Forum Mailbag: Paying for Child’s Medical School, TD Ameritrade, 529 vs. Taxable, And More!

There is so much great information on personal finance forums. I regularly participate on several message boards, including Bogleheads, White Coat Investor, and Rockstar Finance. Here are some of the discussions happening around the internet.

1. Bogleheads: Paying for Child’s Medical School

Question: Bubbadog’s son is a college junior who is planning to attend medical school in two years. He is able to pay for his son’s medical school out-of-pocket without affecting his retirement goals. He was wondering whether he should just pay for medical school out of pocket, or whether he should allow his son to go for student loan forgiveness.

WSP’s Take: There are two questions here: (1) Should he pay for his son’s medical school? and (2) Could it potentially be cheaper to allow the son to take loans and have it forgiven through PSLF or some other student loan forgiveness program?

In my view, the answer to Question (1) is yes, you should pay for medical school if you have the means and the desire to do so. Medical school is incredibly expensive, and your son will greatly appreciate the freedom of graduating medical school debt-free. He won’t have the pressure of student loans throughout medical school and residency, and he won’t feel the pressure of going into a high-paying specialty just for the money. He’ll also be able to have a huge head start in saving for his own retirement if he doesn’t have to spend years paying off his student loans.

The concern about “skin in the game” is significantly lower in medical school than college. To get into medical school shows that your son is studious and will take medical school seriously. The concern that they will be more likely to drop out is valid, but some physicians feel trapped in their profession because of their student loan debt. If medical school is not right for them, then they should not live their life doing something they don’t want to do because of medical school debt.

Regarding Question (2), while it is possible that there could be a cheaper way to fund medical school through loans and loan forgiveness, I would not count on it. There is widespread skepticism that the PSLF program will continue in its current form. In addition, remember that while you can pay for your child’s medical school tuition without incurring any gift taxes, I’m not so sure you could just pay off hundreds of thousands of student loans in a single payment without incurring any gift taxes.

2. Reddit: Index Funds at TD Ameritrade

Question: Armedloir asks which index fund or ETF that is offered at TD Ameritrade is best.

WSP’s Take: We talk a lot about Fidelity, Schwab, and Vanguard when it comes to index funds, but there are other brokerages as well. TD Ameritrade was one of the first online brokers, and they currently offer over 100 commission-free ETFs.

Unfortunately, many of the best ETFs offered by Vanguard and iShares will cease to be commission-free at TD Ameritrade beginning on November 20, 2017. These include many of the best Vanguard ETFs, including VTI (Total Stock Market), VEA (Developed International Stock Market), VT (Total International Stock Market), and BND (Total Bond Market).

You can still build a low-cost three-fund portfolio with other commission-free ETFs at TD Ameritrade, including SPDR Portfolio Total Stock Market ETF (SPTM, ER = 0.03%), SPDR Portfolio World ex-US ETF (SPDW, ER = 0.04%) and SPDR Portfolio Aggregate Bond ETF (SPAB, ER = 0.04%).

3. White Coat Investor: 529 vs. Taxable Account

Question: Golfer68 lives in a state that offers no tax credit for 529 contributions, and they add a 0.25% management fee on top of the fund expense ratios. He has a newborn, and was wondering whether it would be better to simply invest in a taxable account.

WSP’s Take: Certainly the 529 is more restrictive in how it can be withdrawn without paying a tax penalty. But it’s far more likely that your kid will go to college than not, and the 529 offers many tax benefits over taxable accounts.

While it appears that the OP’s 529 plan has higher-than-average administrative fees, because it offers no state tax benefit, he does not have to invest in his own state’s 529. In fact, it would be preferable for him to open a 529 in another state that has lower costs with excellent investment options, such as Utah, New York, or Michigan.

4. White Coat Investor: Too Much Money In A 529?

Question: LizFK has a 4-year-old and a 2-year old with 529s totaling $22,500 and $13,200, respectively. She is depositing $250 per month per child into their 529. She is concerned that there may eventually be too much money in the 529, especially if the children get a scholarship or otherwise not needing the full account balance for college.

WSP’s Take: There’s always a balance between overfunding and underfunding your 529. The penalty for underfunding your 529 is a lost opportunity to save money on taxes. The penalty for overfunding your 529 is a loss of flexibility in how the money can be spent, or taking a penalty to withdraw the money for non-education purposes.

Remember that the beneficiary on the 529 can be transferred to grandchildren, nieces, nephews, and other relatives. The beneficiary can even be changed to yourself.

If you are willing for the money to be used by your grandchildren or other relatives and you are otherwise saving enough for your own retirement and financial goals, then I would continue to contribute to a 529. If your children are the only beneficiaries you’d like the 529 money to go to, then you should be a little more restrained in your contributions.

At $3,000 a year per child, I think you are striking an appropriate balance between overfunding and underfunding your 529 based on your concerns. At this contribution rate, you are unlikely to be able to pay for four years of private college tuition, but will probably be able to pay for most of your children’s public school education. Remember, you can always pay the difference in school expenses from your other investment accounts.

Wall Street Shares: 5 Articles To Read This Week

1. Some Random Guy Online: Student Loan Balance = $0 — SRGO shares some tips on how he paid off over $400,000 in student loan debt.
2. PlanEasy via Budgets Are Sexy: Is Checking Your Money Every Day Making You Sad? — My very first post on this blog was about reducing the frequency you check your investments. Owen at PlanEasy shares his thoughts, including a nifty table on the probability that the S&P 500 has risen over various time periods, from 1 second to 1 year.
3. Future Proof MD: Studentloans.gov Repayment Estimator Walkthrough — Dr. Liu walks you through this great calculator from the Education Department.
4. Live Free MD: If You Don’t Have Your Health, You Don’t Have Your Freedom — LFMD’s motto is “Remember, It’s Not About the Money; It’s About the Freedom”, but he argues that you can’t have freedom without health as well.
5. A Good Life MD: Gratitude Blog Journal — while this is a personal reflection on the things this radiation oncologist is grateful for, I think it helps us with each of our own reflections on the things we are thankful for in life.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?