There is currently a tax credit for low-income persons contributing to
an IRA, but unfortunately this does not apply to full-time students, as
I understand things.

andyshank[at]gmail.com wrote:
- quote -

Andy,
Two Qs here - what kind of account(s) should the money sit in, and what
kind of investments should you buy within those accounts?

Something to talk over with your friend, for money you want to set aside
for a long time, is a Roth IRA. When your income is low, as in grad
school, it's a good time to get as much money as possible into one. You
can do that two ways, through contributions and converting retirement
savings you might have already - eg a 401k from your old job?

Contributions require earned income, and if you have a stipend for
teaching or plan to have a part-time job, that'd satisfy the
requirement. You can contribute up to $4k per year to the Roth as long
as you have at least $4k in earned income.

You don't mention whether you have any retirement money saved up from
your job, but if so you also might consider converting those dollars
into a Roth IRA. You can do this with assets sitting in a 401k plan or
traditional IRA, for example. If you have those it's worth seeing if
this is an option. The reason is that this kind of conversion is
taxable, but if you aren't making much money (as in grad school) you
probably won't pay much if anything in tax.

The advantage of the Roth IRA account for long-term savings is not only
that your money grows without paying taxes on earnings year to year, but
also that you never pay taxes on those earnings, as long as you meet the
requirements for distributions (essentially, it's retirement money).
This tax-free nature is a potentially huge advantage. Plus, unlike other
types of IRAs you can tap into your Roth IRA contributions if you need
to, so it's not as if the money is truly locked up. It sounds like you
might like this flexibility.

With the $25k you have a good source of funds for Roth contributions and
depending on whether this is an MS or PhD kind of track you might end up
using a good portion of the $25k. You probably don't want to put the
whole nut into a Roth, but rather would keep a good rainy-day fund to
cover unexpecting living costs, car repairs, moving costs, etc. I think
life goes a lot easier if you have $5k+ sitting in an accessible place -
not to blow on stupid stuff but earning interest somehow (savings
account, CDs, savings bonds) and there if you need it.

Once those bases are covered you could consider some accessible
investments in a regular taxable investment account. It could end up
being just $5k-10k but whatever it is, might as well put it to work.
This is after you've set aside the rainy-day fund.

So that's the account side of things, what about investments? No need to
get fancy, you might go to www.vanguard.com and figure out a mix of
index funds that you can buy and let plug away. More aggressive in the
Roth, less in your taxable account. You might even keep the whole mix
very conservative if you think you might be tapping into it. For
example, you might not like the student loan interest rates that you end
up with, and decide to shift some money to pay them down a bit.

Normally grad school is a time for going in the hole financially and
this stuff could help compensate, at least a bit.

-Tad

How long will you likely be in graduate school?

Also, do you have another cache of cash right now, such that you can truly
tie up this $25k for awhile? If not, set aside some portion of the $25k as a
truly liquid cash account, prefereably at someplace like emigrantdirect.com
and change the numbers below accordingly.

If you're be in graduate school only about two years, I'd try either (1) an
account with a bank like emigrantdirect.com, currently paying 3.25%
interest, no strings attached from what I'm reading at its web site and
hearing; (2) a CD ladder BUT only going out maybe two years. In other words,
divide your $25k into four, equal parts (or even eight, equal parts). If
four, buy one each of the following at $6250 each: 6-month , one-year, 1.5
year,and 2-year CDs. If eight, buy one each of the following at about $3125
each: 3-month, 6-month, 9-month, etc. to 2-year CDs.

The interest rate spread between 2-year CDs(or even 1-year CDs) and 5-year
CD averages is currently only about 0.7%, tops. I see many banks offering
2-year CDs (min. deposit = $500) paying over 4% right now. See
http://www.bankrate.com/brm/rate/high_home.asp

John, the guy would be locking up most of his money for at least three years
under your plan. I have doubts that this will give him the needed
flexibility while optimizing interest yield. Also, if interest rates are
heading slowly up, he may be better off with rungs a smaller time period
apart, as well as shorter maturity.

Under this plan, he can get half his money back within a year; all within
two years.

To add also to Beliavsky's suggestion: there is a sizable tax credit for low
income taxpayers who contribute to either a Roth or Traditional IRA. Also,
if the OP contributes to a Roth IRA, he can always withdraw the contribution
part at any time without penalty. The Roth is one category of "emergency
fund" resources.

John A. Weeks III wrote:
- quote -

That seems reasonable. An alternative is a short-term bond fund.
Full-time grad students often earn income as teaching or research
assistants. I suggest that the OP try to make annual contributions to a
Roth or traditional IRA if at all possible, since the tax benefits are
large for contributions made at young age. I think there is even a tax
credit for contributions to traditional IRAs by low-income taxpayers
(which the OP will likely be during grad school), but please verify
this.

In article <1118511325.685030.292040[at]g49g2000cwa.googlegroups.com> ,
andyshank[at]gmail.com wrote:

- quote -

One thought is to ladder CD's or bonds. Buy $5K each in a
1yr, 2yr, 3yr, 4yr, and 5yr maturity CD (or bonds). Each time
one comes due, buy another 5yr. This gives you the 5 year rate
on CD's, but you are never more than a year from your money.
Then work very hard to avoid emergencies.

-john-

--
================================================== ====================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
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Hello everyone and thanks in advance for any assistance I receive.

I am starting grad school as a fulltime student this August. I am
resigning from my job to focus completely on school so I'll essentially
be living off student loans. Just yesterday I sold my condominium and
stand to profit about $25,000 from the sale. I want to do something
more significant with this money than just throw it in my money market
account, but I also need to have access to it in case of necessity (car
repair, unexpected school expense, student aid shortcoming, etc.).
What would some of you gurus suggest I do with it? I'm going to a
college friend soon who is a financial advisor but just wanted to arm
myself with a variety of ideas beforehand. Thank you very much!

Andy