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Fixing a 750K portfolio as an MS1 + pay for med school

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  • Avatar MedicMegan 
    Participant
    Status: Student
    Posts: 3
    Joined: 07/19/2019

    I am an incoming MS1 and I’m in the very fortunate position of having received approximately 600K about 2.5 years ago. At that time, I knew nothing about investing so my dad invested the money for me in a taxable Fidelity account. The investments are now worth about 750K.

    I learned a lot from reading WCI over the last few months and now want to manage my own investments as well as use the money to pay about 70k/year for med school. Long story short, I realized that my dad has invested in a hodge-podge of individual stocks, actively managed funds, and passively managed index funds and ETFs. Overall, I have about 300K split across four different US index funds/ETFs, 430K split across 14 different stocks and 2 actively managed funds, and 20K in cash.

    Here’s my plan:

    • 300K of Index funds and ETFs: Keep these
    • 430K of individual stocks and actively managed funds: I can easily sell about 100K of the stocks on which I made no profit. With the remaining 330K, I made about 100K in long term capital gains (can only offset about 10K of this with losses) so I was planning to gradually sell these off over the next 2-3 years to fund my tuition as I go and minimize taxes (I have no other income). I definitely want to start by getting rid of the actively managed funds, however, some of the stocks are in companies like Apple and Microsoft and my dad says these are good stocks that I should keep for the long term.

    Either way, my overall goal would be to transition to something simple like a three-fund portfolio (ITOT, IXUS, AGG) with perhaps a year’s worth of tuition set aside at all times (maybe in a high-interest savings account).

    A few questions:

    • Should I keep a few of the well-performing stocks (total value about 215K, majority of which is in Apple, Facebook, and Microsoft)? Right now these dividends are being reinvested as well.
    • Is my overall plan okay for making sure that I will be able to pay for med school as well as have the remainder responsibly invested over the long term?
    • What would you do in my situation?

    I hope this makes sense, this is my first post here so let me know if I made any mistakes. Any advice is greatly appreciated!

    #231869 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4405
    Joined: 01/08/2016
    Should I keep a few of the well-performing stocks (total value about 215K, majority of which is in Apple, Facebook, and Microsoft)? Right now these dividends are being reinvested as well.

    Click to expand…

    no. index.

    Is my overall plan okay for making sure that I will be able to pay for med school as well as have the remainder responsibly invested over the long term?

    Click to expand…

    youll have to sell more than the true zero CG rate since youll need 70K/year. thats fine. LTCG are great. keep the money conservative as you know you have a fixed expense for 4 years.

    What would you do in my situation?

    Click to expand…

    say thanks dad. im an adult. ive got it from here. feel free to give opinions.

    biggest thing is realize its your money. youll do fine with it.

    read every boglehead, ferri, etc book, read this website.

    #231877 Reply
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 1807
    Joined: 02/11/2019

    What a great “problem” to have.

    You have 4 years with no income.  You can sell the losers now and convert the at the 0% LTCG bracket over the next few years.

    Stop reinvesting dividends now.

    I would not personally hold onto any individual stocks.

    “Never let your sense of morals prevent you from doing what is right.”

    #231890 Reply
    Avatar Xeno 
    Participant
    Status: Physician
    Posts: 128
    Joined: 01/24/2016

    Basically, what @lordosis said. If you want to get really nerdy, Kitces has a good article about your choices, but given your low tax bracket (and particularly your low LTCG tax bracket), and the fact that you may be eligible for a non-refundable tax credit due to paying tuition, you can probably realize a few hundred thousand dollars in capital gains over the next few years and pay at most a few% in state income taxes, and get to reset your cost basis to be higher.

    The Kitces article is here:

    https://www.kitces.com/blog/strategies-highly-appreciated-investments-big-embedded-capital-gains-concentrated-stock/

    If you have any earned income, you may be able to move some of the money into Roth IRA or put it into a traditional IRA and get a saver’s credit to offset your capital gains taxes. I’m not a tax professional, so this isn’t tax advice, and you definitely need to read up on “capital gains harvesting,” which is essentially what you are in a prime position to do.

    #231894 Reply
    Avatar MedicMegan 
    Participant
    Status: Student
    Posts: 3
    Joined: 07/19/2019

    Thank you all for your advice, particularly on capital gains harvesting. Everything you mentioned has been very helpful and I now feel more confident that I’m heading in the right direction and can continue learning in the future!

     

    #232004 Reply
    Avatar StarTrekDoc 
    Participant
    Status: Physician
    Posts: 2040
    Joined: 01/15/2017

    First step:  move dollars that we fund you through the next four years into a ‘safer’ index — depending on what you want — cash, or bonds, or income index — as it’ll fund over four years.  you want minimize a big drop.    Would liquidate that 100k for year 1. and cash.   Liquidate another 50k to hold as cash Emergency Fund.  move 230k to a safer fund with lower volatility.

    2nd step:  during med school; liquidate 39k a year of capital gains holdings that you’ve identified that you would like to move away.  This will throw off $0 Capital gains and allows you to move it to whatever future index you want and support what you need.

    2nd step:  during residency, plan would fully leverage your W2 status by socking away as much as you can to tax sheltered positions.  If you fall short, dip into some of the taxable funds as these will be the lowest capital gains you’ll ever pay at 15%.

    3rd step and beyond– continue to max out all tax sheltered funds possible to drive that income tax down as far as possible.

    Study hard.  Make your grandparents proud.

    Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1799
    Joined: 01/08/2016

    Couple thoughts, could lifetime learning credit be used to offset income from portfolio? Dont forget that the portfolio is kicking off income.

    Is there a state deduction for 529? You could fund 529 up to credit amount. If no state deduction, would there be any benefit for op to superfund a 529? I’m thinking tax free growth on a bond/cash fund, so another 1-2k/yr without tax liability.

    Hopefully one of the tax folks can clarify.

    #232046 Reply
    Liked by MedicMegan
    Avatar MedicMegan 
    Participant
    Status: Student
    Posts: 3
    Joined: 07/19/2019

    I was thinking about the lifetime learning credit but never thought about using a 529. I’ve never had to file taxes before this so I’m pretty unfamiliar with this kind of stuff (and neither are my parents so I can’t ask them). I was thinking of going to talk with the person who does their taxes for more specific advice.

    Regarding the 529, my family and I live in Maryland but I’ll be going to medical school in Massachusetts. I think Maryland allows you to deduct $2500 in contributions per year.

    If anyone here more familiar with tax issues can shed some light on this, that would be great.

    #232135 Reply
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 1807
    Joined: 02/11/2019

    How much in state taxes can the OP really save using a 529 when he has no income?
    The timeframe is too short to get much use from the tax free gains.
    I like the plan outlined by startrekdoc

    “Never let your sense of morals prevent you from doing what is right.”

    #232139 Reply

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