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Taking Out Extra Loans To Fund Roths

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  • #16
    Similar to above, I also did this.  Worse case, you can still withdraw Roth principal tax free, if I remember correctly.  Take a look at your odds of graduating and matching: Step 1 1st Time Pass, US MD Graduate = 98+% chance of matching.  Other variables will lead to lower chances.  You know your risk profile best.

    Downstream advantages of Roth invested at this time of career (low tax rate, PseudoDINK status, student standard of living, etc.) are hard to overcome with all of the risk warnings above.

    Also, remember if you want the tax protected space, but aren't keen on investing in the current market, you can park the money (within a Roth account) in a conservative allocation until market risk is more suitable to your readiness)

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    • #17
      @DR_JB - You're correct. Worst case scenario, you withdraw the Roth principal tax free and apply it toward the student loans. Seems like low risk and a lot of potential upside. Not sure why so many posters find this strategy to be so risky.

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      • #18
        I did this (since my wife worked making a small salary) and it was NOT to make money. I actually lost a little money (but will hopefully make it up in the long term). Basically when you get your med school loans they give you a lump sum check and you have no idea how much you truly need but it is hard to ask for it later. So I took out some extra for Roth IRA and then I was able to risk cutting it close in my bank account since I had basically $11k/yr added to this "emergency fund" (since you can take out the principal penalty/tax free). I actually took substantially less loans than I was offered and felt more and more comfortable doing so each year as my "emergency fund" grew over the 4 years of medical school. Luckily our cars didn't break down and we are able to squeeze by every year with quite low amounts left in the bank account.

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        • #19
          Now that Roth 401k(s) or 403b(s) exist, I think this question is moot. As I mentioned on a WCI article, I have 50k+ in Roth space while my wife is in residency (18k + 18k + 5.5k + 5.5k + over 3k match). If you are using student loans to pay for a Roth, it is just a shell game. Is it worth it to put 11k in Roth when every year of residency most people will have 45k+ in Roth? I doubt it.

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          • #20




            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.
            Click to expand...


            100% agree. That is always the part I feel people miss, your roth grows infinitely until you use it all or die...your student loans are going to get paid off. To me if your in this conversation you hopefully have enough head on your shoulders that defaulting isnt even on the radar. You can never get those years back.

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            • #21
              I would do it as long as the interest rate isn't in that 6-7% range.  One other thing that was nice when I did it back in school was that I got the savers credit.  I can't remember how much it was, but because I was saving and not making much the government has a credit for that, up to $1000 a person.  They might only need to take out $9,000 to cover the amounts.

               



























              Credit Single Filer               Head of Household         Joint Filers
              50% $18,250 or less $27,375 or less $36,500 or less
              20% $18,251-$19,750 $27,376-$29,625 $36,501-$39,500
              10% $19,751-$30,500 $29,626-$45,750 $39,501-$61,000

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              • #22




                Now that Roth 401k(s) or 403b(s) exist, I think this question is moot. As I mentioned on a WCI article, I have 50k+ in Roth space while my wife is in residency (18k + 18k + 5.5k + 5.5k + over 3k match). If you are using student loans to pay for a Roth, it is just a shell game. Is it worth it to put 11k in Roth when every year of residency most people will have 45k+ in Roth? I doubt it.
                Click to expand...


                I, too, am in a similar situation as the OP. I'm a single, female, (almost) PGY3 resident, with the option of contributing up to $18,000 per year into a Roth 403(b). I've been contributing the max amount into my Roth 403(b) since last fall (currently valued at ~$23k), and I've been maxing out my Roth IRA since college (as able) and plan to continue doing so until I start making too much money.

                However, I've now gone through most of my savings, and my $600 paychecks (amount leftover after Roth 403(b) contribution) every two weeks just aren't cutting it. At this point, I'm wondering if it would be worth it to take out a "residency loan" (5% interest rate, don't have to pay back until after residency/fellowship) to fund my Roth 403(b) in full ($18k per year) during residency. I realize that the earnings/loan interest would probably cancel each other out (if not put me in the hole) in the short term. But as another person mentioned, the real value is the 20-30 years beyond that of tax-free growth.

