Putting Aside Money For Grad School?

CapsaicinBoy asks: "Like many geeks, I'm just about to leave academia for a very lucrative position in the private sector. The thing is, I am planning of going back for my doctorate in few years. Hence my question: What is the best way to put aside money for future educational expenses? The IRS guidelines for Educational IRA's appear to be tailored for parents. I'd really like to find a way to put aside pre-tax dollars now for the lean years in future."

Re:Roth IRA

[unitron]

In this particular case, what are the chances that CapsaicinBoy is under 18? Sounds to me as though he's just picked up a 4 year college diploma if his next educational step is grad school. If he had gotten to that point at or below the age at which most graduate high school, I'd think he'd have his pick of scholarships and grants.

What do you need the money for?

[woggo]

If you've been accepted into just about any Ph.D. program in an engineering/CS school, your tuition is getting paid, and they're giving you money to live on (albeit not as much as you'd get at your lucrative start-up).

It sounds to me like what you want is a suggestion for "how to save money to maintain (some) lifestyle", not "how to save money to afford to attend graduate school." (Although, if you're that set on a particular lifestyle, the two may be synonomous.)

With "lifestyle maintenance" as an objective, here's my advice: A Roth IRA is a great deal for a retirement account, but you can only put $2000 per year in it. If you're planning on going back to graduate school soon -- when you're still current on the research -- that's not going to be enough, and it's not going to grow enough. If you're used to academia, you won't have any problem living on $30k/year and saving $50k, especially if you're single and have no kids. (That's assuming a fairly lean -- by industry standards -- salary.) Put that $50k in an index fund, or even a money market account. Be sure to check the penalties for early withdrawal. (That sounds pretty obscene, no?)

• Here [fidelity.com] is a page at fidelity.com describing how to invest for growth.
• Here [vanguard.com] is "Vanguard University."
• Vanguard's recommended links [vanguard.com]

Sure, there are other mutual fund companies -- this is just to get you started.

Good luck with the company, and if you're interested in databases, allow me to suggest an excellent program [wisc.edu] for your return to academia. (I may be a little biased, though.)

best,
~wog

An IRA won't work if your job is too lucrative

[hubie]

You didn't mention how lucrative your job is, but the tax deductable part of an IRA contribution declines with your gross adjusted salary.

If you are hell-bent on robbing Peter to pay Paul and you want to raid your retirement, if you can set up a 401k with your employer because I believe (check this out to make sure) that you can withdrawl penalty-free for education with those too. However, the smart thing to do is to set up your IRA/401k now with your current job and contribute the maximum you are allowed and don't touch it until you are ready to retire. Remember the 8th wonder of the world: compounding interest!!! You'd be surprised how much difference there is starting your retirement savings in your early 20s vs. your early 30s.

If you are already saving for retirement and you are trying to save for grad school, good for you. If you are planning on going to grad school in a relatively short period of time (five years or so), then I doubt in terms of growth it makes a whole lot of difference where you put your money. The safe thing is in CDs or bonds because at least you know what you'll be getting.

Forget expenses...

[jclip]

It makes relatively little sense to use any sort of tax-advantaged account for education savings for yourself, for the reasons other posters have pointed out. There are some things you can do besides saving, IMHO, to make things more fun in grad school:

• Build great credit, and a lot of it. Grad students are not seen as good initial credit risks, but a history of on-time payments and significant balances will allow you to take advantage of credit. This may seem like a road to ruin at first, but take into account how cheap money can be at times...for example, I bought a new car in grad school. The manufacturer gave me a 0.9% loan, so it didn't make sense to pay for it with savings. Meanwhile, I knew a lot of "fiscally responsible" students who had avoided credit in college and couldn't get a $500-limit Mastercard, let alone a car loan.

  (Speaking of which, credit-card interest is often very low for grad students--you fit the lender's "about to get in deep financial trouble, so entice with low-rate cards" profile. If you are careful, you can use this leverage to your advantage.)

• Fully fund your retirement plan and let that serve as your emergency fund. For obvious reasons, it helps to have a financial safety net in grad school. You can play fast and loose with your income if you don't need to worry about emergency expenses. Good credit can reduce this need, but retirement cash could bail you out (perhaps literally) of a bad situation.
• Listen to the sage advice of Rob Peters and Phillip Greenspun. Getting What You Came For is a great book, highly recommended for all prosepctive PhD students. Greenspun's pages [greenspun.com] tell it like it is.

Roth IRA

[daftgirl]

Since the education IRA probably wouldn't be the way for you to go, have you looked into a roth IRA? Granted, you have to use after-tax dollars, but there is no tax when you withdraw. You can withdraw your contributions after five years, but you have to leave the earnings in the account until retirement age, OR (If I'm remembering correctly) you can take out up to $10,000 in earnings without penalty if it's for the purchase of your first house or for college expenses. I'm not sure if the "college expenses" clause applies to graduate study or only undergrad. But it's something to check out. If you meet all the gov't requirements, you can put in $2,000 a year, as opposed to only $500 with the education IRA.

Re:Roth IRA

[daftgirl]

Look here [fairmark.com] for some info on the regulations relating to education expenses and roth IRAs. Also, you can establish an education IRA for yourself because contributions can only be made until the person whose name it is in turns 18. After that, no more contributions can be made, and all the money has to be used or transferred to someone else by the time the account holder is 30.

it's not hard

[m.o]

I've done precisely that - spent a year working in the industry and now (well, in a month) go back to grad. school for the Ph.D. The nice thing about Ph.D. programs at good schools is that they usually pay you enough to live on, so whatever you save during your stint in the industry is your extra cash.

Now, suppose you get paid $75,000 (though your options can increase that number dramatically - go ORCL!). Subtract taxes - you're left with something like $50,000 (not sure, but all estimates here are rough; I don't think you can realistically avoid any significant amount from being taxed; all the 401k's and IRA's are very small per year, but accumulate over time). Subtract $20,000 for various expenses (housing, car, food, etc.) - so you're left with $30,000. Invest somewhere, and assuming this investment goes well you can have almost $10,000 per year extra in grad. school.... Which is nice.... If you also work during the summers while in grad. school, you can double that amount...

The real problem is that even during that one year you get really accustomed to the fucking-rich-yuppie (well, compared to grad. school anyway) lifestyle, and your expenses and desires go up, up, up... I don't know yet how hard it will be to go back to a more moderate lifestyle, but I think that with all the extra cash (see above) it shouldn't be a problem

Anyway, good luck (and maybe you'll join a great start-up and will retire by the time you go to grad. school)

my painful experience with Roth IRAs

[yankeehack]

A little OT, but I wanted to relate a little story to you. I just had a painful experience finding out that I could not withdraw any **earnings** without penalty (the IRS taking 10% of your earnings) within the 5 year mark of opening my account to buy a first home (which is one of the kind of qualified purchases you can make before you're 59 1/2).

In other words, to withdraw your earnings penalty free to use for first home, education, etc. you need to hold the account for the five year mark. Any money that you **put in** can be withdrawn.

So with all the hullaboo about the Roth being flexible, most of its advocates didn't mention that if you opened the account in 1998 you would have to wait to 2003 to get your earnings for "qualified purposes".