Brand New to Investing/Financial Planning-Freaking Out

[genius7k]

Dear All,

 

I am currently a 30 year old 4th Year Chief Resident (why I did this, I have no idea) in Internal Medicine. No kids, single. I made about 65k this year, and will start a new job in August (pay about 220k). I was in residency, and academic institution for the last 4 years, but I contributed 0 dollars to the 403b. I did not really have guidance from others, and am totally regretting not contributing. I have money saved up, and have some in mutual funds as well.

 

I also have about 370k in loans. 270k, will be taking out of a house loan, refinancing through that. The other 100k, I will be refinancing through out of the student loan companies.

My new job is offering a 401k with no match for clinicians. I am planning on contributing and maxing out my 401k for sure. I have listened to the WCI podcasts, and have done a lot of reading over the last several weeks. However, I am still confused. Between Jan-end of June 2017 I will have made about $32,500 untaxed (plus might get a $5-8k extra). Then I start my new job in August, so for the 2017 year, I will have made around 122,500-roughly. I definitely want to contribute to an IRA for obvious reasons. Will I be able to contribute to a Roth IRA? If I can, it will only be a small amount right (pro-rated amount since 5500 is max)? If not, how much can I contribute to a traditional IRA? And would I be able to turn this tIRA into a Backdoor Roth? And would I get any tax benefits from this? I'm pretty confused about this because I am in the transition year between Chief Resident and Attending, and the salaries are completely different.

Up to now, I haven't been too worried about finances/investing, however, I feel like I am way behind the ball. I am definitely looking into getting a financial advisor, however, any and all advice would be appreciated. Thanks!

 

-New Attending Physician

[DMFA]

If you'll make close to $118,000 single (the lower bound of the contribution limit phase-out), then just do backdoor Roth.  Don't bother with possibly needed to recharacterize or withdraw excess contributions just in case your income barely ticks above that.  Just contribute $5,500 to TIRA, don't deduct it, and convert it to Roth.  No tax deduction, but tax-free growth and withdrawal.

To max your 401(k) in 2017 you'll need to put in 18,000/122,500 = 15% of your gross salary, then change it to 8% starting in 2018 to max the $18,000 (or contribute more and front-load it, up to you).

What do you mean taking $270,000 out of a house loan?  Does that mean you'll be selling your house and paying it off, or doing HELOC?  If you're selling, what are you planning on doing to live after that?

[jfoxcpacfp]

So you have $270k equity in a house? Not bad.

You will be able to contribute $5,500 to a nondeductible TIRA (translation: no current tax benefits), which you can (and should) convert to a Roth IRA - unless you have any pre-tax IRA balance in your portfolio. If you do have pre-tax IRAs:

• Consider rolling them into your employer's 401k before 12/31/17.


• That is, unless you have any IC income and can set up a SOLO-401k.


• If that's the case, I would recommend rolling them into your SOLO-k.


• Of course, if it's only a few thousand dollars, this may be your last good year to convert the balance(s) of your pre-tax TIRA's to a Roth IRA and pay the taxes.

Reviewing the above again, it appears that you do have IC income for 2017. Is that what you mean by "...I will have made about $32,500 untaxed (plus might get a $5-8k extra)"? If so, set up the SOLO-k before 12/31/17 and you'll be able to contribute at least 20% of your net profits. Net profits = Gross income -(applicable tax deductions). If you don't get the full $18k into your employer's 401k, you'll be able to make up the difference in your SOLO.

Bah humbug that you have no employer match.

[StarTrekDoc]

I'm sure you've read about and not doing PSLF or REPAYE on the loans, hence using home equity to shift over the student loans to a lower and tax deductible state, right?  Just double checking.

Double check if your new employer has any other options; if large private group, they may have more to offer for later shareholders.  If institution, ask the HR department about all the options available.

At least this year, you maybe able to get under Roth IRA direct, but if not, do the conversion as offered above.

[The White Coat Investor]

So you're coming out of training with a net worth of -$100K and an income of $220K and your biggest issue is where can you stash more money to get some extra tax benefits? Great to have first world problems eh?

 

See if you can do a Roth 401(k) for 2017, then switch over to the tax-deferred one for 2018. And do your 2017 Backdoor Roth IRA. Since you don't have a traditional IRA, there is no significant downside to just backdooring it in case your income ends up being too high. The tax benefit is that money is never taxed again. You WANT to pay taxes this year. So Roth 401(k) and Roth IRA. Next year you DON'T WANT to pay taxes. So tax-deferred 401(k) and Roth IRA (since you can't deduct a traditional IRA contribution anyway.)

