IBR, AGI, and a 403b to Roth Conversion question

[confettiflyer]

---

Members don't see this ad.

I realize this may be beyond the purview of this forum, but I have a hypothetical question regarding IBR, AGI, PSLF, and an 403b to Roth conversion after a rollover.

Case:Assume you're a new graduate (2012) with $250,000 in federal student loan debt utilizing the IBR repayment term and qualify for PSLF in 2022 working for a 501(c)(3) hospital at a gross of $120,000/yr. Filing status single. Hospital has a 403b match up to 6% 1:1, vest in 1yr.

Question: Can you theoretically max out your contributions to a 403b on a pre-tax basis (thus reducing your AGI), then conduct a conversion to a Roth IRA in later years without triggering some sort of "claw back" by your student loan servicer?

Discussion: Your monthly payment under IBR is based on your AGI, calculated/verified annually by your loan servicer. Since contributions to a 403b reduce your AGI, it concomitantly reduces your payments under IBR. Roth IRA contributions are post-tax and don't reduce your AGI.

Say you contribute maximally to your company's 403b and, after 10 years of qualified payments under PSLF, have your loan balances discharged. You leave your hospital and go into consulting, and you roll over your 403b into an IRA, then convert to a Roth.

What I'm thinking: This is a great way to reduce one's student loan payments and simultaneously a) save more for retirement and b) reduce the total amount paid on my student loan under PSLF (and increase the amount discharged). Since no 1099 is issued, no tax liability exists on this end.

Anyone in SDN land see a problem with this tactic? Thanks in advance, I know this post is "crunchy."

 

[GodsSon2011]

what hospital jobs is giving you 120k,,sign me up..

 

[spacecowgirl]

That's the going rate around here. I make only slightly more at my retail float job, but after call pay, it's about even.

 

[pezdispenser]

Yes, this is a legitimate way to reduce your AGI.

I'm not sure what the Roth conversion has to do with it though.

 

[rph3664]

what hospital jobs is giving you 120k,,sign me up..

Mine just might, with my on-call pay and overtime. 😀

 

[xiphoid2010]

Mine just might, with my on-call pay and overtime. 😀

Texas suburbia. Hurray for no state tax. My staff RPhs make ~$53/hr. I pay my per diem pharmacists $65/hr. Blah, that's what I make an hour. Still, I rather have them fill the gaps than call in some agency pharmacist at $80 an hour.

 

[awval999]

I realize this may be beyond the purview of this forum, but I have a hypothetical question regarding IBR, AGI, PSLF, and an 403b to Roth conversion after a rollover.

Case:Assume you're a new graduate (2012) with $250,000 in federal student loan debt utilizing the IBR repayment term and qualify for PSLF in 2022 working for a 501(c)(3) hospital at a gross of $120,000/yr. Filing status single. Hospital has a 403b match up to 6% 1:1, vest in 1yr.

Question: Can you theoretically max out your contributions to a 403b on a pre-tax basis (thus reducing your AGI), then conduct a conversion to a Roth IRA in later years without triggering some sort of "claw back" by your student loan servicer?

Discussion: Your monthly payment under IBR is based on your AGI, calculated/verified annually by your loan servicer. Since contributions to a 403b reduce your AGI, it concomitantly reduces your payments under IBR. Roth IRA contributions are post-tax and don't reduce your AGI.

Say you contribute maximally to your company's 403b and, after 10 years of qualified payments under PSLF, have your loan balances discharged. You leave your hospital and go into consulting, and you roll over your 403b into an IRA, then convert to a Roth.

What I'm thinking: This is a great way to reduce one's student loan payments and simultaneously a) save more for retirement and b) reduce the total amount paid on my student loan under PSLF (and increase the amount discharged). Since no 1099 is issued, no tax liability exists on this end.

Anyone in SDN land see a problem with this tactic? Thanks in advance, I know this post is "crunchy."

I believe you understand most of the tax laws here because your question is very specific, so bear with me if I restate things you already know.

A 403b account holds pretax savings and the amount deferred into this account will not show up as Wages, Salaries, Tips on your W2, it is not reflected in AGI. You will have to terminate your employment to be able to rollover the balance into an IRA (Tradtional; pre-tax). Let's assume that the tax laws do not change and that the IRB laws do not change. You will be able to convert the Traditional IRA rollover into a Roth IRA but you will have to pay income taxes on the conversion and then conversion will be taxed at ordinary income.

