31 y/o PhD student inherited 58k, very confused

[jackih]

Hello everyone! I just found this sub and spent some time poking around the resources, including the flow chart. That being said, I'm still pretty confused about what to do in my current situation.

Some facts about me:

• 31 Year old PhD student with ~1 year left
• I jut inherited 58k USD from my Grandmother.
• I'd like to work in academia as a research professor while simultaneously starting 1-3 small businesses on the side (over the course of the next 10-15 years).
• I'd like to have 1-2 kids in the next 10 years.
• I have no debt.
• I have ~5-10k at any moment in a savings and I live below my means.
• I have ~8k in an index fund with schwab. I deposit 200 dollars per month into this fund. I actually have no idea if this is smart or not, just something I've done for a few years now.
• I am 99% sure my university does not offer retirement funds matching for PhD students.
• I make around 50k per year. 30k is through a stipend from my university (employed by university) and ~20k is from research consulting (self-employed).

Ok now to the actual questions:

• I'm still not sure I understand the difference between Roth and traditional IRA. Any thoughts on which I should go for is appreciated. Also, what is a mega backdoor Roth IRA?
• Why 15% of pre-tax income? What makes this number significant?
• What is a qualified high-deductible health plan and what is an HSA? Why are these important to invest in?
• What should I do if I both have immediate goals AND want to retire early (or at least be able to)?

Of course any general feedback, book/website/other content recommendations, etc is 100% appreciated. I'm just trying to soak in some guidance right now. I'm still very new to all of this.

Thanks everyone,

Clash

 

[b1inchrist]

@jackih I would keep a pretty big chunk of that money in an HYSA until you graduate and know exactly where you will be living and working next. Having money makes the process of relocating way easier.

 

[jackih]

@b1inchrist That's not a bad idea. I was thinking of keeping ~1/3 of that inheritance anyways for a little bit of startup money for one of my business ideas. Do you have any HYSA's or providers that you particularly like?

 

[b1inchrist]

@jackih Ally.com is clean and simple. There are some that pay slightly higher, but I like clean and simple.

 

[yoli24]

@jackih If I were you I would max out Roth IRA and put some into a high yield savings account and some into your existing investment account. But most importantly: prioritize your financial goals. What is the first thing you want to accomplish? Maybe it’s “obtain PhD and publish some papers. Have minimal stress with regard to finance until that’s done” in which case just park the funds in Roth IRA and investment account and forget about it for a year.

 

[jackih]

@yoli24 Based on the other comments this is exactly what I'm thinking. That being said, if I put my funds into a Roth IRA aren't they locked there until I retire?

 

[yoli24]

@jackih Although you can technically withdraw from Roth IRA, there are huge penalties for doing so. So effectively yes it’s locked. But the sooner you start saving for retirement the better! I know you feel young and invincible now but we all get older seeing your Roth IRA grow over the years will help remind you of your progress towards financial peace.

 

[jackih]

@yoli24 For sure, definitely want to start saving for retirement.

 

[resjudicata]

@jackih Roth contributions are made with money that taxes have been paid on, traditional contributions get deducted from your taxable income. The choice between the two is about trying to minimize the tax rate applied to the money.

As a graduate student living on a stipend (I assume), you should be contributing to Roth accounts because your current taxes should be very low. Until the tax deadline, you can still make contributions for last year.

 

[jackih]

@resjudicata Ok so Roth is preferred when your current tax burden is low because you pay taxes on the money as it goes in?

 

[resjudicata]

@jackih Yes, you want the smallest % of the money to go to taxes.

 

[opova]

@jackih

1. https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/

https://www.investopedia.com/mega-backdoor-roth-401-k-conversion-5210877

• I don't know
• https://www.investopedia.com/terms/h/hdhp.asp

 

[jackih]

@opova Thanks! I'll read these.

 

[resurrectionpower89]

@jackih Roth vs traditional, roth you are taxed in the year you put the money in. Traditional you are taxed the year you take the money out. This applies to IRA and 401k/403b etc.
I think the question you mean is what is a back door Roth IRA. Basically current tax law is dumb. If you make above x dollars, you cannot contribute to a Roth IRA but you can contribute to a traditional ira, you can contribute to the traditional ira and then transfer that money to a Roth IRA with some additional work and paperwork. Again, bad tax law. Mega back door is slightly more complicated but I don’t think you need to worry about it.

15% is a rule of thumb. It’s not magic but it does 2 things, it lowers your actual expenses. Someone making 50k a year living as if they make 42.5k will lead to different expectations than someone living like they make 50k. It also just ensures a sizable sum is continuously invested towards your retirement goals. Again it’s not magic and ideally you want to contribute more than that especially the younger you are which tends to be the point that you have the least money to invest.

High deductible plans are typically cheaper because you pay more out of pocket if something happens same idea as say car insurance where someone who has a 100 dollar deductible is more likely to use their insurance than someone with a 5000 dollar deductible. One advantage to these plans is you and your employer are able to contribute money to help cover these higher deductibles and this money is able to be invested (exact investment vehicles differ per the exact plan). This means you can have money specific to healthcare invested at 25 that you don’t need until you are 60 and it’s tax advantaged. Important to invest in is sort of a misnomer. It can be /is useful but it’s probably not the highest priority thing, but it isn’t another tax advantaged investment vehicle.

There isn’t a magic answer, finance is an art, a science, and is highly personal. There’s no magic bullet that applies to all people in all situations and often times you have to make choices between current and future you. It’s all about balance and figuring out what risks you are comfortable with.

 

[jackih]

@resurrectionpower89 Thanks for this response, appreciate it. I do not think I have access to a high deductible health plan through my university (they currently cover my health insurance).