403(b) vs taxable account

[cd125]

Hello all,

I am a PGY-2, single, in a 4 year program. 400k in federal loans under REPAYE to which I'm making the minimum payment monthly. I have a side business (sole proprieter) that adds about $30,000 of pre-tax income to my ~60k resident salary. I have maxed out my roth IRA for the last 2 years. My program is 403(b) without a match, to which I have not contributed to yet at all (only recently got into WCI/personal finance). Wondering what I should be contributing my money to next, my 403(b) or a taxable brokerage account. My original thought was to invest whatever I had to my taxable account to allow ease of access and use that lump sum from that to pay off a good chunk of my loans once I am an attending.

[Peds]

what state? how are the investment options?

no one said you had to do only 1. why not some to both? 75:25 split 403b:taxable?

[cd125]

Illinois. Was going to do something like 80/20 split S&P 500 index fund/bonds (which i currently do for my Roth IRA)

[LizOB]

Depends on your goals. For purely saving for retirement, the 403b is better. If you want liquidity before retirement, taxable is better.

You mention saving to be able to pay off a chunk of loans after residency. If you're not going for PSLF, why not just put more money towards the loans now?

[cgossage]

What is your interest rate on your student loans? If it is 6.8% or something like that you are going to be hard pressed to beat that return by investing in a taxable account or a 403(b) for that matter.

[cd125]

Its under REPAYE so the effective rate is something like 3%

[jz]

The tax efficiency of your account options: 1) 403(b), 2) Roth IRA, 3) taxable. That's the order to fill up. At your age, you are already delayed in building a retirement fund. 403b can grow without any income tax drag. Once you have an attending income, you can kill off the school debt aggressively. Also, with your short time line of less than 3-5 years, you can not predict market behavior; your taxable balance could be low when you are keen to use it.

[cgossage]

jz wrote:

The tax efficiency of your account options: 1) 403(b), 2) Roth IRA, 3) taxable. That’s the order to fill up. At your age, you are already delayed in building a retirement fund. 403b can grow without any income tax drag. Once you have an attending income, you can kill off the school debt aggressively. Also, with your short time line of less than 3-5 years, you can not predict market behavior; your taxable balance could be low when you are keen to use it.

Click to expand...

I disagree.  As a PGY2, his tax rate is as low as it's likely going to ever be.  The tax reduction from contributing to a 403(b) at this career stage would be minimal.  A much better option is to use the Roth which will provide tax free growth and a tax-free withdrawal during retirement.

[cgossage]

cd125 wrote:

Its under REPAYE so the effective rate is something like 3%

Click to expand...

What is your weighted average rate before your REPAYE interest subsidy?

[WallStreetPhysician]

cgossage wrote:

jz wrote:

The tax efficiency of your account options: 1) 403(b), 2) Roth IRA, 3) taxable. That’s the order to fill up. At your age, you are already delayed in building a retirement fund. 403b can grow without any income tax drag. Once you have an attending income, you can kill off the school debt aggressively. Also, with your short time line of less than 3-5 years, you can not predict market behavior; your taxable balance could be low when you are keen to use it.

Click to expand…

I disagree.  As a PGY2, his tax rate is as low as it’s likely going to ever be.  The tax reduction from contributing to a 403(b) at this career stage would be minimal.  A much better option is to use the Roth which will provide tax free growth and a tax-free withdrawal during retirement.

Click to expand...

Agree. Roth IRA, then 403(b), then taxable. The long-term benefits of the 403(b) outweighs the flexibility and slightly faster loan repayment by using a taxable account.

[DMFA]

cd125 wrote:

Hello all,

I am a PGY-2, single, in a 4 year program. 400k in federal loans under REPAYE to which I’m making the minimum payment monthly. I have a side business (sole proprieter) that adds about $30,000 of pre-tax income to my ~60k resident salary. I have maxed out my roth IRA for the last 2 years. My program is 403(b) without a match, to which I have not contributed to yet at all (only recently got into WCI/personal finance). Wondering what I should be contributing my money to next, my 403(b) or a taxable brokerage account.

Click to expand...

Either 403(b) if your options and fees are good, or a "solo" 401(k) for your business.

The sum of all employEE contributions (elective deferrals) across *all* 401(k) and 403(b) accounts is $18,500/yr.  You can't make elective deferrals for 2017 though since it has to be after the effective date of opening your 401(k), though.  Could do SEP for 2017, but you can't make employEE contributions to it.

EmployER contributions are maxed at 20% of net profits (may also be expressed as 25% of take-home wages; it's just expressed as a/(a+b) instead of a/b).  That's income minus expenses (Sched C line 31), minus half self-employment tax (Sched SE short line 6), divided by 5 which goes on 1040 line 28.  So if you earned $30,000 and had $2,000 of expenses, your SE tax would be $3,956 (half is $1,978), so you could put in 0.20 * (30,000 - 2,000 - 1,978) = $5,204

If you've got the money to do it, I'd:

• Make a SEP-IRA contribution for 2017 up to the above amount; this is probably somewhere around $5,000 or so


• Start a one-participant or self-employed 401(k) at Fidelity, Schwab, TDA, etc (Vanguard's isn't that good) with effective date 1/1/2018


• Make elective deferrals to *either* your employed 403(b) by salary reduction *or* to your SE 401(k) as you go


• If you get over $18,500 in elective deferrals, make the employer contribution to your 401(k): 0.20 * (net profit - half SE tax)

Every $120 you contribute reduces your RePAYE payment by $1, and since unpaid interest is being subsidized by the government anyway, might as well take the adjustment to lower AGI.  Sure, I guess you could do taxable, but a tax deduction and reduction in student loan payments with tax-deferred growth is probably superior to paying tax on QDs/LTCGs in growth despite terminal withdrawal at LTCG rate.

[jfoxcpacfp]

hmmmm...maybe the 403b has a Roth option? 2 birds?