[Faithful Steward]

First off, congratulations on the financial success you've achieved to this point!

While the other respondents have all mentioned very good ideas, I would stress a couple of suggestions to make sure you begin building your financial future from a strong foundation. If you have not already done so, you need to acquire proper disability income insurance and life insurance.

Here are a few things to look for in a disability insurance policy for a physician:

• An "Own Occupation" definition of disability


• A policy with favorable benefits for partial/residual disability, as this is the most frequent type of disability claim for physicians


• A policy with favorable recovery benefits, where you would continue to receive benefits for loss of income despite a return to work on a full-time basis with no loss of time or duties


• A cost of living adjustment to your benefits, so that your benefit maintains your purchasing power through a lengthy or permanent disability


• If you feel your income will grow dramatically, in the future, you may also consider a rider to protect your insurability and allow you to add additional coverage in the future without having to qualify health-wise

When it comes to life insurance, be wary of insurance agents proposing any type of permanent cash value life insurance (whole life, variable life, universal life, or indexed life). At this point, you simply need an appropriate amount of term insurance to replace your income for your family.

 

[genius7k]

Thanks so much for all suggestions. Just to clarify, yes to using home equity for paying off some of the government student loans, and then refinancing. This for tax benefit purposes, etc.

 

So basically, when I enter the new job, I should ask to max out my 401k for 2017? While also taking care of my student loans. Then, if I have enough money leftover, I used a Roth IRA calculator (using 122,500), it says I can contribute 3850 to a Roth IRA for 2017. So should I put 3850 in a Roth IRA account, as well as then put money in a Traditional ira, then convert it to backdoor roth? And if so, how much can I put in the traditional? Is the total 5500? And should I wait until 2018 when I get my W2 from both companies just to make sure the total amount, then put money into the IRAs (since technically I have until April 15)?

 

This is all great information. It has literally opened up a new chapter in my life. Can't wait to read WCI!

[hightower]

Definitely keep on reading and it will all start to make more sense to you.  Yes the max ROTH contribution is 5500/yr and yes you can contribute directly to it this year.  Next year you'll need to start doing backdoor Roth's.

With regards to refinancing your home to pay off student loan debt...that's not a bad idea as it can obviously save you a lot on interest especially since mortgage interest is tax deductible.  But be careful not to put too much debt on your house.  You don't want to be in a scenario where if the market drops again you owe more on your mortgage than the house is worth.  Most banks/mortgage companies will only let you go 80% loan to value anyway.

[Zaphod]

hightower wrote:

Definitely keep on reading and it will all start to make more sense to you.  Yes the max ROTH contribution is 5500/yr and yes you can contribute directly to it this year.  Next year you’ll need to start doing backdoor Roth’s.

With regards to refinancing your home to pay off student loan debt…that’s not a bad idea as it can obviously save you a lot on interest especially since mortgage interest is tax deductible.  But be careful not to put too much debt on your house.  You don’t want to be in a scenario where if the market drops again you owe more on your mortgage than the house is worth.  Most banks/mortgage companies will only let you go 80% loan to value anyway.

Click to expand...

Its always preferable to the student loan. This is pure win-win. As long as people are making payments, its hard to foreclose on people now. Which wouldnt be too hard for an employed physician.

[hightower]

Zaphod wrote:

hightower wrote:

Definitely keep on reading and it will all start to make more sense to you.  Yes the max ROTH contribution is 5500/yr and yes you can contribute directly to it this year.  Next year you’ll need to start doing backdoor Roth’s.

With regards to refinancing your home to pay off student loan debt…that’s not a bad idea as it can obviously save you a lot on interest especially since mortgage interest is tax deductible.  But be careful not to put too much debt on your house.  You don’t want to be in a scenario where if the market drops again you owe more on your mortgage than the house is worth.  Most banks/mortgage companies will only let you go 80% loan to value anyway.

Click to expand…

Its always preferable to the student loan. This is pure win-win. As long as people are making payments, its hard to foreclose on people now. Which wouldnt be too hard for an employed physician.

Click to expand...

I'm not saying that he'll be in danger of foreclosure or anything like that.  I'm just saying that if the market were to drop AND he wanted to move, it wouldn't be a good idea to be in debt for more than the house is worth.  It's more of a freedom to move kind of thing.  Of course, if he's saving enough, he'd be able to just pay off the difference at closing and still get out of the mortgage.  So, I'm not saying he shouldn't do it, I just personally wouldn't want to owe 100% loan to value or even 90% loan to value.  The highest I would go is 80%.  But, maybe that's just me.  It's probably because I lived through the 2007/2008 housing market crash where we saw the value of our home at the time drop by 50%.  If you're certain that you're in your "forever" home than none of this matters.  But, who's certain of that?