Example: You defer the maximum legal amount of $17K a year for 10 years. Let's assume (for this discussion) no match and no interest earned. You terminate your employment after you have received confirmation that all the loans are discharged. You will then be able to rollover the balance of the 403b into a Rollover Traditional IRA. You will then be able to recharatcterize the Rollover Traditional IRA into a Roth IRA but you will owe income taxes on the entire $170K balance (this will be tens of thousands of dollars). You do not have to convert to a Roth IRA and I do not know why you would want/feel the need to.

This assumes that IRB laws and "backdoor" Roth recharacterization rules do not change. I believe they will change. Nevertheless, the above is a factual explaination of what would be able to be done.

The biggest issue with your very interesting and specific question is securing employment at a 501c3 not-for-profit organization and changing tax laws; specifically IRB lookback, etc.

 

[awval999]

I have answered you question to the best of my ability, please do me the same:

1. Have you really accumulated $250K of federal student loans?
2. What percent chance do you give yourself of being forgiven of all federal student loans on 2022?
3. Do you realize that just the interest on $250K of student loans @6.55%(automatic debit) is $1364.58/month while your IRB payment is only $1050 (I calculated with IRB.org calculator)
4. Do you realize that if this program reformed or eliminated that your student loans are undischargable and unbankruptable?
5. Do you realize that the current federal budget projects $1T deficits in the future while the population refuses to raise taxes and that discretionary spending is an easy target?
6. Have you read the 2008 Federal Register documents pertaining to PSLF?
http://edocket.access.gpo.gov/2008/pdf/E8-24922.pdf
7. Do you realize that your choices on who or when to get married or start a family are affected due to the IRB calculation?
8. Do you care how people think of you when they find out you plan to get >$250K of student loan principal and interest forgiven on the backs of the taxpayers?

Thank you for your reponses.

 

[awval999]

Please don't take my opinion harshly. I love tax code minutia. I love everything about that question you asked.

Nevertheless, let me tell you how your story ends.

When its time to pay the piper the Congress will change the code to only allow either: Forgiveness of a maximum amount such as $100K or removal of highly compensated employees (pharmacists and especially physicians) from the 10 year exception.

I will tell you this, the Congress and the public will never allow forgiveness of $300-400K medical debt from (highly compensated) physicians. This will trickle down to the pharmacists too. This law--and you know it--was made for social workers, teachers, and public employees and not highly compensated health care workers.

This law won't stand. You will have pharmacists and physicians that are paying their debt write their congressmen/women to end this. It's not fair. It won't stand. And you know it. Once the media gets wind of it, I'd say by year 8 or so, the out cry from the public will be hellaious. I can already see it now, in 2020 or so, a Republican Congressmen says on CNN, "Originally this law was to help teachers and social workers, not highly compensated physicians, and as such we will limit loan forgiveness to $100K".

Sorry bub. Hope it works out for you though. I really do.

 

[confettiflyer]

hey awval, thanks for your response, it's great. i love tax code and legal minutiae also, it takes kind of a twisted mind to come up with these "what ifs." Here are your answers from your post of questions.

1. Have you really accumulated $250K of federal student loans?
No, I picked $250k because it was a nice round #. I'm south of $200k (this includes undergrad loans).

2. What percent chance do you give yourself of being forgiven of all federal student loans on 2022?
Greater than 85% (see detailed answer 5).

3. Do you realize that just the interest on $250K of student loans @6.55%(automatic debit) is $1364.58/month while your IRB payment is only $1050 (I calculated with IRB.org calculator)
Yes, for a hypothetical person w/ $250k in debt (I'm sure they exist), the payment will not come close to the interest. This is why PSLF is so important to discharge the remaining at 10 years, otherwise the normal discharge is at 25 years, at which point the borrower will have paid >$315,000 vs. $126,000.


4. Do you realize that if this program reformed or eliminated that your student loans are undischargable and unbankruptable?
Understood, I think we all know this.

5. Do you realize that the current federal budget projects $1T deficits in the future while the population refuses to raise taxes and that discretionary spending is an easy target?
Also understood. Recall that this legislation was enacted during the Bush administration and the earliest "payouts" would occur in 2017 (also see answer to #6).

I do not believe that future legislation will significantly alter the basis of this program. While denying highly compensated individuals a chance at participating sounds like a good idea, the ability to restrict based on income is difficult. The basis of the program has always been to benefit those persons whose student loans are high relative to income. Take a physician with $500k in loans taking a job that makes $120k vs. a pharmacist making $120k. Both are "highly compensated individuals" on the income side but the debt tells the story.

I suppose congress can come up with some magic ratio, but that's best left to the agencies administering the program.

Further, PSLF is not subject to the appropriations process. Money is not "spent" on it, instead, the owed debt is written off by the treasury. This is an important distinction vs. other government programs that you are referring to that may be funded/defunded on an annual basis.

