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Author Topic: My postgraduation BigLaw budget  (Read 8578 times)

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Re: My postgraduation BigLaw budget
« Reply #40 on: May 12, 2005, 04:08:40 PM »
Sweet! I'd forgotten about being able to take money out to lower the Adjusted Gross Income.

Does anyone know the maximum one can save pre-tax? Assuming the firm has something similar to a 401(k) and I set up a Roth IRA?

In your scenario, you won't be able to set up a ROTH IRA.  This is because only people with incomes under 65k are eligible for Roth IRAs.  You can, however, set up a REGULAR IRA, in addition to your company's 401k.


Also, Roth IRA's are funded with after-tax dollars, which is why they are tax free when you make the withdrawals; the taxes have already been paid. 

Also, Regular IRA's are based largely on the premise that your tax burden will go down as you enter your MANDATORY withdrawals around retirment age because your income will go down (due to retirment/stopping working).  This presumed reduction in income is not necessarily so, given the choices and types of investments that people can make. (After all, people are working later and later in life...And what if you actually do make partner? So much for your income going down as you get older...So your tax-deferring Regular IRA may actually cost you more money if you actually make more as you age...

Not that IRA's are a bad idea in general; just that you need to have a full and complete picture in order to know if that's really the best place to put most of your retirement money. 

You won't really know what's best until at least 4-5 years out of law school, so an IRA is probably a good idea until you get a clearer picture...

Just something to think about.

ormachea

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Re: My postgraduation BigLaw budget
« Reply #41 on: May 12, 2005, 04:24:11 PM »
Good point, though I mixed up the IRA terms. At the same time, if I make Partner, I don't think I'll be too concerned about my retirement.  ;D

What about the interest on my loans giving me a tax-deduction? Will I be making too much for that to happen?

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Re: My postgraduation BigLaw budget
« Reply #42 on: May 12, 2005, 04:25:33 PM »
Good point, though I mixed up the IRA terms. At the same time, if I make Partner, I don't think I'll be too concerned about my retirement.  ;D

What about the interest on my loans giving me a tax-deduction? Will I be making too much for that to happen?

Yep. Sorry.  (I believe the limit is also 65k...I may be wrong on that exact number, but I know that 100+ is DEFINITELY ineligible...)

ormachea

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Re: My postgraduation BigLaw budget
« Reply #43 on: May 12, 2005, 04:44:41 PM »
Good point, though I mixed up the IRA terms. At the same time, if I make Partner, I don't think I'll be too concerned about my retirement.  ;D

What about the interest on my loans giving me a tax-deduction? Will I be making too much for that to happen?

Yep. Sorry.  (I believe the limit is also 65k...I may be wrong on that exact number, but I know that 100+ is DEFINITELY ineligible...)

Damn discriminating against the well-to-do... No wonder we rush to set up tax shelters.

Will I at least be able to deduct the interest from my mortgage a few years down the line?

Are we there yet?

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Re: My postgraduation BigLaw budget
« Reply #44 on: May 12, 2005, 04:47:56 PM »
Good point, though I mixed up the IRA terms. At the same time, if I make Partner, I don't think I'll be too concerned about my retirement.  ;D

What about the interest on my loans giving me a tax-deduction? Will I be making too much for that to happen?

Yep. Sorry.  (I believe the limit is also 65k...I may be wrong on that exact number, but I know that 100+ is DEFINITELY ineligible...)

The $65K AGI number is correct for single filers. The deduction for student loan interest actually begins to phase-out at an AGI of $50K, so by the time you reach $65K, it's been reduced to zero. For the record, married people filing jointly will have the phase-out begin at a combined AGI of $100K with complete phase-out at $130K. So if you happen to marry someone who either doesn't work or has a very low paying occupation it is possible to fly under that "married - filing jointly" AGI value with some effort.

Yes, you will be able to deduct mortgage interest on your primary residence, although I'm not sure about your planned Texas property.  ;D

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Re: My postgraduation BigLaw budget
« Reply #45 on: May 12, 2005, 04:51:32 PM »
Easiest way to lower your AGI is to buy property. Property taxes and mortgage interest are deductible--you can lower your AGI considerably that way. Of course, depending on your income, you might have to start worrying about the AMT, but that's probably a few years away.

