Best use of $40k - student loans, taxable account, or 529?

[Nebulus2017]

Hi all,

 

First time poster, long time reader. I am looking for advice regarding the best way to utilize some extra cash from a recent real estate sale.

 

A bit about myself - I am a resident who has ~ 15 months left in my training, and my wife is a pharmacist currently at home with our new daughter. We have 340k of student loans between us, consolidated a variable rate that is currently ~5%.

 

Our roth IRAs are both fully funded for 2017, and my 401k will be fully funded by the end of the year. These are our only current investments.

 

Question #1 - From the home proceeds, we are planning on putting a large chunk aside for a down payment on our next home. So, my first question for is what would be the best place to park this money for ~12 months? I was thinking a high-interest savings account (maybe via an online-only bank?) or a 12-month CD.

 

Question #2 - After the down payment is put aside and we put some cash towards student loans, we'll have ~$40k extra left over from the sale. Should we just put more towards our student loan principal? Or should we start a 529 for our daughter? Or should we start a new, post-tax/taxable retirement savings account with Vanguard? Maybe a mixture of these options?

 

Thanks guys! Any and all advice is appreciated!

 

[GXA]

Congratulations on your sale!!

1. Yes - 12 month CD or online savings account (such as Ally bank).

2. It depends.  Front loading a 529 would be a good use of the funds.  Are there any state tax benefits for the 529?  What is the interest rate on your student loans? Taxable accounts are valuable and this would be a good time to get one started.  I agree with your thoughts - maybe a mixture of each of these options...

[Nebulus2017]

GXA - thanks for the quick response!

 

I'm in MA, so I'd probably look into out-of-state options (like Utah) for the 529.  Student loans are at a variable rate, currently 5.19% and rising.

 

For taxable accounts, would I just log into my Vanguard account and buy shares of whatever low cost mutual fund I want? Basically the same as my IRA but just without placing them into a pre-tax "vehicle" like a IRA or 401k?

 

Thanks!

[jhwkr542]

1) Agree with Ally account. Needs to be liquid with no risk attached.

2) With 5% student loans that are likely trending up, I'd max out the state deduction for 529 then dump everything to student loans. I wouldn't mess with taxable at that rate of student loans. If you can finance them lower, then you may consider taxable. Also with that rate, I'd consider a physicians mortgage loan to increase your allotment towards student loans if you really are buying (another discussion altogether). But if you're doing pslf, then don't put an extra penny to those loans.

[Golfing Doc]

I would also go with 529 for state tax deduction, then put the rest in to student loans.

If you want it to be more liquid, I'd use a high interest checking account with bank of internet (1.25%) or ally (I think 1%). I don't think CDs are much higher than this

[Nebulus2017]

Hey guys,

 

Thanks for all of the advice - will aim to get an online savings account rather than a CD.

 

For the 529, I'm in MA and thus do not believe that we get a tax benefit from them. Does that change your advice/thoughts on this at all?

 

Also, if I do go the 529 route, isn't it possible to front load up to 5 years worth of 529 contributions at once? Should I put in as much as possible, or just max 1 year's worth and put the rest towards loans?

 

Thanks!

[jhwkr542]

A quick Google search looks like you get $1k (2k filing jointly) in MA starting this year. I'd do that. I wouldn't front load it because that doesn't get the tax breaks those other years plus it's mainly for getting around gift taxes. By putting money towards loans, you're taking a guaranteed 5%+ simple interest return on your money. Investing may return more but with more risk. I like the guaranteed 5% return with the added piece of mind of getting out of debt faster.

[MochaDoc]

Why not put all the extra money, after maxing out retirement accounts, toward your student loans? With ~15 months until the end of residency and if you follow the usual recommendation of waiting 2 years to buy a house after getting your first job, you're looking at 39 months until your next house purchase. Why keep that down payment money, at ~1.25%, on the sidelines when your variable, interest rate is costing you 5%+ for at least 15 more months (presuming you refinance to more favorable rates as an attending)? Furthermore, chances are with a significant increase in income as an attending (with possible signing bonus and productivity/annual bonuses), and paid off student loans, you can save up a sizable down payment fairly quickly during your first two years of practice.

[Nebulus2017]

Wow, you're totally right! I checked a year back and MA didn't have a state tax deduction for 529s, but it looks like the state legislature voted one in just last Fall.

 

Good call with limiting oneself to the annual max contribution - that way you can enjoy the annual tax benefit.

[Nebulus2017]

Mocha Doc - A bold and somewhat scary suggestion!

 

The thing is, my wife and I may be on child #2 when I finish training, and we're hoping to own rather than rent such that we can avoid multiple disruptive moves. However, you're right, what if I don't make partner or end up disliking the group/locale.

 

Definitely something to consider!

[MochaDoc]

Nebulus2017 wrote:

Mocha Doc – A bold and somewhat scary suggestion!

 

The thing is, my wife and I may be on child #2 when I finish training, and we’re hoping to own rather than rent such that we can avoid multiple disruptive moves. However, you’re right, what if I don’t make partner or end up disliking the group/locale.

 

Definitely something to consider!

