Personal Finance 101 for Young Lawyers Forum

[jbagelboy]

I disagree with the 401k investment idea, since most firms don't match so its more like having a savings account, which is very low returns.

what is the 401k investment idea?

Let me clarify--if you work at a large law firm, I disagree with the advise that you should be placing money ina non-matched 401k in lieu of paying off high interest student loans. Obviously I think people should be using 401k's as a more general matter.

[dabigchina]

I disagree with the 401k investment idea, since most firms don't match so its more like having a savings account, which is very low returns.

what is the 401k investment idea?

Let me clarify--if you work at a large law firm, I disagree with the advise that you should be placing money ina non-matched 401k in lieu of paying off high interest student loans. Obviously I think people should be using 401k's as a more general matter.

This is a perennial debate that I don't think has a "right answer".

In the long run 401k contributions are going to have a higher expected value than paying off loans. This is especially true if you can refi with a private lender. On the other hand, I appreciate that if you get shitcanned in a downturn you might be doubly fucked.

That being said, if you have moderate amounts of debt, there's no reason to not both max out tax advantaged accounts and pay off loans fairly aggressively. Tax advantaged accounts only amount to 22.5k per year anyway..

ETA: I believe if you do a backdoor Roth contribution those contributions can be withdrawn without penalty before 59.5 years old, which may give you some liquidity. The same can be said for the principal part of a Roth 401k.

[patentlitigatrix]

What are good legit ways to reduce taxable income for high income earners? Married couple with 4 kids, combined income over 500k. Both my husband and I max out our 401k, itemize, take mortgage deduction. I know taxes will be high regardless, but any tips from experience? We get the god damn AMT every year so I feel like itemizing and taking all these deductions is really not that helpful.

In particular, I don't get how back-door Roth IRA conversions help. Don't you still pay the tax on the income before you put it into the traditional IRA? So how does this help?

And HSAs make me nervous. Even as a family of 6, our health-care costs are generally low, and we get a super-cheap HMO through my husband's employer. I doubt we'd even meet the deductible on an HDHP. No one has any chronic medication conditions, or really gets sick often. Is the idea to save this for use later in life? So you are betting on getting sick? And can't you only contribute 6k a year anyways?

Also, I just don't like having cash tied up that I can't use now.

Also, do you have a 529 set up? With 4 kids college is going to be expensive any way you cut it.

We're not doing a 529, but are otherwise saving for college etc. My state doesn't offer a deduction on 529 plans, so it just doesn't seem worth it. Unless I am missing something?

[Tiago Splitter]

What are good legit ways to reduce taxable income for high income earners? Married couple with 4 kids, combined income over 500k. Both my husband and I max out our 401k, itemize, take mortgage deduction. I know taxes will be high regardless, but any tips from experience? We get the god damn AMT every year so I feel like itemizing and taking all these deductions is really not that helpful.

In particular, I don't get how back-door Roth IRA conversions help. Don't you still pay the tax on the income before you put it into the traditional IRA? So how does this help?

And HSAs make me nervous. Even as a family of 6, our health-care costs are generally low, and we get a super-cheap HMO through my husband's employer. I doubt we'd even meet the deductible on an HDHP. No one has any chronic medication conditions, or really gets sick often. Is the idea to save this for use later in life? So you are betting on getting sick? And can't you only contribute 6k a year anyways?

Also, I just don't like having cash tied up that I can't use now.

Also, do you have a 529 set up? With 4 kids college is going to be expensive any way you cut it.

We're not doing a 529, but are otherwise saving for college etc. My state doesn't offer a deduction on 529 plans, so it just doesn't seem worth it. Unless I am missing something?

529's grow tax-free if used for education. You can just open one up and change beneficiaries (i.e. give money to different kids depending on need) down the line.

[patentlitigatrix]

What are good legit ways to reduce taxable income for high income earners? Married couple with 4 kids, combined income over 500k. Both my husband and I max out our 401k, itemize, take mortgage deduction. I know taxes will be high regardless, but any tips from experience? We get the god damn AMT every year so I feel like itemizing and taking all these deductions is really not that helpful.

