OP, did you consider converting a big chunk of your tax deferred savings to Roth and using the windfall to pay the extra tax? Seems like the perfect situation: falling income and money freed up to pay tax. You may need to avoid pushing your income out of the standard Roth phaseout in the first year but should be able to leverage this to your advantage.
If I were you, I would probably set aside the rest for an investment in something not correlated with stock, perhaps real-estate or a local business. I personally would not pay off loans with that interest rate and with a plan for payoff already in place. Whatever you do with it, save buying lottery tickets or some terrible options, you are in an awesome position to become very wealthy! Congrats.
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I’m in Podunk America and our Hospitalists make 350-450k (confirmed on our non profits tax returns), so that number is rare but is out there.
OT, I live about 20 miles from Podunk, KY. Are you a neighbor of mine :-) ?Leave a comment:
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I'm in Podunk America and our Hospitalists make 350-450k (confirmed on our non profits tax returns), so that number is rare but is out there.Leave a comment:
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Curious as well – “medical” resident to be attending making 350-400k ?
Very few fields nowadays have that kind of salary.
I’ve always been impressed with how much variation there is in a single field. I know emergency docs making $120K and I know emergency docs making $600K. I’m sure many fields are similar. It depends on the type of practice, where it is, how hard you work, etc.
True, ED docs can crack that figure on shift work in podunk USA sure. I have never seen internal medicine/hospitalist with those numbers, OP saying medicine I meant internal medicine.Leave a comment:
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Nothing wrong with buying a 20k car in his situation. He's in a good enough financial place that a degree of consumption leveling is totally rational. It's not like his life is going to be so much better in two years or retirement because he drove a wreck until he graduated residency and put the rest in an index fund.
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Curious as well – “medical” resident to be attending making 350-400k ?
Very few fields nowadays have that kind of salary.
I've always been impressed with how much variation there is in a single field. I know emergency docs making $120K and I know emergency docs making $600K. I'm sure many fields are similar. It depends on the type of practice, where it is, how hard you work, etc.Leave a comment:
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Curious as well - "medical" resident to be attending making 350-400k ?
Very few fields nowadays have that kind of salary.
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I would buy the car, pay off my loans, and keep the rest in a money market account until I finish my training. There will only be around 80k left, and there's nothing wrong with adding that to your emergency fund for now. You will have expenses when you relocate after residency, and the extra liquid money will come in handy. After that, max out the retirement accounts and fund your 529. If you don't want all of that money sitting around, you can invest some of it in the 529 in November after the baby is born. A 529 works like a Roth, with after tax dollars growing tax free, no taxes on withdrawal if used for higher education. You can contribute $14,000 per donor per child per year, and you can front load for 5 years. That means you have an additional $140,000 of tax deferred space to fill any time over the next 5 years
There's nothing wrong with paying off your loans if that's what you want to do. Yes, you're only getting 3.2% return on that, but that's guaranteed and way better than bonds are paying, and you'll feel better and be able to save more every month ( aka improved cash flow).
There's nothing wrong with getting a better car, or a new car. New cars cost more for very good reasons. (less chance of it being a lemon, lower mileage, and you get the newest safety features) If you're planning on having more children, consider a minivan. I was going to suggest a Honda Odyssey, but if you need 4 wheel drive, you have to go with the Toyota Sienna, as the Odyssey doesn't have 4 wheel drive.
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I am a bit curious as to what job, after chief year, will be pulling down 350-400k as a medicine attending. You should point me in that direction
Anyway, I would take option #2. I support your desire to pay off the loans. Paying them off will free up your cash flow and help offset your impending loss of salary and increased month to month expenses.Leave a comment:
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I would consider NOT paying off your student loan right away
It is low rate and your are facing 2 relatively low earning years (compared to both current and future earnings). You are also facing some uncertainty about exactly what expenses/income will be those 2 years.
I'd max out the Roths, buy a reasonable car and keep the money available in case your plans change. If for whatever reason (health issue, preference, employment issue) you and your wife decide you want her to stay home full time you'll have the money to bridge until you are an attending. If things go as you plan, you can just pay off the loan when you become an attending. Waiting that 2 years gives you a lot of flexibility just when you may need it
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Like WCI said, its not either/or. I would map it all out and see which way accomplishes the most good across the spectrum rather than a on/off comparison. One thing that you touched on but didnt elaborate on is cash flow. There is definitely a balance in there that from a cash flow perspective is going to make the most sense.
I had a similar situation recently with more tax deferred space, choice was to put double away from now, but it saved a relatively minor amount of taxes (since it dipped into the lower marginal rate) but severely limited cash flow in case of an emergency. I chose taxable instead since the tax diff was minimal and the liquidity much much higher. This is probably the right way to view your situation (cash flow, not taxable), and will help clarify where the money goes first.
Also, you're not going to be in a very high bracket anyway so more tax advantaged isnt going to be that much of an advantage in your case.Leave a comment:
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Thanks for the input...although I feel like some of the responses have gone in the wrong direction and didn't really answer the question I posed and were more focused on a car. To answer some of the questions listed above.
