Personal Finance 101 for Young Lawyers Forum

[kalvano]

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.

Also, correct me if I'm wrong, but any return on those investments is still tax-free, provided you only withdraw your contribution. So if you have contributed $25,000 over 5 years, and that's now $30,000 due to investment growth, you can withdraw the $25,000 and the $5,000 is still yours tax-free so long as you don't withdraw it until retirement. Is that correct?

[Danger Zone]

Yes that's right. Once you reach 59.5 years, you can withdraw earnings tax free.

[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)

Incredibly minor, but if you haven't already maxed out your HSA with personal contributions this year (or for next year's planning purposes), you can have the judiciary divert pre-tax money directly into your HSA. Obviously, you'd get to take the HSA deduction anyway, so the only difference this makes is reducing your salary for FICA purposes. Again, very small, but every cent helps.

See http://www.biglawinvestor.com/sneaking- ... urity-tax/ for more info.

The form you need to submit to the judiciary is here (the regular allotment form you can fill out online won't cut it). Fill out that PDF and submit it to your court's HR. Mine had never seen it before, but it worked its way up the chain to DC and my contributions have been coming out ever since.

[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

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.

Also, correct me if I'm wrong, but any return on those investments is still tax-free, provided you only withdraw your contribution. So if you have contributed $25,000 over 5 years, and that's now $30,000 due to investment growth, you can withdraw the $25,000 and the $5,000 is still yours tax-free so long as you don't withdraw it until retirement. Is that correct?

I am starting to get sold on this now that I can withdraw up to my contribution tax free.

[Tiago Splitter]

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.

Also, correct me if I'm wrong, but any return on those investments is still tax-free, provided you only withdraw your contribution. So if you have contributed $25,000 over 5 years, and that's now $30,000 due to investment growth, you can withdraw the $25,000 and the $5,000 is still yours tax-free so long as you don't withdraw it until retirement. Is that correct?

Yeah contributions come out first. And they can be taken out any time. The 5 year rule is for earnings (gotta be 59.5 or other penalty exception AND have five years in the account).

[Danger Zone]

Just so we're on the same page, there's two five year rules that apply to Roths:

https://www.kitces.com/blog/understandi ... nversions/

[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)

Incredibly minor, but if you haven't already maxed out your HSA with personal contributions this year (or for next year's planning purposes), you can have the judiciary divert pre-tax money directly into your HSA. Obviously, you'd get to take the HSA deduction anyway, so the only difference this makes is reducing your salary for FICA purposes. Again, very small, but every cent helps.

See http://www.biglawinvestor.com/sneaking- ... urity-tax/ for more info.

The form you need to submit to the judiciary is here (the regular allotment form you can fill out online won't cut it). Fill out that PDF and submit it to your court's HR. Mine had never seen it before, but it worked its way up the chain to DC and my contributions have been coming out ever since.

Anon who asked this question.

Thanks for the recommendation on the HSA AO form, I'll make sure to add that for the next clerkship. Also, I appreciate the reference to biglawinvestor, I have not seen that site before. Other than that recommendation, nothing else that I can really do for pre-tax/tax advantaged accounts without TSP plan access?

[Dr. Nefario]

What's the general thoughts on not aggressively paying down debt and instead doing a refi and saving money so that a house/etc can be purchased even if you sizzle out of biglaw? Is aggressively paying debt for the long term even worth it? I came across several articles discussing saving for retirement and how much better off you'd be by saving as much as possible and paying debt over 10 years compared with paying off in 3-5 and then saving.

[Anonymous User]

What's the general thoughts on not aggressively paying down debt and instead doing a refi and saving money so that a house/etc can be purchased even if you sizzle out of biglaw? Is aggressively paying debt for the long term even worth it? I came across several articles discussing saving for retirement and how much better off you'd be by saving as much as possible and paying debt over 10 years compared with paying off in 3-5 and then saving.

Think it depends on you and how comfortable you are with debt hanging over your head. I had $250,000 in debt when graduating from law school and decided to aggressively pay it down. After 4 years I've paid about half of it down and am now much more comfortable refinancing and saving as much as possible while I can.

[Dr. Nefario]

Random one-off: are there any positive or negative repercussions that could be felt in the loan refi market if sofi is granted bank status from their application?

[Anonymous User]

I make $72K but I have $75K in student loan debt. Am I screwed?

[Danger Zone]

I make $72K but I have $75K in student loan debt. Am I screwed?

Not even close. That's what PAYE/IBR is for

[Anonymous User]

I'm in a similar predicament. I make $68K or $75K with bonus at a 5 attorney firm in the Southeast (ATL/Charlotte) but I have $99K in student loan debt. I don't have any CC debt but I feel like I'll never be able to buy a home with that debt burden.

[Anonymous User]

I'm in a similar predicament. I make $68K or $75K with bonus at a 5 attorney firm in the Southeast (ATL/Charlotte) but I have $99K in student loan debt. I don't have any CC debt but I feel like I'll never be able to buy a home with that debt burden.

I finished UG with 100k+ in debt. Started out making 75ish, and I could manage it on the 10 year plan. If you have a SO who can contribute to bills, you should definitely be able to make things work with buying a house. You won't be living in a McMansion by any means, but build the equity up and then upgrade after the loans are paid off.

[Anonymous User]

I'm in a similar predicament. I make $68K or $75K with bonus at a 5 attorney firm in the Southeast (ATL/Charlotte) but I have $99K in student loan debt. I don't have any CC debt but I feel like I'll never be able to buy a home with that debt burden.