In particular, I don't get how back-door Roth IRA conversions help. Don't you still pay the tax on the income before you put it into the traditional IRA? So how does this help?

And HSAs make me nervous. Even as a family of 6, our health-care costs are generally low, and we get a super-cheap HMO through my husband's employer. I doubt we'd even meet the deductible on an HDHP. No one has any chronic medication conditions, or really gets sick often. Is the idea to save this for use later in life? So you are betting on getting sick? And can't you only contribute 6k a year anyways?

Also, I just don't like having cash tied up that I can't use now.

Also, do you have a 529 set up? With 4 kids college is going to be expensive any way you cut it.

We're not doing a 529, but are otherwise saving for college etc. My state doesn't offer a deduction on 529 plans, so it just doesn't seem worth it. Unless I am missing something?

529's grow tax-free if used for education. You can just open one up and change beneficiaries (i.e. give money to different kids depending on need) down the line.

Right. Maybe we do need to look at this again, particularly if interest rates go up. I remember looking at a handful of plans, but it seemed like the account maintenance fees would eat so much into the returns that it didn't seem like it was worth the trouble and having money tied up.

[dabigchina]

What are good legit ways to reduce taxable income for high income earners? Married couple with 4 kids, combined income over 500k. Both my husband and I max out our 401k, itemize, take mortgage deduction. I know taxes will be high regardless, but any tips from experience? We get the god damn AMT every year so I feel like itemizing and taking all these deductions is really not that helpful.

In particular, I don't get how back-door Roth IRA conversions help. Don't you still pay the tax on the income before you put it into the traditional IRA? So how does this help?

And HSAs make me nervous. Even as a family of 6, our health-care costs are generally low, and we get a super-cheap HMO through my husband's employer. I doubt we'd even meet the deductible on an HDHP. No one has any chronic medication conditions, or really gets sick often. Is the idea to save this for use later in life? So you are betting on getting sick? And can't you only contribute 6k a year anyways?

Also, I just don't like having cash tied up that I can't use now.

Also, do you have a 529 set up? With 4 kids college is going to be expensive any way you cut it.

We're not doing a 529, but are otherwise saving for college etc. My state doesn't offer a deduction on 529 plans, so it just doesn't seem worth it. Unless I am missing something?

529's grow tax-free if used for education. You can just open one up and change beneficiaries (i.e. give money to different kids depending on need) down the line.

Right. Maybe we do need to look at this again, particularly if interest rates go up. I remember looking at a handful of plans, but it seemed like the account maintenance fees would eat so much into the returns that it didn't seem like it was worth the trouble and having money tied up.

In case you, or anybody who references this thead don't know, I think you can use any state's 529 plan. If your state's plan sucks you can use a better state's. The only downside is you lose the state tax preference.

ETA: just saw that your state doesn't offer 529 deduction. This means that you should definitely shop around for the best plan.

[bk1]

This is a perennial debate that I don't think has a "right answer".

In the long run 401k contributions are going to have a higher expected value than paying off loans. This is especially true if you can refi with a private lender. On the other hand, I appreciate that if you get shitcanned in a downturn you might be doubly fucked.

That being said, if you have moderate amounts of debt, there's no reason to not both max out tax advantaged accounts and pay off loans fairly aggressively. Tax advantaged accounts only amount to 22.5k per year anyway..

ETA: I believe if you do a backdoor Roth contribution those contributions can be withdrawn without penalty before 59.5 years old, which may give you some liquidity. The same can be said for the principal part of a Roth 401k.

I mostly agree with this. I think tax-advantaged accounts are relatively small enough (23.5k/year) that I think it's still a no-brainer even for biglawyers who owe full freight and live in high CoL areas (unless you have children).

You can withdraw backdoor Roth contributions after 5 years without penalty. See https://www.kitces.com/blog/understandi ... nversions/

[Bluem_11]

There's a fair amount of uncertainty still with re: to loans at the moments too. For the large % of grads who are using income-based in some form, it probably makes more sense to go 401K (especially if matched) than pay down loans in part, invest in another part in a more liquid account, and pay the tax bomb when it comes. However there is uncertainty about the program. Some R's in Congress are not a fan, and it could be amended. Who knows if they'd apply it to current borrowers, or grandfather any changes in. But overall just plain uncertainty when trying to forecast the loan payments.

