With the cost of graduate school tuition ranging anywhere between $30,000 to $70,000, it may be hard to think of your graduate school years as a time to better position yourself to achieve your long term financial goals.
If you’re like most students, you either quit your job, took some sort of pay cut or reduced hours, and are probably going to miss out on the promotion you were in line for during the past couple of years. Both the explicit (tuition, moving, living) and opportunity (lost wages) cost of making the decision to attend graduate school are very high, yet the hope is that over the long term the increase in wages or the career change that made you decide to go to grad school in the first place will pay off. Here are some ways you can help your long term financial situation during your expensive grad school years.
Convert 401(k) or IRAs to Roth
Assuming that you saved to a company employer plan like a 401(k) or an IRA, your grad school years could be a perfect time for Roth conversions. Assuming you have no income during your school years, the standard deduction allowed by the IRS ($6,300 in 2016) and the personal exemption you can claim for yourself ($4,050 in 2016), plus the lifetime learning credit of $2,000 you can claim while in school allow you to convert roughly $26,000 of IRA money to Roth for free. To do this, rollover your 401(k) account into an individual IRA and then transfer the amount you wish to convert to a Roth IRA account.
Contribute to your Roth IRA
Unlike with traditional IRA accounts, any withdrawals from Roth IRAs are completely tax free. That is, there is no tax owed on any contributions or earnings when you withdraw funds from a Roth IRA. As stated before, a single student has a cushion of roughly $26,000 before any income tax is triggered. Assuming you earned income under this cushion and saved a portion or all of it to a Roth IRA, you would not only not pay taxes on the income, but also on any investment earnings! Roth IRAs are not only a great way to save for retirement but can also help you save for a first-time home purchase. Up to $10,000 of investments earnings can be withdrawn tax-free even if you’re under the age of 59 1/2 (and contributions can always be withdrawn without penalty).
Make sure your portfolio’s allocation is correct
It has been proven, and re-proven, that a portfolio’s asset allocation, or the selection and weight allocated to different equity and bond categories, is by far the most significant determinant of portfolio returns over the long term. Most people focus on picking the right securities, rather than looking at the big picture and allocating their portfolio in the correct asset classes. During your grad school years, most likely your late 20s or early 30s, you should probably aim for a portfolio consisting of 70-90% stocks and 10-30% in bonds. If possible, you should try to hold both domestic and international stocks and bonds for added diversification. Due to the exponential nature of compounding, having the right asset allocation in your early years of saving can have a huge impact over the long term. If all, or most, of your money is in retirement accounts (IRA, Roth IRA, 401(k), etc.) you will only have to pay trading costs to do this since you will not trigger any tax liabilities. If you are placing trades in a brokerage account, just be aware that any gains will be taxed at either your ordinary tax rate or at the beneficial capital gains tax rate (depending on how long you have held the security).
Going to graduate school can be one of the best things you do to advance your career.
That said, the financial burden this decision can have on your long term financial health can be huge. Hopefully these easy to complete tips can better position you to achieve your long term financial goals, whatever these may be!