                I have almost 200k in student loans but am planning for PSLF in approximately 7 years. I also have 250k in life insurance, about 60k total in retirement accounts, and a very reliable/relatively new car.

                So...should I scale back my Roth 403(b) contributions to JUST what I can afford while still paying my bills?? (this would be about $7800 per year)

                Or should I take out the residency loan and fully fund my Roth 403(b) for the remainder of residency?? (I can take out $15k for 3rd year and $15k for 4th year.)   Thanks in advance for your advice!

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                • #23
                  The math might favor doing it on margin: that is, the interest lost on $44K at 6.8% over 10 years ($16,762) will be far less than the interest gained on $44K at, to be conservative, 5%-ish over 30 years ($152,581), especially if you consider the following things:
                  - Retirement Savings Contribution Credit (10-50% of contributions if AGI < $61k for MFJ or <$30.5k MFS/single
                  - The deductibility of the student loan interest once you start paying it (though not eligible if MFJ > $160k, which you'll likely be out of residency)
                  - Paying your loans more quickly, refinancing, and REPAYE would reduce interest lost
                  - If you do PSLF (that is, do GME and work at a 501(c)(3) after training), the student loan amount matters much less

                  However, the mathematically correct answer isn't always the correct answer for all comers because it relies on other things being equal: you graduating from med school, getting through residency, getting a well-paying specialty/position, staying married, and your IRA portfolio doing well.  You also might commonly hear the adage "debt is not a pet."  Sometimes the psychology of money is a greater force than the math.  Ceteris paribus can be very dirty words...

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                  • #24






                    At this point, I’m wondering if it would be worth it to take out a “residency loan” (5% interest rate, don’t have to pay back until after residency/fellowship) to fund my Roth 403(b) in full ($18k per year) during residency.
                    Click to expand...


                    Where does one get such a loan that doesn't need to be re-paid until after training?  My husband plans on being (what it seems to be) PGY-infinity, so I'm very interested in learning about this.

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                    • #25


                      At this point, I’m wondering if it would be worth it to take out a “residency loan” (5% interest rate, don’t have to pay back until after residency/fellowship) to fund my Roth 403(b) in full ($18k per year) during residency. Where does one get such a loan that doesn’t need to be re-paid until after training? My husband plans on being (what it seems to be) PGY-infinity, so I’m very interested in learning about this.
                      Click to expand...


                      The credit union affiliated with my university (in Louisiana) offers the residency loans. As others have mentioned with regard to student loan refinancing, the idea is probably for them to offer these favorable loans in hopes of gaining customers for long-term banking relationships. And because they verify residency/fellowship status prior to disbursing the loan, they're ensuring that they're only giving these loans out to very credit-worthy people

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                      • #26
                        Doing it in residency is more risky, especially since you don't get the interest reductions (e.g. RePAYE) or tax-free forgiveness (e.g. PSLF) you can get on student loans, and you will probably make too much to get the RSCC back on your taxes (>61k MFJ, >30.5k MFS/single).  That's pretty much purely investing on margin, and at 5% that's a lot to overcome.  For a 3-year residency that's inviting $54k in debt at 5%...

                        As to you whose spouse will be PGY-12 or whatever, PLEASE tell me he's doing a IDR/PSLF stack...say you're neurosurg, 7 years in residency getting paid peanuts, that's 7 years of tiny li'l IBR/REPAYE/etc payments while the interest is capitalizing, then 3 years on that higher amount capped at the 10-yr standard rate, then tax-free forgiveness after 120 payments.  You really can't beat that (unless he gets a non-501(c)(3) offer that's worth way more over what's probably over $100k in tax-free forgiveness).

                        Do your own math, then make sure that's commensurate with whatever risk you're willing to take on, then make sure your behavior matches your math and reasoning...that's the hardest thing with all this imo

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                        • #27
                          Yes, we are definitely in IBR/PSLF since PGY1. Thanks for the heads up in case we weren't ?

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