[kalvano]

What are good legit ways to reduce taxable income for high income earners? Married couple with 4 kids, combined income over 500k. Both my husband and I max out our 401k, itemize, take mortgage deduction. I know taxes will be high regardless, but any tips from experience? We get the god damn AMT every year so I feel like itemizing and taking all these deductions is really not that helpful.

In particular, I don't get how back-door Roth IRA conversions help. Don't you still pay the tax on the income before you put it into the traditional IRA? So how does this help?

And HSAs make me nervous. Even as a family of 6, our health-care costs are generally low, and we get a super-cheap HMO through my husband's employer. I doubt we'd even meet the deductible on an HDHP. No one has any chronic medication conditions, or really gets sick often. Is the idea to save this for use later in life? So you are betting on getting sick? And can't you only contribute 6k a year anyways?

Also, I just don't like having cash tied up that I can't use now.

Also, do you have a 529 set up? With 4 kids college is going to be expensive any way you cut it.

We're not doing a 529, but are otherwise saving for college etc. My state doesn't offer a deduction on 529 plans, so it just doesn't seem worth it. Unless I am missing something?

529's grow tax-free if used for education. You can just open one up and change beneficiaries (i.e. give money to different kids depending on need) down the line.

Right. Maybe we do need to look at this again, particularly if interest rates go up. I remember looking at a handful of plans, but it seemed like the account maintenance fees would eat so much into the returns that it didn't seem like it was worth the trouble and having money tied up.

Aren't you in Texas? Look at the NY 529 plan. All Vanguard index funds so fees are like .17%. It's basically like an IRA for educational expenses in that everything grows tax free, and you aren't going to find similar returns on any other type of investment with the same tax benefits. With four kids, it would probably be good to try and have $150,000 to $200,000 in there for college expenses.

[patentlitigatrix]

Aren't you in Texas? Look at the NY 529 plan. All Vanguard index funds so fees are like .17%. It's basically like an IRA for educational expenses in that everything grows tax free, and you aren't going to find similar returns on any other type of investment with the same tax benefits. With four kids, it would probably be good to try and have $150,000 to $200,000 in there for college expenses.

Nah, I just like to complain about TX courts. I am in CA.

I really do need to look at this again and look at a broader set of plans. I'll check out the Vanguard NY ones, thanks. But say we do put 200k in this thing, and then don't end up needing all of it for educational expenses. Don't we then pay a 10% penalty to get the remaining money out?

[Wipfelder]

Aren't you in Texas? Look at the NY 529 plan. All Vanguard index funds so fees are like .17%. It's basically like an IRA for educational expenses in that everything grows tax free, and you aren't going to find similar returns on any other type of investment with the same tax benefits. With four kids, it would probably be good to try and have $150,000 to $200,000 in there for college expenses.

Nah, I just like to complain about TX courts. I am in CA.

I really do need to look at this again and look at a broader set of plans. I'll check out the Vanguard NY ones, thanks. But say we do put 200k in this thing, and then don't end up needing all of it for educational expenses. Don't we then pay a 10% penalty to get the remaining money out?

In most instances, you can withdraw the amount equal to scholarships penalty-free. That isn't a complete answer, I know, but it is a significant point.

[bk1]

Aren't you in Texas? Look at the NY 529 plan. All Vanguard index funds so fees are like .17%. It's basically like an IRA for educational expenses in that everything grows tax free, and you aren't going to find similar returns on any other type of investment with the same tax benefits. With four kids, it would probably be good to try and have $150,000 to $200,000 in there for college expenses.

Nah, I just like to complain about TX courts. I am in CA.

I really do need to look at this again and look at a broader set of plans. I'll check out the Vanguard NY ones, thanks. But say we do put 200k in this thing, and then don't end up needing all of it for educational expenses. Don't we then pay a 10% penalty to get the remaining money out?

The penalty is only on earnings (you also pay on tax on it, in some instances the kid might pay taxes on it which would be better).