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I'm a bit confused about what would cause a disruptive move to happen? If you all are already considering baby #2 at this point, why not simply rent a large enough apartment for the first two post-residency years? The only true potential disruption that I foresee is if the first gig doesn't work out and you have to move somewhere else but you're tied to a mortgage in your old locale. Furthermore, as has been stated by a few more seasoned attendings/business owners, they love it when new hires buy property straight out of residency because it means they're a bit more trapped and have less bargaining power. Definitely things to think about.

Please let us know what you ultimately decide/how things work out.

[Nebulus2017]

Mocha,

 

To break it down a bit, my wife and I have lived together in the greater Boston area for over 10 years. In that time, we have moved between rentals 5 different times, for a variety of reasons.

 

4 years ago we moved into a studio condo that we bought, then sold after 2 years at a significant profit and moved into a 2-bedroom condo. Now, two years afterwards and with an infant in tow, we selling this condo at a significant profit and moving into a rental house.

 

The house rental lease is only 14 months long, after which we will pack up and move AGAIN (likely to another state), for an attending-level position. At that time, we will likely be on child number 2.

 

So my only issue is that, given this track record of constantly moving and shuffling, it would be a little depressing to (a) move backwards to an apartment, and (b) know that we'll have to move again into a more permanent house after just 2 years at the next location.

 

But you're absolutely correct that owning a home up front gives the practice a lot more leverage over you. Furthermore, if things don't work out with the new group, we'd have to pack up and move again anyway (and be stuck selling a new house).

 

It's certainly a tricky situation - and one that I'm thinking hard about.

[Zaphod]

Nebulus2017 wrote:

Mocha,

 

To break it down a bit, my wife and I have lived together in the greater Boston area for over 10 years. In that time, we have moved between rentals 5 different times, for a variety of reasons.

 

4 years ago we moved into a studio condo that we bought, then sold after 2 years at a significant profit and moved into a 2-bedroom condo. Now, two years afterwards and with an infant in tow, we selling this condo at a significant profit and moving into a rental house.

 

The house rental lease is only 14 months long, after which we will pack up and move AGAIN (likely to another state), for an attending-level position. At that time, we will likely be on child number 2.

 

So my only issue is that, given this track record of constantly moving and shuffling, it would be a little depressing to (a) move backwards to an apartment, and (b) know that we’ll have to move again into a more permanent house after just 2 years at the next location.

 

But you’re absolutely correct that owning a home up front gives the practice a lot more leverage over you. Furthermore, if things don’t work out with the new group, we’d have to pack up and move again anyway (and be stuck selling a new house).

 

It’s certainly a tricky situation – and one that I’m thinking hard about.

Click to expand...

Dont let emotions or perceived stations of living situations impact these decisions. They dont actually matter. I went from a big brand new house to apt from residency to fellowship and was actually really surprised how easy it was to live smaller, and the great relief it was a lot of the time. Also lived in an apartment for 2+ years when getting real job, both have pluses and minuses.

Whats the difference between an apartment and a condo seriously? You dont have to get a crap apt, get a nice one. My last one was a luxuryish place, and if I could have bought one of the rows I would, loved it.

[MochaDoc]

Nebulus2017 wrote:

Mocha,

 

To break it down a bit, my wife and I have lived together in the greater Boston area for over 10 years. In that time, we have moved between rentals 5 different times, for a variety of reasons.

 

4 years ago we moved into a studio condo that we bought, then sold after 2 years at a significant profit and moved into a 2-bedroom condo. Now, two years afterwards and with an infant in tow, we selling this condo at a significant profit and moving into a rental house.

 

The house rental lease is only 14 months long, after which we will pack up and move AGAIN (likely to another state), for an attending-level position. At that time, we will likely be on child number 2.

 

So my only issue is that, given this track record of constantly moving and shuffling, it would be a little depressing to (a) move backwards to an apartment, and (b) know that we’ll have to move again into a more permanent house after just 2 years at the next location.

 

But you’re absolutely correct that owning a home up front gives the practice a lot more leverage over you. Furthermore, if things don’t work out with the new group, we’d have to pack up and move again anyway (and be stuck selling a new house).

 

It’s certainly a tricky situation – and one that I’m thinking hard about.

Click to expand...

Regardless of your decision it will be an informed and intentional one. I do hope you run the numbers regarding interest saved by throwing your windfall, minus retirement and single-yer 529 contribution funds, toward your 340k @5%+ variable, interest rate student loan. The math alone may make the decision for you.

[Nebulus2017]

Mocha,

 

I literally was just doing that and saw your post - too funny!

 

The 340k @5.2% goes to --> 357k after just one year. If I pay down 100k only, as intended, one year of interest on the remaining balance goes from 240k --> 252k, so that alone saves $5k in one year.

 

But you're right - we could save a bit over $17k in interest in one year alone by just knocking them out. Very tempting....

 

I'm also considering a sliding scale...what if I were to apply 200k to the loans, save 125k left over for a down payment, and work hard over the next year to increase the size of that down payment nest egg?

 

I'll let you know what we do, and how it plays out, one way or the other.