I make half of what my debt load is. Either go on PAYE or look into refinancing to bring the monthly payments down. It can be managed.

[PowerBag21]

Is there a general consensus on how much money to keep in your checking account? I've always heard that you should have 3-6 months of living expenses in cash, but it feels kind of silly to have $20k+ sitting in my checking account rather than putting a good chunk of this into my taxable brokerage account. Would it be foolhardy to put $10k-$15k of this into my brokerage account and just keep $5k-$10k in checking?

[kalvano]

Is there a general consensus on how much money to keep in your checking account? I've always heard that you should have 3-6 months of living expenses in cash, but it feels kind of silly to have $20k+ sitting in my checking account rather than putting a good chunk of this into my taxable brokerage account. Would it be foolhardy to put $10k-$15k of this into my brokerage account and just keep $5k-$10k in checking?

That's what I do. I have generally low risk investments, and if an emergency comes up, I don't think I'll be left in a bad spot. But it seems silly to keep that much in a savings account - I keep around $7500 or so, which should be enough to cover most anything that comes up.

[ponderingmeerkat]

Is there a general consensus on how much money to keep in your checking account? I've always heard that you should have 3-6 months of living expenses in cash, but it feels kind of silly to have $20k+ sitting in my checking account rather than putting a good chunk of this into my taxable brokerage account. Would it be foolhardy to put $10k-$15k of this into my brokerage account and just keep $5k-$10k in checking?

In the "I don't practice what I preach department", I highly recommend keeping your 6 months liquid (savings account--not checking) when you're first starting out. You have to realize that you're most likely to need your emergency fund when you're unemployed, and you're most likely to be unemployed during a market downturn. So a pure-brokerage e-fund adds to your risk profile.

Now, to be honest, my wife and I, we only keep $5K in checking and everything else in brokerage. But here's why I think we can get away with it while most TLSers can't:

1. My wife and I both work, which lessens the likelihood of typical "job churn" leaving us both without any income in a given month.
2. We don't have kids or pets so we expose ourselves to less risk associated with those unexpected expenses popping up (especially when compared to a typical 4-person family with a dog/cat and associated hospital/vet bills).
3. We have two paid off cars (so no car note to wrangle). The cars are also only a couple years old and so we don't expect major repair expenses in the foreseeable.
4. We have no mortgage or student loans left.
5. Our taxable brokerage account exceeds six figures. Meaning even if the market declines by 50+% like in 1929, there should still be enough in there to cover six months of expenses.
6. Our IRAs/401Ks are roughly equivalent in value to our taxable brokerage account and could be raided in a "no shitter" emergency to keep food on the table for several years.

All this to say, I sincerely doubt many (any?) TLSers fit this profile, and I only very recently felt comfortable taking that additional 15-20K in the emergency fund out of savings and putting it back to work in the brokerage account. If you have non-mortgage debt (car/student/etc), if you are single (or have a significant other that doesn't work and doesn't offset the volatility in your income), if you're married with tons of childcare/petcare costs that are "spikey" or unpredictable, if you don't have enough in savings that you could weather a 50% "haircut" in a market downturn and still cover your emergency fund requirements, then don't do it.

Good luck!

[Pokemon]

Is there a general consensus on how much money to keep in your checking account? I've always heard that you should have 3-6 months of living expenses in cash, but it feels kind of silly to have $20k+ sitting in my checking account rather than putting a good chunk of this into my taxable brokerage account. Would it be foolhardy to put $10k-$15k of this into my brokerage account and just keep $5k-$10k in checking?

Are you in biglaw? If so, agree that you can just keep 5k 10k in savings (why checking when saving has no withdrawal fees and still get that fat 1.20% at an online only bank?).

Reason why I mention biglaw is that even if fired you will still get some sort of income when they fire you which even if only a month salary it still ends up being a considerable amount.

[PowerBag21]

Thanks for the responses. I am a second year in BigLaw. Between my checking account and brokerage account, I have about $30k saved (also about $20k in my 401k which I don't plan on ever touching but in a true emergency I could access it). I think I'll open up a savings account with $15k or so, keeping checking at $5k-$6k, and then continue putting the $2k I'm saving every month into brokerage account.

[Anonymous User]

For someone with no investments whatsoever and more than enough for an emergency fund, would now be a smarter time to invest (knowing a correction could happen at any moment) or would it be better to wait for the correction and buy then?

[RaceJudicata]

For someone with no investments whatsoever and more than enough for an emergency fund, would now be a smarter time to invest (knowing a correction could happen at any moment) or would it be better to wait for the correction and buy then?

Don't try and time the market. If you want to invest, invest -- but be in it for the relatively long haul.

[Wipfelder]

For someone with no investments whatsoever and more than enough for an emergency fund, would now be a smarter time to invest (knowing a correction could happen at any moment) or would it be better to wait for the correction and buy then?

Don't try and time the market. If you want to invest, invest -- but be in it for the relatively long haul.

Amen.

[Anonymous User]

As a newbie risk averse investor, people on here would yell at me for how much I have in savings in comparison to investing. Where are non-expert investor people investing this money? Just index funds or is there something I'm really missing?

[Pokemon]

As a newbie risk averse investor, people on here would yell at me for how much I have in savings in comparison to investing. Where are non-expert investor people investing this money? Just index funds or is there something I'm really missing?

Index etfs for me. I do not try to time the market but I try to do some diversification and try to invest further when I see a decline somewhere.