[Wipfelder]

Aren't you in Texas? Look at the NY 529 plan. All Vanguard index funds so fees are like .17%. It's basically like an IRA for educational expenses in that everything grows tax free, and you aren't going to find similar returns on any other type of investment with the same tax benefits. With four kids, it would probably be good to try and have $150,000 to $200,000 in there for college expenses.

Nah, I just like to complain about TX courts. I am in CA.

I really do need to look at this again and look at a broader set of plans. I'll check out the Vanguard NY ones, thanks. But say we do put 200k in this thing, and then don't end up needing all of it for educational expenses. Don't we then pay a 10% penalty to get the remaining money out?

The penalty is only on earnings (you also pay on tax on it, in some instances the kid might pay taxes on it which would be better).

It's been said that one can convert the 529 "overage" into a gift to your adult children with little/no taxes paid. It's a bit far down the line for most of us, but does anyone have any experience executing this?

[kalvano]

Aren't you in Texas? Look at the NY 529 plan. All Vanguard index funds so fees are like .17%. It's basically like an IRA for educational expenses in that everything grows tax free, and you aren't going to find similar returns on any other type of investment with the same tax benefits. With four kids, it would probably be good to try and have $150,000 to $200,000 in there for college expenses.

Nah, I just like to complain about TX courts. I am in CA.

I really do need to look at this again and look at a broader set of plans. I'll check out the Vanguard NY ones, thanks. But say we do put 200k in this thing, and then don't end up needing all of it for educational expenses. Don't we then pay a 10% penalty to get the remaining money out?

I believe you can withdraw the amount of your contribution penalty-free. Also, California has an excellent 529 plan, I believe.

[RaceJudicata]

Another thing to look into (and I have absolutely no idea about the mechanics - just know that it was done for me): If one of your kids doesn't end up going to college, you can change beneficiaries or move around the money to pay for another kid's graduate/professional school expenses. My brother didn't go to college, so I was able to use some of his funds for my law school tuition. Again, not sure the mechanics of how this worked, but it seemed totally normal for the bursar/plan to divert the money in this way.

[Tiago Splitter]

Another thing to look into (and I have absolutely no idea about the mechanics - just know that it was done for me): If one of your kids doesn't end up going to college, you can change beneficiaries or move around the money to pay for another kid's graduate/professional school expenses. My brother didn't go to college, so I was able to use some of his funds for my law school tuition. Again, not sure the mechanics of how this worked, but it seemed totally normal for the bursar/plan to divert the money in this way.

Yep you can change the beneficiary to a different family member. If you're really thinking ahead you could start one for yourself and then change the beneficiary to your kid once he or she is born.

[Stringer6]

I'm almost finished reading I Will Teach You to Be Rich. Life-changer for my ignorant ass.

[Should I Transfer??]

The OP greatly oversimplifies the REPAYE decision because forgiveness is currently treated as taxable income. Unless I missed something, it is far from clear that will change.

[Tiago Splitter]

The OP greatly oversimplifies the REPAYE decision because forgiveness is currently treated as taxable income. Unless I missed something, it is far from clear that will change.

I don't think he even oversimplifies it; he just makes a quick mention and concedes a discussion of it would require another equally lengthy post.

[AVBucks4239]

The OP greatly oversimplifies the REPAYE decision because forgiveness is currently treated as taxable income. Unless I missed something, it is far from clear that will change.

I don't think he even oversimplifies it; he just makes a quick mention and concedes a discussion of it would require another equally lengthy post.

I actually started writing an ebook on student loan repayment options for grad students but got lazy and never finished it. So ya, the student loan discussion was beyond the scope of this thread, and I thought the Student Loan Repayment thread had adequate discussion.

[mt2165]

This seems like a decent place to put this, apologies if this was previously answered - so in the process of filing taxes for the first time. If I had a 2L SA in NYC. If I'm a single, non-NYC resident with minimum exemptions and some scholarship, any idea of what I should be seeing back in tax returns? TurboTax has me at 5300 between Fed and NY. Does that sound right - was under the impression most people saw a little more than that?

[RaceJudicata]

This seems like a decent place to put this, apologies if this was previously answered - so in the process of filing taxes for the first time. If I had a 2L SA in NYC. If I'm a single, non-NYC resident with minimum exemptions and some scholarship, any idea of what I should be seeing back in tax returns? TurboTax has me at 5300 between Fed and NY. Does that sound right - was under the impression most people saw a little more than that?