One thing you might want to consider is stretching out your federal loan payments over more than 10 years, especially if your interest rate is low when you consolidate. You could still make large payments early on (although that might not make financial sense, depending on your interest rate), but choosing a longer repayment period will allow you to have a lower required payment, in case you just hate biglaw and decide to get out early.

ormachea

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Re: My postgraduation BigLaw budget
« Reply #46 on: May 12, 2005, 05:01:31 PM »

Yes, you will be able to deduct mortgage interest on your primary residence, although I'm not sure about your planned Texas property. ;D

Haha. I'm moving away from that idea for now--seemed a little dubious anyway. I'll probably post a revised version of the budget in a few days.

Easiest way to lower your AGI is to buy property. Property taxes and mortgage interest are deductible--you can lower your AGI considerably that way. Of course, depending on your income, you might have to start worrying about the AMT, but that's probably a few years away.

One thing you might want to consider is stretching out your federal loan payments over more than 10 years, especially if your interest rate is low when you consolidate. You could still make large payments early on (although that might not make financial sense, depending on your interest rate), but choosing a longer repayment period will allow you to have a lower required payment, in case you just hate biglaw and decide to get out early.

When does the Alternative Minimum Tax affect people?
And we'll see about the federal loan payments. It's not a bad thought, but there's only so long I want to pay loans--and I don't know if I have the discipline to consistently pay more than the minimum.

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Re: My postgraduation BigLaw budget
« Reply #47 on: May 12, 2005, 05:23:32 PM »
Not sure of the answer to the AMT question, although I know it's become a problem for some upper-middle income people who were never intended to fall within its parameters. There is talk that Congress should correct the problem, but it doesn't seem likely to happen soon.

As for the federal loans... I know what you mean about repaying for awhile. My consolidation is for 25 years, which makes me sick when I think about it. But, my interest rate is less than 3 percent, and after I schedule direct deposit it drops a quarter point and then with three years of on-time payments it will drop another quarter. With an interest rate of just slightly more than 2 percent, paying ahead doesn't make financial sense. I can definitely find an investment with a greater return than that. Add in that I'm married and will be able to deduct my student loan interest, and it makes sense for me to drag it out as long as possible.

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Re: My postgraduation BigLaw budget
« Reply #48 on: May 12, 2005, 06:30:44 PM »
Not sure of the answer to the AMT question, although I know it's become a problem for some upper-middle income people who were never intended to fall within its parameters. There is talk that Congress should correct the problem, but it doesn't seem likely to happen soon.

As for the federal loans... I know what you mean about repaying for awhile. My consolidation is for 25 years, which makes me sick when I think about it. But, my interest rate is less than 3 percent, and after I schedule direct deposit it drops a quarter point and then with three years of on-time payments it will drop another quarter. With an interest rate of just slightly more than 2 percent, paying ahead doesn't make financial sense. I can definitely find an investment with a greater return than that. Add in that I'm married and will be able to deduct my student loan interest, and it makes sense for me to drag it out as long as possible.

There are really two realms of federal student loans to talk about here:  ones that have been consolidated at the current historic lows (scheduled to last only until 6/30 of this year--so if you haven't consolidated, get on the phone now), and the loans we will all be taking on over the next three years.

Already consolidated federal loans have interest so low that it barely even keeps up with inflation.  Throw in those random 1/4% discounts, and it's effectively a free loan (when looked at in the long haul). 

So if you have other loans with higher interest rates (as 99.9% of us will, because we'll be getting more loans in order to go to law school), accelerate payment to those newer loans first. Then worry about speeding up your older consolidated loans... 

Just because they're older doesn't mean they have to be paid off first...

ormachea

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Re: My postgraduation BigLaw budget
« Reply #49 on: May 12, 2005, 06:37:38 PM »
Interesting advice. Since I went to a cheap public school though, I avoided getting any student loans for my undergrad. I will however, be looking at a loan amount just shy of 100k for law school.