6. Have you read the 2008 Federal Register documents pertaining to PSLF?
http://edocket.access.gpo.gov/2008/pdf/E8-24922.pdf
Yes, but more interesting is the official CBO estimate for the cost of this legislation. http://www.cbo.gov/ftpdocs/86xx/doc8643/hr2669pago.pdf As a whole, the bill that was signed into law saves the government $$$ and brings in revenue from the consolidation process. In terms of politics, there's been a resurgence of interest in making higher education available. It doesn't seem politically popular to attack doctors with $500k in student loans or teachers with low incomes that are on the path to discharge debt.

7. Do you realize that your choices on who or when to get married or start a family are affected due to the IRB calculation?
Yes, for simplicity sake I omitted changes in marital status. Assuming the spouse makes some decent income, this would increase the IBR payment unless the couple files married-separate, but the downsides to that are evident. The addition of kids then decreases the payment again due to the increase in household size.

8. Do you care how people think of you when they find out you plan to get >$250K of student loan principal and interest forgiven on the backs of the taxpayers?
Easy. I'll compare myself to a prison inmate who costs taxpayers more on an annual basis. The difference is I'm a productive member of society. No sweat off my back.

 

[confettiflyer]

This assumes that IRB laws and "backdoor" Roth recharacterization rules do not change. I believe they will change. Nevertheless, the above is a factual explaination of what would be able to be done.

I believe the Roth recharacterizations will remain simply because they are a boon to government coffers. It increases the amount of taxes collected now and kicks the can down the road.

We all know how much government loves to buy now/deal with money later.

Even if we get to "later" and realize that we're broke, it would be in the interest of whoever is in office at that time to maintain or even promote a recharacterization in order to capture revenue at that time.

 

[confettiflyer]

Please don't take my opinion harshly. I love tax code minutia. I love everything about that question you asked.

Nevertheless, let me tell you how your story ends.

When its time to pay the piper the Congress will change the code to only allow either: Forgiveness of a maximum amount such as $100K or removal of highly compensated employees (pharmacists and especially physicians) from the 10 year exception.

I will tell you this, the Congress and the public will never allow forgiveness of $300-400K medical debt from (highly compensated) physicians. This will trickle down to the pharmacists too. This law--and you know it--was made for social workers, teachers, and public employees and not highly compensated health care workers.

This law won't stand. You will have pharmacists and physicians that are paying their debt write their congressmen/women to end this. It's not fair. It won't stand. And you know it. Once the media gets wind of it, I'd say by year 8 or so, the out cry from the public will be hellaious. I can already see it now, in 2020 or so, a Republican Congressmen says on CNN, "Originally this law was to help teachers and social workers, not highly compensated physicians, and as such we will limit loan forgiveness to $100K".

Sorry bub. Hope it works out for you though. I really do.

I wrote about this in the earlier post, but the term "highly compensated individual" doesn't tell the whole story.

Even if loan forgiveness is limited to $100k, it's still a boon.

Plus, I don't think that many healthcare workers will know about it or qualify. Most of our profession goes into retail anyway, even if someone transitions to hospital or government, by the time they hit 10 years within that institution they will have already paid off their loans.

In other words, you don't get many people like me who position themselves to draw maximum benefit from this program by maxing out loans, purposefully lowering AGI via pre-tax 403b processes, and aiming to stay at a 501c3 that long.

When you drill down to who would benefit in the pharmacy world, it would have to be someone with a) substantial undergrad loans b) someone who attended a private pharmacy school with tuition >$25k/yr c) maxed out student loans d) maintained IBR for the life of their loan payment, e) 10 years at a 501c3, f) made no additional payments on their loans to accelerate repayment.

Problems arise with c -- conventional wisdom says borrow as little as possible, many people adhere to this, d & f -- same concept, people want to pay down their loans, e -- mentioned this earlier, >50% of our profession is wiped out by going to retail, i haven't calculated it, but there has to be a certain # of years in retail that will make PSLF not work out even if you transition out.

 

[awval999]

Great responses. As always feel free to PM me if you have any more interesting questions. When I recalculate your payments with the IBR.org calculator with $200K in loans it works out to about interest-only. You are pretty much just playing options on your debt.

Worst case you played the interest-only game. Best case you are done.

Good luck!

 

[awval999]

I believe the Roth recharacterizations will remain simply because they are a boon to government coffers. It increases the amount of taxes collected now and kicks the can down the road.

We all know how much government loves to buy now/deal with money later.

Even if we get to "later" and realize that we're broke, it would be in the interest of whoever is in office at that time to maintain or even promote a recharacterization in order to capture revenue at that time.

This is true.