-I am not set on a $20-25k car. I just put that number up there and would hope to avoid that as being a focus of this post. The goal is to get a safe SUV with 4 wheel drive for my wife and baby (we live in Michigan). Whether that is a purchase from a parent, friend, dealership has not been looked into yet. I'm hoping to get one for 5-15k but I conservatively put other numbers up there in the post.
-As to what I would do without the inheritance... Our likely salary will drop to ~75-100k. However, additional expenses for daycare (when my wife does work), diapers, nursery, etc... would significantly increase our costs. We'd also have a larger emergency fund. Only the leftover money would be put in tax protected accounts when possible. However, paying for all that, a car, and still maxing out retirement accounts (18+18+6.5+5.5+5.5 last year) is just not feasible. We also just purchased life insurance on both of us so add that to the mix which we didn't have last year and would still have student loans that we're paying.
I hope this clarifies some of the questions/posts above. Really, the question (after all expenses paid) is to invest the balance NOW in taxable accounts or LATER in tax protected accounts.
I do appreciate all the input. Thank you.
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Option #1 - Pay off student loans, max out Roth IRAs, pay cash for car, and use enough of the inheritance to fund 401k contributions at a tax savings of 25% + your state bracket.
After your wife goes part-time, I would suggest contributing only enough to 401k's to get you to 15% federal bracket then put whatever you will not spend in the next 5 years in taxable accounts, the rest in high-yield checking/savings.Leave a comment:
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Neither. Pretend you didn’t get it. Do not let it inflate your spending or living expenses. Decrease your spending to match your decreased income for the very short amount of time until you’re done with residency. Number one rule for rich people to stay rich “Never spend the principle”. Think of this inheritance as a tool to make future money, not as money to spend.
For instance, you “need” a $20-25k used car as a resident? How about a really nice $5-8k car to keep living as a resident?
It sounds like he is planning to use this inheritance to invest/pay off loans, so how is “pretending you didn’t get it” good advice? He is asking for the best way to as you say, “use the inheritance as a tool”?
Regarding the car, if he is purchasing a reasonable car in cash for $20,000 why would you fault him? They have a combined income of $150,000 and have the cash for the car. With a growing family it would make sense if he wanted to purchase either a “newer used” car or a new car at that price. As long as he is not financing the car, which it sounds like he is not, I do not think that is a bad decision.
A car should probably not be more than 10% of your income. I know this drops many peoples cars to pretty terrible levels, but otherwise its an awful waste of money. A reasonable 20k car? You can get very nice cars for the 10-15k range, 20k is wasteful at this level. Remember, your car sits unused and a waste of value 95% of the time or more.
I just had an email last night from a dealership and there was a 2012 BMW something, looked very nice, 80k mile iirc, and it was 12.5k. Certainly one can find a reliable and less flashy car for similar or better year, mileage, whatever.Leave a comment:
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Neither. Pretend you didn’t get it. Do not let it inflate your spending or living expenses. Decrease your spending to match your decreased income for the very short amount of time until you’re done with residency. Number one rule for rich people to stay rich “Never spend the principle”. Think of this inheritance as a tool to make future money, not as money to spend.
For instance, you “need” a $20-25k used car as a resident? How about a really nice $5-8k car to keep living as a resident?
It sounds like he is planning to use this inheritance to invest/pay off loans, so how is “pretending you didn’t get it” good advice? He is asking for the best way to as you say, “use the inheritance as a tool”?
Regarding the car, if he is purchasing a reasonable car in cash for $20,000 why would you fault him? They have a combined income of $150,000 and have the cash for the car. With a growing family it would make sense if he wanted to purchase either a “newer used” car or a new car at that price. As long as he is not financing the car, which it sounds like he is not, I do not think that is a bad decision.
You are incorrect, he is not using the inheritance purely to invest or pay off debt (which would be using the tool, btw). he clearly states in #1 ".....will be used for upcoming purchases. We will then utilize this extra money to help pay for living expenses over the next two years" and in #2 he states, "we likely wouldn’t be able to max out our tax protected accounts over the next two years". They also won't have an income of $150k, they will have an income of maybe $100k, based upon his wife "decreasing to 1/3 or 1/2 time"....which is still a lot more money than many other resident families live on, and should be enough to still use tax advantaged savings accounts.
which is why I say neither and I "fault" him on spending so much on a car. IMHO he should not use the inheritance for living expenses and he should not stop maxing out retirement accounts. He should live within the means that he has, and invest ALL of the inheritance, either in debt paying 3.5% guaranteed, in a taxable account paying market returns, or in a cash emergency fund paying about 1%....whatever. But, the money should not be spent now, and they should not stop maxing their tax-advantaged accounts.....imho.
JK, what would you have done if this inheritance didn't show up? Do that. Well, assuming "that" doesn't mean spending 20% of your annual gross income on a single car (not including, gas, insurance, repairs, taxes etc).
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