[DMFA]

genius7k wrote:

Thanks so much for all suggestions. Just to clarify, yes to using home equity for paying off some of the government student loans, and then refinancing. This for tax benefit purposes, etc.

 

So basically, when I enter the new job, I should ask to max out my 401k for 2017? While also taking care of my student loans. Then, if I have enough money leftover, I used a Roth IRA calculator (using 122,500), it says I can contribute 3850 to a Roth IRA for 2017. So should I put 3850 in a Roth IRA account, as well as then put money in a Traditional ira, then convert it to backdoor roth? And if so, how much can I put in the traditional? Is the total 5500? And should I wait until 2018 when I get my W2 from both companies just to make sure the total amount, then put money into the IRAs (since technically I have until April 15)?

 

This is all great information. It has literally opened up a new chapter in my life. Can’t wait to read WCI!

Click to expand...

I still don't understand *exactly* how you're utilizing home-equity.  There are several ways to do that which can have very different outcomes.  Is it a cash-out refinance, a HELOC, selling the house, etc?

At your new job, you will most likely have to input with your payroll servicer the percentage of your gross pre-tax pay to put toward your 401(k).  You usually can't just say "max it," you usually have to divide $18,000 by what you'll gross and round up to the next whole number percent.  They'll stop pulling once you defer $18,000 into it.

You can try to figure exactly what your phased-out contribution max will be, contribute that, and do the rest via backdoor Roth.  But if you won't use the funds within 5 years anyway - and you'd better not, since it's a waste - you may as well not bother, just in case you're wrong and need to withdraw the excess contribution (or pay a penalty on it), and just do the $5,500 backdoor now.

You need to make sure your withholding is appropriately set up on your W-4, too...many new attendings under-withhold and end up with a big tax bill in April when they file.

It's really kind of enlightening, isn't it?

[mamaham]

glad that you found the site and information before you got too far along...  congrats!
like others have eluded to, you are just starting out and it will all become clearer when you do more research.  my personal opinion is that you are freaking out and getting overwhelmed without having a big picture/plan in place.  take a few steps back ---  read the WCI book, read the blog posts for beginners, read a few books.  then once you have a foundation, you can come up with a plan (short and long term) and decide IF you need a financial advisor (still trying to figure that out myself).

[Zaphod]

hightower wrote:

Zaphod wrote:

hightower wrote:

Definitely keep on reading and it will all start to make more sense to you.  Yes the max ROTH contribution is 5500/yr and yes you can contribute directly to it this year.  Next year you’ll need to start doing backdoor Roth’s.

With regards to refinancing your home to pay off student loan debt…that’s not a bad idea as it can obviously save you a lot on interest especially since mortgage interest is tax deductible.  But be careful not to put too much debt on your house.  You don’t want to be in a scenario where if the market drops again you owe more on your mortgage than the house is worth.  Most banks/mortgage companies will only let you go 80% loan to value anyway.

Click to expand…

Its always preferable to the student loan. This is pure win-win. As long as people are making payments, its hard to foreclose on people now. Which wouldnt be too hard for an employed physician.

Click to expand…

I’m not saying that he’ll be in danger of foreclosure or anything like that.  I’m just saying that if the market were to drop AND he wanted to move, it wouldn’t be a good idea to be in debt for more than the house is worth.  It’s more of a freedom to move kind of thing.  Of course, if he’s saving enough, he’d be able to just pay off the difference at closing and still get out of the mortgage.  So, I’m not saying he shouldn’t do it, I just personally wouldn’t want to owe 100% loan to value or even 90% loan to value.  The highest I would go is 80%.  But, maybe that’s just me.  It’s probably because I lived through the 2007/2008 housing market crash where we saw the value of our home at the time drop by 50%.  If you’re certain that you’re in your “forever” home than none of this matters.  But, who’s certain of that?

Click to expand...

I dont believe a "forever" home exists personally, but maybe one day I'll find one. I mean all houses degrade and deflation usually means you get more/better overall stuff for less cost, moving makes sense from time to time, situations change, etc...cant imagine being in one place 30 years, let alone a house. Longest I've been in one region is 15 years.

Though Santa Barbara could keep my long term I'd imagine. We'll see.

Remember you can walk away from a house, rent it in the interim, etc...as a good saver you have those options, you cant do that with a student loan. I know the walking away eschews personal responsibility and such crowd, but is your right per the contract. I'd take those options.