New intern needs financial advice

[blue0rchid]

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Hello,

I've been poring over articles and posts on financial advice on tax, insurance, etc... It's very overwhelming. I've tried to find answers myself the best I could but I still have some questions.

I'm debating between contributing to either Roth 403b or College Saving Plan 529. The 529 plan has the state matching 14% of my yearly contribution up to $2400 per account per year (I want to advantage of this because it uses my previous year AGI to calculate the %, and clearly I made no money last year with an AGI of $0). So I think I should max out the 529 plan before Roth 403b. Am I right?

Also, does anyone know that if I apply for Dependent Care FSA (it seems like my program offers this, and it will be eligible alongside with an HSA), do I have to declare my children as my dependents when filing tax at the end of the year? I mean I'll use it to pay for daycare directly, but may not claim my kids as dependent (the other parent claims them).

 

[doc05]

no. save for your retirement first. do the 403b.

 

[dpmd]

Any matching for your 403b?

 

[blue0rchid]

no. save for your retirement first. do the 403b.

Can you please explain a little more?

I know that I should put money into roth 403b because I'm in a low tax bracket now. But the college saving plan has 14% matching, that's essentially 1K free money ($7200*0.14). If I max out my college saving accounts to $7200 then I can put left over money into Roth 403b. My Roth 403b limit is $18K. I don't think I can max it out if I do it first.

 

[blue0rchid]

Any matching for your 403b?

No matching as far as I know. I would have gone with it if there's matching.

Btw, I have a 401k that I saved when I was with my previous career. Can I roll it into some other account or just leave it be?

 

[doc05]

Can you please explain a little more?

you won't be able to take advantage of a roth account once you earn an attending's salary, so use this while you can. Income in residency is too limited to max out both accounts, and retirement savings is far more important than the college plan.

 

[doc05]

No matching as far as I know. I would have gone with it if there's matching.

Btw, I have a 401k that I saved when I was with my previous career. Can I roll it into some other account or just leave it be?

you can roll it into an ira or keep it where it is. do a web search or speak with a financial advisor because there are several considerations to keep in mind.

 

[QofQuimica]

It's not clear to me if the 529 is for you or for your child. If it's for your child, I agree with the previous poster that you should focus on your own retirement savings first before saving for your child's education. If it's for yourself, the answer is a bit more complex. The purpose of a 529 is to save money for education expenses. While the match from the state is nice, unless you have plans to earn an additional degree yourself or use that money for your child's education, you will pay both a withdrawal penalty and income taxes on any earnings you withdraw from the 529 for non qualified purposes. The penalty alone is 10%, which, when added to your marginal tax bracket rate (probably 25% for a resident and 33% for an attending), obviously more than negates the 14% state match. And that's assuming you don't also have state or local income taxes to consider.

Regarding the Roth, it is a totally fine thing to do at your income bracket, and probably a very good idea if you already have a lot of pretax dollars saved up from before med school but don't have any Roth accounts yet. The downside is that you fund the Roth account with post-tax dollars instead of pre-tax dollars, but then that money grows tax-free ever after. The benefit of a Roth is that we don't know what future tax brackets will be, and it provides a hedge for you in the event that your marginal tax rate ends up being higher in retirement than it is now.

BTW, it's not true that you can't still contribute to a Roth account as an attending, at least for now. There is a strategy called a "back door Roth" where you make a nondeductible traditional IRA contribution with post-tax dollars, then roll it into a Roth IRA. There is no income limit to do this, so it is a roundabout way for even attendings and others who earn too much to directly contribute to a Roth to be able to contribute to one indirectly. But as a resident, you can easily make direct Roth contributions, so don't worry about this right now.

 

[blue0rchid]

The 529 is for my children.

Thank you for your responses.

Is it true that you would pay more tax as married with a combined income over 400k than being single and file separately with over 200k each? Can't you just be married and file separately?

 

[QofQuimica]

The 529 is for my children.

Thank you for your responses.

Is it true that you would pay more tax as married with a combined income over 400k than being single and file separately with over 200k each? Can't you just be married and file separately?

Yes, there is a filing status called "married, filing separately," as well as "married, filing jointly." Which one would give you the bigger tax advantage depends on your specific situation. Most married people choose to file jointly. Either way, you're getting into complex enough rules here (tax law) that you're better off hiring an accountant to figure this out for you. If you're making $400,000 with complicated tax returns, paying for an accountant to review your situation is probably money well-spent.

 

[The White Coat Investor]

Retirement is more important than college. You can get loans for college, but not retirement.

If you aren't already saving 20% of your income for retirement, I'd save more for that before moving on to college savings.

403b for retirement, 529 for college.

States don't "match" but they might give you a deduction or credit for your contribution. Same thing in the end I suppose.

 

[blue0rchid]

I have another question. Which is better, paying into social security or use the deferred compensation plan 457 in lieu of social security? The rep kept referring to SS as the "black hole where money goes to to die". Deferred compensation 457 sounds very appealing. I'm not sure what to choose. A quick google didn't talk much about the two in term of 457 replacing SS option. Help?

 

[QofQuimica]

I have another question. Which is better, paying into social security or use the deferred compensation plan 457 in lieu of social security? The rep kept referring to SS as the "black hole where money goes to to die". Deferred compensation 457 sounds very appealing. I'm not sure what to choose. A quick google didn't talk much about the two in term of 457 replacing SS option. Help?

I need more info to give you a good answer. First, how disciplined are you? Will you fully fund the 457 if not forced to participate in SS? Second, what kind of investment options does the 457 plan offer? Hopefully you have some good low-cost investment options within it. Third, who is sponsoring the 457? Ideally, it's a public 457 (so through the state government, not through a private corporation, where your funds could go to pay the company's creditors in the event that your company defaults on its debt). If you are disciplined, have low-cost investment options, and it's a public 457, I would pick the 457. Your SS contributions go not into an account to pay for your future retirement (or even current retirees' retirement), but rather to a general pot in which the money can be used to pay for nation building in Iraq or Obamacare or whatever other ill-advised spending whim the government decides to blow it on. To me, that's a no-brainer. I trust myself to manage the money well way more than I trust the government to do it. That being said, I don't have an either-or option. So I fully fund both: the 457 of my own free will, and SS under duress.

 

[Psai]

So I want to sign up for repaye and I decided to max a roth 403 b but now I'm wondering if it makes sense to do it pretax to lower the payments. If I take home 3k then I'll be paying 300 but if I do a traditional 403 b then I would take home maybe 2k and save an extra 60 or so after taxes which ends up being about 700 a year. Is that right? I'm wondering if that extra money is worth the later tax advantage of the Roth.

I chose the 403b over a 401k and 457 because they offered better index fund options.

 

[dpmd]

So I want to sign up for repaye and I decided to max a roth 403 b but now I'm wondering if it makes sense to do it pretax to lower the payments. If I take home 3k then I'll be paying 300 but if I do a traditional 403 b then I would take home maybe 2k and save an extra 60 or so after taxes which ends up being about 700 a year. Is that right? I'm wondering if that extra money is worth the later tax advantage of the Roth.

I chose the 403b over a 401k and 457 because they offered better index fund options.

If your goal is paying off debt for the least money possible i would stick with the roth option (unless the 401k has a match in which case that might be better) but if you are thinking of a loan forgiveness program i guess the other way would be better.