$5300 seems great. If you don't think its right, try a different program -- hr block, whatever. See if the number is any different. Otherwise, submit and enjoy the cash.

[Anonymous User]

Does anyone have experience with variable life insurance? Is this a reasonable investment vehicle for someone starting out in biglaw? I ask because I have a policy that I purchased when I was just starting in biglaw. Though it sounded great at the time, I'm now having serious second thoughts, and the articles I've found on the subject are not quieting my anxiety.

The policy currently has a surrender value of less than half of the value I've paid into it. (The policy has a 10-year surrender term - something I didn't appreciate at the time of purchase.) I've voiced my concerns to the financial adviser who sold me this thing, and he has assured me that the tax savings over a long period of time will more than make up for the substantial cost of insurance. I am unconvinced.

I'm not quite sure what my next move should be, so I figured I'd put it to the group. Any advice would be appreciated. The current cost of insurance is $67/month, and I'm a little over a year into the 10-year surrender period. If I surrender now, I lose ~$3,000.

[Wipfelder]

Does anyone have experience with variable life insurance? Is this a reasonable investment vehicle for someone starting out in biglaw? I ask because I have a policy that I purchased when I was just starting in biglaw. Though it sounded great at the time, I'm now having serious second thoughts, and the articles I've found on the subject are not quieting my anxiety.

The policy currently has a surrender value of less than half of the value I've paid into it. (The policy has a 10-year surrender term - something I didn't appreciate at the time of purchase.) I've voiced my concerns to the financial adviser who sold me this thing, and he has assured me that the tax savings over a long period of time will more than make up for the substantial cost of insurance. I am unconvinced.

I'm not quite sure what my next move should be, so I figured I'd put it to the group. Any advice would be appreciated. The current cost of insurance is $67/month, and I'm a little over a year into the 10-year surrender period. If I surrender now, I lose ~$3,000.

Variable life insurance is more or less a scam. It makes sense to purchase only if your unable to get regular life insurance. Assuming you are under 30, and healthy, you could get a decent term policy for like, 15-30 dollars a month.

What do you mean you lose 3000? Did you invest 3000 into the policy?

Anyways, if you buy term LI and invest the difference, you'll have a better insurance plan and a better investment plan. The returns in life insurance policies are really, really cruddy.

[Anonymous User]

Does anyone have experience with variable life insurance? Is this a reasonable investment vehicle for someone starting out in biglaw? I ask because I have a policy that I purchased when I was just starting in biglaw. Though it sounded great at the time, I'm now having serious second thoughts, and the articles I've found on the subject are not quieting my anxiety.

The policy currently has a surrender value of less than half of the value I've paid into it. (The policy has a 10-year surrender term - something I didn't appreciate at the time of purchase.) I've voiced my concerns to the financial adviser who sold me this thing, and he has assured me that the tax savings over a long period of time will more than make up for the substantial cost of insurance. I am unconvinced.

I'm not quite sure what my next move should be, so I figured I'd put it to the group. Any advice would be appreciated. The current cost of insurance is $67/month, and I'm a little over a year into the 10-year surrender period. If I surrender now, I lose ~$3,000.

Variable life insurance is more or less a scam. It makes sense to purchase only if your unable to get regular life insurance. Assuming you are under 30, and healthy, you could get a decent term policy for like, 15-30 dollars a month.

What do you mean you lose 3000? Did you invest 3000 into the policy?

Anyways, if you buy term LI and invest the difference, you'll have a better insurance plan and a better investment plan. The returns in life insurance policies are really, really cruddy.

Currently the total investment value of the policy is ~$4600, but I pay a ~$3k "surrender charge" if I try to get out now.

I started with an initial investment of $2k. I've been paying $200/month for the last year or so, of which $67/month is for insurance costs. I've expressed my concerns to the financial adviser regarding what appears to be just a very large fee in the form of insurance costs, and he has assured me that the tax benefits of this policy will far outweigh the insurance costs in the long run. I think I've been had.