Use savings $$ to lower loans or contribute to a Roth?

[OoohShiny]

Hi everyone! I'm hoping some of you financially savvy folks can help me out. So I'm a recent college grad, working full time for another 1.5 years before matriculating med school (if all goes as planned of course!)

The most immediately pressing question is whether I should contribute to Roth for the 2012 tax year. (And if so, if I should put in the full $5000 limit) I will be able to put in 5k this year and 5k next year - making for 10k in the Roth before I enter med school. Obviously I doubt I'll be contributing while in med school.

So, is it worth having that 10k in the Roth and leaving it to grow until I retire? (Option A)
Or is it better to use the 10k to lower the amount of loans I'll have to take out(which will be on the order of ~250k)? (Option B)

I've tried reading a bit and see people suggesting "rolling the Roth" for school tuition so perhaps that's Option C? I'm super confused by this though!

PS The idea of not being able to save at all really for retirement for 8 years (med school + residency) makes me nervous. So that's kind of where the whole jumping onto the Roth wagon comes from

Also, I'm saving quite a bit and wondering what is best to do with it - I should have around 25k by matriculation, any suggestions on what to do with my current savings (15k) for the next 1.5yr? Savings accounts have abysmal rates....

Thanks everyone!

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[nBeeDee]

I'm in a similar situation, recent college grad who's worked for the past 2 years and is going to med school this fall, and I'd be curious to hear input as well.

I plan to use my savings towards living expenses for (hopefully) the first couple years of school, which would otherwise be paid for using GradPLUS loans. Looking at it one way, that investment is a guaranteed 7.9% return, while the IRA may or may not gain that much over the same period of time (probably not). I'm also debating if I should start an IRA this year with some of my savings and use the rest on living expenses as long as I can.

If you use 10k towards your cost of attendance for your first year instead of taking out loans, it would save you over 2k of interest which would accrue over 4 years of med school (for both stafford or gradPLUS rates). Or you could hold on to it as a safety net, maybe put it into something that gains more interest than a savings account but is still relatively liquid.

Also FYI you can contribute up to $5500 into an IRA for 2013!

 

[nBeeDee]

Just found a related thread that may help:

http://forums.studentdoctor.net/showthread.php?t=984596

 

[Igor4sugry]

What is the value of your emergency fund?

I would keep that money in readily accessible place such as regular bank account (even if <1% return) for a rainy day. You never know when you will need to make a big purchase in med school that will be outside your cost of attendance.

 

[OoohShiny]

nBeeDee - Thanks for the link and info on the 2013 limit! And yes, it's a gamble on whether the IRA will do better than 7.9%, but I'm also thinking that it may help in financial aid since funds in the IRA will be sheltered while normal savings won't.

Igor - My roth contributions (not earnings) can still be pulled out at any time for emergencies and such. Plus my family won't hang me out to dry if I was ever in dire need, which I'm quite fortunate for

 

[nBeeDee]

nBeeDee - Thanks for the link and info on the 2013 limit! And yes, it's a gamble on whether the IRA will do better than 7.9%, but I'm also thinking that it may help in financial aid since funds in the IRA will be sheltered while normal savings won't.

Igor - My roth contributions (not earnings) can still be pulled out at any time for emergencies and such. Plus my family won't hang me out to dry if I was ever in dire need, which I'm quite fortunate for

Those are good points, there doesn't seem to be much of a downside not to open one. Although I'm not expecting anything but loans from finaid regardless of my savings Maybe you should max out your IRA but and use the leftover towards tuition.

Just out of curiosity, what companies are you looking at? Most people on SDN say Vanguard is the way to go.

 

[dantt]

One thing to keep in mind regarding the IRA...compounded gains are not taxed until you withdraw or not at all if it's a roth. Once the time period you're not contributing to the account has passed, you can never invest more into it to make up the years you did not contribute.

 

[LaughingMan]

Man a Roth IRA is truly a blessing.

 

[nBeeDee]

One thing to keep in mind regarding the IRA...compounded gains are not taxed until you withdraw or not at all if it's a roth. Once the time period you're not contributing to the account has passed, you can never invest more into it to make up the years you did not contribute.

Yeah I was referring to a roth, it wouldn't make sense for me to do a traditional IRA. All very true, t-minus 11 days to contribute for 2012!

 

[dantt]

Yeah I was referring to a roth, it wouldn't make sense for me to do a traditional IRA. All very true, t-minus 11 days to contribute for 2012!

Regardless of whether the retirement account is a regular or roth IRA, the gains are taxed only once (either at withdrawal or before contribution). Thus you shouldn't look at gains over 2 years but compounded gains over the life of the account.

 

[galaxyx]

You can also use your roth ira to pay for educational expenses penalty free so theres no reason Not to put the max in the ira even if you might spend it later on tuition

 

[OoohShiny]

Just out of curiosity, what companies are you looking at? Most people on SDN say Vanguard is the way to go.

I'm not sure which Roth I want yet - Vanguard or Fidelity most likely, but then I need to figure out what type of fund I want... Ahh so much to learn in so few days!