Author Topic: newbie with a particular medical student debt question  (Read 4810 times)

stringcheese

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newbie with a particular medical student debt question
« on: September 21, 2014, 11:19:50 AM »
Hello all,
I have followed this forum for a long time but haven't really posted. I wanted to share a bit about my situation. I am in my final year of medical school (note: thank god) and have been careful in taking out only what I need to pay my tuition/rent in terms of student loans, but that's still a large chunk of change in this day and age in the US. My debt (for 5 years, not the traditional four; I did a master's degree while pursuing my MD) is around 150k, substantially less than many of my friends. Interest rates for earlier loans are 6.8%, though new federal loan rates are 5.4%.

Here's the thing. I received an inheritance in the past year, about 70k. By law it was transferred to an inherited IRA. I talked to my family's financial planner about withdrawing it little by little to reduce taxes and pay off some of my higher-value, higher-interest loans (i.e., one of 40,500 at 6.8%). How is the best way to do this without getting tax penalties from the IRA itself? I'd appreciate any tips or strategies you have.

Thank you so much! 


wallaceiii

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Re: newbie with a particular medical student debt question
« Reply #1 on: September 21, 2014, 12:09:10 PM »
I don't know if there is an additional restriction for medical school but my understanding is you can withdraw from an IRA without any additional tax penalties to pay for educational expenses before you reach the age restriction.

Abe

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Re: newbie with a particular medical student debt question
« Reply #2 on: September 21, 2014, 01:16:11 PM »
You have an inherited IRA, which is different from your own IRA. You have to take a required minimum distribution from the IRA within 5 years of you inheriting the account. If it is a traditional IRA, it will be taxed as income for you, which should be negligible while in school (not negligible once a resident, so it is your advantage to start now). There are no exemptions from being taxed on these distributions, but there is no penalty for taking more than the required minimum.

My recommendation - take as much as you can while a med student. Once you are a resident, your salary will be $50k, putting you in a higher tax bracket. Any distributions will be essentially taxed within the 25% bracket, vs 10-15% now.  Best strategy I think would be to take up to $50k to pay off your high-interest loan now, you'll have to pay taxes on that "income" but it'll be a lower average rate than taking it when you are a resident and already paying taxes on your salary. Unfortunately you won't be able to divide it up among multiple years since it is your final year of school.


As an aside, I'm working on a short guide for med students & residents regarding finances and management of such. We have special situations given the (likely) significant increase in salary that most standard guides don't address well. If your med school was like mine, they did about 2 seconds of education regarding this, and there are a lot of people ready to prey on us. When I'm not on call so much I'll post it to the forum.
« Last Edit: September 21, 2014, 01:23:20 PM by Abe »

Catbert

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Re: newbie with a particular medical student debt question
« Reply #3 on: September 21, 2014, 03:07:24 PM »
+1 for what Abe said.  Take it now and pay at your low tax rate.

former player

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Re: newbie with a particular medical student debt question
« Reply #4 on: September 21, 2014, 03:11:01 PM »
Also, for financial advice specific to medics, have you looked at the White Coat Investor site?

stringcheese

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Re: newbie with a particular medical student debt question
« Reply #5 on: September 22, 2014, 06:53:09 AM »
Thank you all for your advice. I will definitely use it.

Formerplayer, I have looked at that website. It's helpful. I approach student debt the same way many members of this site do, but it can be difficult because of the many years of lost earnings as well as the brutal day-to-day training of residency (makes it easy to forget about long-term financial planning, I guess). I'm just trying to set myself up to pay down my debt aggressively while also starting to build my savings. A difficult thing to do with 80-100 hour work weeks and a low starting salary in residency, but hopefully I'll have some success. Right now I am grumbling about the many thousands it takes to apply to residency...there is an interesting exposť to be done about the explosion in cost of medical school in the era of concern over health care prices! 

yoga mama

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Re: newbie with a particular medical student debt question
« Reply #6 on: September 22, 2014, 09:14:32 AM »
Just wanted to say, good for you, @stringcheese, for being proactive about your student loan debt and expenses in general.  I finished med school with well over $300K in student loans and while tuition was expensive, it could have been much less if I had made better choices.  You're starting out in the right mindset, congratulations!  And enjoy your 4th year.

NinetyFour

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Re: newbie with a particular medical student debt question
« Reply #7 on: September 22, 2014, 09:26:12 AM »
Regarding your inherited IRA, was the deceased already taking RMDs from it?  If that is the case, I believe you have to continue to take RMDs yearly, right away.  Tha money will be taxed, but you won't pay penalties.  In fact, I believe that you could withdraw all of it with no penalties--but you would pay tax on all of it.

Abe

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Re: newbie with a particular medical student debt question
« Reply #8 on: September 22, 2014, 07:16:51 PM »
That is correct. No penalties since redemption is required, but will be taxed since the relative did not pay taxes. Roth IRAs are not taxed at redemption so are better methods of transferring wealth over generations (assuming the account has grown over time).

