Roth account. But that's an odd thing to assume about funds you're presumably setting aside for retirement.

[Anonymous User]

Pretty sure I did not see the answer to my question on this thread, but what do people recommend in terms of saving/investing while in multiple one-year clerkships? (JSP-11 and -12)

I've capped my HSA contributions and am going to cap Roth IRA contribution, but as a term clerk, I can't open a TSP account. Are there other investment vehicles or is my best remaining option just contributing to a taxable brokerage account? (No loans, so that isn't a factor)