I am in my last year of fellowship and just now beginning to research how to manage my financial situation. I have a family and have not been able to save money during residency. Now that I am in fellowship in a location with a lower cost of living I want to be more proactive in beginning to save. I have less than 100k in student debt with low interest rate, no RothIRA or 401k, 15k in bonds that are making 5% in returns, and enough savings for emergencies and other incidentals. My first question is, should I be setting up a RothIRA this late in the game or just apply the money we can afford to towards our debt burden? Second, would it be wise to deposit my bonds while the taxes on capital gains will be less and put that money directly into a RothIRA or other retirement account or keep them where they are gaining 5% a year? Third, how much of a difference does it make to start a retirement account just before leaving fellowship as opposed to my first year as an attending?
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1) Absolutely Roth if income allows.
2) Liquidate bonds and put money into VTSAX.
3) Perhaps not "much" of a difference, but the sooner the better, in my opinion. If you're leaving fellowship next month, I'd skip it to save the paperwork hassle. But if you have enough time to max it out for the year, go for it.
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Yes to selling your ultra high interest bonds to fund a Roth IRA. Do this for both 2017 and 2018. Every year of qualified retirement savings matters to you because you are already behind others. Fellowship has put you into an even more reduced earnings cycle of life.
Tangentially, whenever the next recession/bear market arrives, your ultra high interest bonds will devalue more than other safer bonds.
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Thank you for your responses. I have recently become aware that I can invest in a 457b account. This looks even better than a RothIRA unless I am missing something. Would you max out this first before the Roth? I'm not sure if it makes a difference but I will likely be leaving the institution and state for my first attending job. Does changing states affect any of the rules on Roth and 457b plans?
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Definately Roth IRA is your first retirement "bucket" to fill. Keep in mind that both you and your spouse have separate Roth IRA accounts, so that is potentially 11k/year that can be put in. That is probably all you can do for now in fellowship. Once you become an attending, read WCI's "how to do a backdoor Roth conversion" post about a dozen times so you understand how you can contribute to a Roth account for the rest of your life (or until Congress changes the law). If you have a 401k through fellowship with a match, contribute enough to get the match, it's easy enough to rollover once you leave to make it worthwhile. 457 plans are definately not for fellows-the tax deferral from a low-tax time of life to a higher-tax time of life makes 0 sense.
100% high yield bond allocation for a fellow is...unorthodox. Most people on this forum would recommend 50-100% stocks due to higher average long-term gains. Liquidating that account in order to fund Roths (with stock) seems like an easy call.
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One caveat. When I was a fellow we did not have earned income. We had stipends. This was not eligible for Roth IRA contributions. Which is ludicrous.
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How is it not considered earned income when you pay taxes on that money?
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