It's not too hard to save during residency- you have no time to spend money anyway. Also, watch out for residencies that have routine 80+ violations. You are almost certainly not getting better training because of it, just more nonsense paperwork to deal with. It is also a mark of an institution not necessarily committed to education and possibly more to profits, otherwise they would have hired more PAs or NPs.
« Last Edit: September 22, 2014, 07:19:56 PM by Abe »

bugbaby

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Re: newbie with a particular medical student debt question
« Reply #9 on: September 22, 2014, 08:54:15 PM »
I disagree about taking say 50 k and paying tax.. at 15% that's 7.5 k gone --

Rather, take the amount now and pay tuition for the remaining 2 years -- it's tax- free withdrawal from IRA to pay for tuition expenses - the net saving this way on the 50k example is: 7.5k - (6.8-5.4) *50k this is the extra interest on not paying your earlier loans = 7.5k -700 = 6.8k saved.

look it up: its tax free to use IRA for tuition.

Icecreamarsenal

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Re: newbie with a particular medical student debt question
« Reply #10 on: September 23, 2014, 11:49:34 AM »
Babybug, he's done with school and will get paid next year in internship.

Good luck string cheese, I wish I had found MMM earlier in my life and career.  I'm 3 years an attending now, going on 4.


It helps to choose a high paying specialty; don't twist your soul into a pretzel to do it though. My debt was 120k and it was paid off the first year.  Some I know are above 500k, practicing as family med docs, and are bitter as bitter can be about it.
There may be an emotional benefit to having no student loan debt as well, it was definitely a boat anchor for me.

Abe

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Re: newbie with a particular medical student debt question
« Reply #11 on: September 23, 2014, 05:11:53 PM »
I second icrecreamarsenal's advice on paying off debt quickly. Live like a resident a few extra years after finishing, and you will thank yourself later. My wife just started her first job out of residency as a family doctor and will pay off her loans in the next year (since we only need my resident salary for expenses).  Another inspiring story: one of my friends is a cardiac anesthesiologist at a very well-paying hospital. He paid off $200k in loans in one year, living off of his wife's resident salary. Then, he bought a used sailboat. Yeah, he's the only anesthesiologist at his hospital driving a Civic, but also the only one who can go sailing post-call!

stringcheese

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Re: newbie with a particular medical student debt question
« Reply #12 on: September 29, 2014, 08:05:21 AM »
thanks for all of the advice. i'm applying in anesthesia, actually -- funny you should mention that story. i have no attachment to fancy cars/houses/clothes and the like, and i agree that for me, the emotional burden of debt is the biggest factor in my decision-making process. i've been able to live on relatively very little for all of medical school, despite living in one of the most expensive places in the US (bay area). i'm married and my husband is not in medicine but is in a very high-earning field with no debt. because of his job and our preferences geographically, we will likely be living in a high COL area for residency and beyond. 

i am going to contact vanguard and see what they can do for me about my IRA. thanks again for all of the advice. it's nice to find the other MDs/almost-MDs on this site. sometimes i get overwhelmed with the financial insanity that is medical school and residency, so it's nice to hear from those who are s/p that period of their lives. :)

Penny Lane

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Re: newbie with a particular medical student debt question
« Reply #13 on: September 29, 2014, 08:21:44 AM »
DH and I are docs at the end of our career ( we are in the volunteer etc zone, no more work for $) and we really feel for you younguns getting out with so much debt.  The nonprofit world of medicine is a joke; you are now a profit center for your institution. 

We always drove used cars; we picked them out in the doctors' lot.  We spent $ on what was important, what we loved, and not statusy things.  We went parttime/practice shared in our 40's and everyone else envied us, but had too much lifestyle to support to do something similar. 

Abe

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Re: newbie with a particular medical student debt question
« Reply #14 on: September 29, 2014, 07:29:59 PM »
Good luck to you on the match! You are already on the right track for making the rest of your life financially secure. If you remain this frugal for the first few years out of residency, the loans won't be much of a deal. Too many people expect to buy Ferraris and huge houses right out of residency out of some sense of entitlement for their "suffering". They fail to realize that: 1) junior partners/attendings are paid less than average for a given specialty and 2) no one cares what you own/do outside of the hospital.


ERMDER

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Re: newbie with a particular medical student debt question
« Reply #15 on: September 30, 2014, 12:30:20 PM »
Just chiming in, as (like stringcheese said) it's nice to find others in the same situation and with the same goals/outlook. First post as a long-time lurker of MMM.

I'm also a 4th year medical student, and will owe about $340k (at ~6.8% interest) when I graduate (this despite living frugally). With annual living expenses of about $12-14k, I have calculated that I will be able to keep on top of the interest as a resident, and then continue this lifestyle for several years as an attending.
Compared to my peers, I feel very fortunate that in that I'm single, enjoy inexpensive hobbies, and have been well aware of the MMM mindset for quite some time. That, and knowing that "Happiness = Reality - Expectations".

Emergency medicine, for those interested.

Cheers,

W

yoga mama

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Re: newbie with a particular medical student debt question
« Reply #16 on: September 30, 2014, 06:52:59 PM »
I finished training with ~$350K in student loan debt, from undergrad, grad, med school, 5 year residency + fellowship with no payments (even interest).  It is always smart to tackle it early and I'm really glad you guys are already on board with the MMM spending philosophies.  This blog would have served me well 20 years ago as I started my debt accumulation career.  Good work to you young 'uns and good luck in your residency interviews :)