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  • Taking Out Extra Loans To Fund Roths

    Here's another great question I received via email and I'd love to hear your take on it. A few details changed to protect the innocent.
    I am entering medical school this summer and am married without children. We have no debt, a $12K emergency fund, and $18K in Roth IRAs. I will take out loans to cover tuition (in-state), fees, books, etc, but will have living expenses covered because my spouse (a teacher) is working full-time and will continue doing so while I'm in med school. My spouse working makes us eligible to continue making Roth IRA contributions while I'm in med school, but we couldn't swing it on her salary. I'm wondering if taking out an additional 11k in loans each year to fund our Roth IRAs would be wise, especially when considering the time it will have to grow, the opportunity lost if I don't (can't contribute retroactively), and the tax advantages which will be unavailable as an attending.

    What do you think?
    Helping those who wear the white coat get a fair shake on Wall Street since 2011

  • #2
    This is basically investing on margin but with a non-callable loan (student loan). Margin investing is generally considered risky but a big part of the risk is that your loan can get "called" when the market is down and you are forced to liquidate at a loss to pay it back (read about the travails here of a graduate student investing on margin during graduate school. I would still say this is not a great idea (I'm relatively debt averse).  Depends somewhat on what the student loan interest rates will be, the stability of the spouse's job, risk tolerance, etc.

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    • #3
      i would vote no to taking out the extra loans.

       

      but if theres anyway to pick up extra work that would pay, extra hours she could pick up, selling extra stuff on craigslist, and make it work that way.

       

      maybe see if your parents would fund your roths....just an idea...

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      • #4
        That couple is way ahead of the game, financially speaking, already.  They have a nice emergency fund and Roth IRAs.  I doubt they would need the full $11k in loans as they could squeeze some from the teacher salary.  Does she have a defined benefit plan at work or 401k?  Instead of loaning money, look at her contribution rate.

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        • #5
          It depends on the interest rate of those loans.  If at 6.8% or higher, no.  If lower than 3-4%, I would say yes.  Around 5%, it's iffy.

          Better option is to get a "loan" from parents, if possible.  (I know not everybody has well-off parents.)  They can fund your Roth IRA, mortgage, and so on.  In return, when you are rolling in dough as an attending and they near or in retirement, you can take care of them so they can delay withdrawing from their 401k and IRAs so it can compound for longer.  Working together through the generations to build wealth is the way to go, if your family's finances and relationships can swing it.  You know your family best.

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          • #6
            It is risky. Not everyone finishes med school, sometimes people don't match for a residency slot, and those that do sometimes decide they don't want to practice. I would vote no, too much risk. You will make enough money over the course of your career that the lack of a few years of roth contributions will not matter in the end.

             

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            • #7
              I agree with dragonfruit,  the rate on the loans matters a lot.

              I am in a similar situation the person who wrote the email.  The issue for me involves what to do with a signing bonus: do I pay off student loan debt or invest in back door Roths for me and my spouse?  While I  am in a different part of my training,  the question for both of us is whether or not to invest on  margin.

               

              It is definitely a tough question. I value Roth space a lot,  so I will probably opt for backdoor Roths and pay down student loan debt very aggressively once I start my job in the summer.

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              • #8
                Absolutely, I'd do it (and I did it). I went through the same dilemma in law school and took out extra loans and funded two years of Roth contributions. I don't think the interest rate on the loans matters. They'll be paid off in on a short term horizon (probably less than 10 years) meanwhile that 11K will continue to compound for more than 30 years.

                 

                I'm glad I did it.

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                • #9
                  Having known people who failed to graduate, as well as people who have not completed a residency because they were fired, at the current 6.8% interest rate this idea is insane. I've been in an age appropriate Vanguard Target Date fund and would have lost money over the time in medical school if I had done that.

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                  • #10
                    The early 20's medical school me would absolutely do this if it was available.  This version of myself had no money and was not scared or concerned with debt.  Now that I'm 40 and actually make a good living, there is no way I would every borrow money to invest.  Too many things can potentially go wrong.  My advise is if you really want to contribute $11,000 to Roth IRA's find a way to make that extra money between yourself and your wife and/or tighten up your spending.  If you are not able or willing to do that, partially fund Roths as much as you can or forget about it until residency

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                    • #11
                      Tough call.  Depends on the loan rates.  Agree with some above posters re: risk of not graduating or not matching.  Certainly with a two-income household it makes it a bit more palatable but a teacher salary isn't likely all that high.. Personally did not do Roth until residency but can see the appeal of earlier contributions as well.

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                      • #12




                        I agree with dragonfruit,  the rate on the loans matters a lot.

                        I am in a similar situation the person who wrote the email.  The issue for me involves what to do with a signing bonus: do I pay off student loan debt or invest in back door Roths for me and my spouse?  While I  am in a different part of my training,  the question for both of us is whether or not to invest on  margin.

                         

                        It is definitely a tough question. I value Roth space a lot,  so I will probably opt for backdoor Roths and pay down student loan debt very aggressively once I start my job in the summer.
                        Click to expand...


                        Benajmin - your situation is different.  You already have outstanding debt to pay for your education.  The OP would be taking additional debt for the purpose of contributing to his RothIRA.  You already have the debt bc of medical school.  As others have stated, the OP is essentially using margin to fund his RothIRA.

                        Your situation depends on the interest rate of your student loan.  If you have a low-interest student loan (say around 3%-4%), then it maybe advisable to fund your backdoor Roths (assuming an average stock market return).  Keep in mind that the stock market performed terribly this past year however.  The wisdom of your decision may not be known for another year or two after you invest in a Roth over paying off loans.  (Unfortunately, you just have to assume an average return.)  However, if you loan rate is higher, then you should pay off the student loan debt.

                        Paying off your student loans is much like paying off your mortgage for many people.  I'm 40 years old, 10 years post-residency and we've paid off $120k in student loans and a $300k mortgage.  Haven't regretted it one single bit.  Now, I have 20+ years left in the accumulation phase with no debt whatsoever and the security of a good home that I own in a good neighborhood.

                        I'm a big fan of getting out of debt.  The psychological value is definitely worth it.  I sleep well at night.

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                        • #13
                          In general, I would say that there's no absolute need to max out the Roth IRA as suggested.  They could use other means (i.e. not taking out loans) to partially fund their Roth if they have enough disposable income to do it.

                          Taking out additional debt when the OP has not even completed medical school is absurd.  So many things can happen that can delay or derail his situation.

                          The risk being calculated here is not just an interest rate/rate of return comparison.  There's the risk of not finishing medical school, failing the USMLE, failing to match in your specialty, illness/disability, or any other life crisis.

                          Fund the Roth when he/she has completed medical school.

                           

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                          • #14




                            It is risky. Not everyone finishes med school, sometimes people don’t match for a residency slot, and those that do sometimes decide they don’t want to practice. I would vote no, too much risk. You will make enough money over the course of your career that the lack of a few years of roth contributions will not matter in the end.

                             
                            Click to expand...


                            I agree with ER doc here.  I've seen/heard residents change specialties, drop out all together, and even fired from residency.  By only entering medical school, you have many more years to go and even then you could quit or fail.  Bad idea.

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                            • #15
                              Without an iota of doubt would borrow to fund roths

                              The Roth Ira is the best thing since APPLE PIE!!!

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