11 Personal Finance Tips for MBA Students

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Invest in Your Roth IRA

To be eligible to invest in a Roth IRA, you need to earn less than $127,000 in adjusted gross income per year.  With base salaries finally starting to rise up after the economic crisis, this means that for many MBA students, these two years spent in business school will be the last time you’ll ever be eligible to invest in a Roth IRA.

A Roth IRA allows you to invest assets in a retirement account and pre-pay your taxes on it.  Therefore, it grows tax free and you are allowed to withdraw the money you invested into the account (not necessarily the investment gains you made), whenever you want, without any tax penalty.  This liquidity is the key reason why the Roth IRA is superior to the Traditional IRA.  While a Traditional IRA allows you take an income deduction based on the amount of your investment, those assets cannot be withdrawn until you retire.  Otherwise you’re hit with a penalty that could very likely wipe out any investment gains you made.

While short term tax deduction is great, the Traditional IRA forces you to lock away your assets for several decades.  If the economic crisis in 2008 taught us anything, it’s that bad stuff happens.  I can almost guarantee that we’ll have another crisis before the time you retire.  Therefore, it makes sense to invest in a Roth IRA to keep your assets liquid.  You’ll be able to access your retirement funds, without a tax penalty, for whatever significant events that could happen between now and the time you retire, such as supporting a home purchase, mitigating the effects of a job loss, or starting a new company.

Perform a Roth Conversion

For most MBA students, the two years spent in business school will be the lowest earning period of their professional lives.  Because of this situation, business school is the best time to perform a Roth conversion.

Most people have money invested in a traditional retirement account, where a tax deduction was taken on the investment amount.  A Roth conversion changes your traditional retirement funds into Roth funds, allowing them to grow tax free and be withdrawn before retirement without a penalty.  However, because you already took a tax deduction on these amounts, you’ll need to count anything you convert to Roth as income for that year.

Despite this additional fee, the fact that you’re earning so little income during business school means that the cost you incur for the conversion will be smaller than the taxes you would have paid, had you invested the funds in a Roth IRA when you were working full time.

Keep in mind that you don’t get the liquidity benefit of the Roth IRA right away.  After performing a Roth conversion, you’ll still need to keep your funds invested in your Roth for five years before you can withdraw it without any penalty.  This is still significantly better than having to wait until you retire.

Get a Credit Card with No Foreign Transaction Fees

If you’ve decided to go to business school, you’re likely going to use your time to travel abroad at a least once during your two years.  When abroad, one of the most annoying things that most credit card companies do is tack on an additional percentage fee to every overseas transaction you make.  The convenience of not having to carry around cash is great, but those additional fees put a lot of pressure on a budget that is already constrained.

To combat this, there are a handful of credit cards in the market that waive foreign transaction fees completely.  The VentureOne Rewards card from Capital One is one of the few “no foreign transaction fee” cards that also has no annual fee associated with it.  Therefore, it makes sense to sign up for this card when you start business school, regardless of whether or not you have an international trip planned.

Check to See Whether You Can Deduct Your MBA

The requirements for being able to deduct your MBA are somewhat gray as there have been several legal cases on the subject and the results have varied.  What the rules state is that, if you work in a particular occupation, and return to that same occupation, the MBA can be considered an investment in education required to improve skills in your trade and can therefore be deducted.  What’s gray is the definition of occupation and whether you need to be returning to the exact same industry.  (My summary is an over generalization of a very complex tax issue, so I definitely suggest that you research the subject online for the finer details)

What this means for most students is that, if you’re being sponsored by your company to get your MBA, and you know you are returning back to them, then you probably qualify for the deduction.  You should still get a tax advisor to process the transaction.

However, if you’re in a situation where it’s unclear, (such as returning to the same industry, but serving a different function, or returning to an industry you’ve worked in before, but not the one you worked in right before business school) you should seek out a tax advisor and get his or her opinion on what to do.  This deduction can literally save you tens of thousands of dollars, so it’s worth at least investigating whether you qualify.

Tutor First Year Students

If you have a business school subject that you’re passionate about, tutoring is one of the easiest ways to earn income.  A lot of students who are new to the business world hit a wall trying to learn the core course materials, so there’s definitely demand for this service.  By becoming a tutor, you not only earn a decent hourly rate, but you’ll also get to network with some of your fellow classmates.

Become a Teaching Assistant

The Teaching Assistant position really isn’t that glamorous, as you’ll spend most of your time grading papers, dealing with administrative issues, responding to student complaints, and assessing student participation in class.  However, the position does provide more money than tutoring and it also allows you to build a relationship with a professor.  If you’re interested in having a professor sponsor an independent study project, becoming his or her TA is a great way to get started.

Participate in Case Competitions

This final form of income is one that many people don’t focus on.  Almost all case competitions have some sort of cash prize for teams that win or place.  What people don’t realize is that there are a ton of case competitions occurring every month, sponsored by different companies and schools, all around the world.

At Anderson, we had a group of students who sought out these events and competed in every case competition they could find.  They were a cohesive group that became very proficient in the process, usually place first or second in everything they entered.  This approach won’t work for everyone, but for those of you that are really good at case competitions, it can become a source of income for you.

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