Magazine article Medical Economics

Money Management Q&A

Magazine article Medical Economics

Money Management Q&A

Article excerpt

Finances after med school

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 LRAs during residency, or should L 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 taxfree 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. …

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