Aaron Skloff, AIF, CFA, MBA
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Q: I am a fourth-year medical student committed to a residency program starting in July, when I will be making a salary of
$50,000. With a student loan interest rate at 6.8 percent and post-medical school debt around $200,000, should I consider
investment opportunities such as Roth IRAs during residency, or should I focus only on paying off students loans? A: As does life, financial matters require balance. Paying off your student loans is critical in building and maintaining a
healthy credit score. Just as important are the rewards of combining the time value of money with tax-free investing. Tackle
both.
The IRS imposes strict annual limits on how much you can contribute toward some of the most attractive tax-free savings vehicles.
Take advantage of them each year, because you cannot turn back the hands of time and contribute.
Although a relatively modest salary presents challenges, it generates a lower income tax rate. Income tax rates are calculated
on a graduated basis. On a $50,000 salary, your federal income tax rate may only be 18 percent on a blended basis. If you
believe your income tax rate is likely to increase (due to higher income and/or the government raising tax rates) in the future,
then you should save on an after-tax basis in a tax-free shelter, one that will remain income tax-free for the rest of your
life and the lives of your heirs. First determine whether your employer allows you to make after-tax contributions to a Roth 401(k) or a Roth 403(b) and provides
matching funds in your retirement plan. If so, then contribute at least enough to receive the maximum percentage of matching
funds. For example, if your employer matches 50 cents on the dollar on the first three percent of salary, then you would earn
a $750 profit on your $1,500 contribution (based on a $50,000 salary). That's a guaranteed 50 percent return on investment.
Also, consider a Roth IRA. Even if you cannot maximize the full $5,000 contribution amount ($6,000 if you are aged 50 or more
years), you will have your own retirement account with a host of choices and fewer restrictions than an employer retirement
plan. Most employers place limits on the number and type of investments in your retirement plan account. Most of those limitations
are removed in an IRA account.
Roth 401(k), Roth 403(b), and Roth IRA contributions grow tax-free. Upon separation of service (or beforehand in some cases),
you can roll over your Roth 401(k) or Roth 403(b) into a Roth IRA. Unlike the traditional IRA, the Roth IRA does not have
required minimum distribution requirements. Without such requirements, which force you to begin withdrawing funds by the year
after you reach age 70.5, you could continue building wealth without depleting the account. Further, you can pass significantly
more wealth to your heirs when they inherit your Roth IRA. Work with your financial adviser to determine your goals and financial
plan.
Send your money management questions to memoney@advanstar.com
. Answers to our readers' questions were provided by Aaron Skloff, AIF, CFA, MBA. He is chief executive officer of Skloff Financial
Group, a registered investment advisory firm based in Berkeley Heights, New Jersey. He may be contacted via http://www.skloff.com or (908) 464-3060.
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