What to do with extra moonlighting $

[midwestpulmdoc]

Hello, I'm a fellow-in-training and wanted to know what the best thing to do with my extra moonlighting $ is, either increase my contribution to my 403(b) or pay down debt.

Current debts:

FedLoans $150,000 at 6.8% - minimum monthly payment $620

Navient $6000 at 6.8% - minimum monthly payment $100

Car loan $8000 at 5.5% - minimum monthly payment $150

I currently make $62000 from my fellowship and fully fund a Roth IRA ($458/month). I have a 403(b) at work that I contribute $50/month to. I estimate I'll make approximately $20,000 this year in extra take-home pay from moonlighting. I recently decided that I will not go for PSLF so I know I have to refinance at some point. I know I will have to pay off student and car loans at some point so it seems reasonable to me to pay off my car loan and Navient with that money.

On the other hand, increasing my 403(b) contribution seems too good to pass up. My marginal tax rate is 33% (25% federal and 8% state). The way I see it is if I put in $1000 into my 403(b), that is really only costing me $670. Isn't that basically an immediate 49% return? ($330/$670).

Curious what people do in this situation.

Thanks!

[ENT Doc]

I wouldn't regard the 403b contribution as an immediate 49% return.  You put down $1000 but the government owns 33% of that - you don't own all of it.  When you withdraw the funds what % the government claims depends on future tax rates and income.  Paying down your loans is a guaranteed 6.8% rate of return, and from what I've heard about 403b's, there can be a lot of fees/costs that hurt your underlying growth.  I would start funding your Roth with $5,500 on Jan 1st and (depending on fees) contribute more to your 403b.  In terms of extra moonlighting you have a few options - set up an individual 401k (SEP will create future problems with the backdoor Roth) to further reduce taxable income, or use the moonlighting money to partially fund the loans.  With the market generally being overbought at this point I'd be more inclined to pay down the high interest rate loans first as this is a guaranteed rate of return of 6.8%.  Also, consider going "rice and beans", as Dave Ramsey would say, to increase your potential to contribute to retirement AND pay down those loans.

[DMFA]

midwestpulmdoc wrote:

Hello, I’m a fellow-in-training and wanted to know what the best thing to do with my extra moonlighting $ is, either increase my contribution to my 403(b) or pay down debt.

Current debts:

FedLoans $150,000 at 6.8% – minimum monthly payment $620

Navient $6000 at 6.8% – minimum monthly payment $100

Car loan $8000 at 5.5% – minimum monthly payment $150

I currently make $62000 from my fellowship and fully fund a Roth IRA ($458/month). I have a 403(b) at work that I contribute $50/month to. I estimate I’ll make approximately $20,000 this year in extra take-home pay from moonlighting. I recently decided that I will not go for PSLF so I know I have to refinance at some point. I know I will have to pay off student and car loans at some point so it seems reasonable to me to pay off my car loan and Navient with that money.

On the other hand, increasing my 403(b) contribution seems too good to pass up. My marginal tax rate is 33% (25% federal and 8% state). The way I see it is if I put in $1000 into my 403(b), that is really only costing me $670. Isn’t that basically an immediate 49% return? ($330/$670).

Curious what people do in this situation.

Thanks!

Click to expand...

Yikes.  $8,000 at 5.5% on a car loan?  Not cool, but let's deal with the now.  I'd knock it out, tbh.  That's a bit high of a rate to let slide.  If it were at 2-4% like most car notes I'd prob emphasize retirement.

FedLoans and Navient...are those both federal direct loans?  Any reason you can't consol/refi both, since you've thrown out PSLF?

You're starting to see the purpose of tax-advantaged retirement savings...but it's not really as much return as you're implying, since it will be taxed at your federal rate when you draw it.  So that's what's called being "tax-deferred:" deducted now, grows with tax-free dividends/capital gains, then just gets taxed as income (after growing).

So, with the glory of tax-deferred investments, *if* you're paid on 1099 as an independent contractor for your moonlighting, you might also consider starting an independent 401(k) for your moonlighting income.  You can contribute a total of $18,000 "employee" contributions (elective salary deferral) across all 401(k)/403(b)s, plus "employer" non-elective contributions of up to 20% of net profits after self-employment tax (so more like 18.6%), up to a total of $54,000 across all 401(k)/403(b)s for 2017.

So your income will be $82,000?  What's your repayment plan?  You should be eligible for RePAYE based on an AGI of $62,000 with a payment of about $370.  $850/month accrues on $150,000 at 6.8%; your monthly payment isn't covering it, and since you're on the hook for it anyway, you should limit interest accrual as much as possible.  Plus, since you don't earn much at the moment, you want to limit your payment as well.  RePAYE, in which the government subsidizes half of unpaid interest every month and payment is (AGI - [1.5 x poverty]) / 120, is a good blend of both of those.

Now, next level.  Whether to pay off your debt (after minimizing interest accrual) or invest for your retirement can be a tough choice.  Here's the thought process I advise:

• Get rid of high-interest loans >6-8%; your car loan might fit in here


• If your student loan interest is appropriately mitigated:
  
  
  
  • Doing RePAYE in training (minimizes both payment and interest accrual)
  
  
  • Refinancing to a low-rate, short-term private servicer (e.g. SoFi 2.11% for 5-yr var)
  
  
  
  


• Then, the mathematics support investing in your tax-advantaged retirement accounts:
  
  
  
  • At your bracket (25%), you'll probably benefit from Roth as much as pre-tax (e.g. 403b), since you'll probably retire at 25% as well
  
  
  • If your 403(b) has matching, you should put as much in it to maximize the match, since that's free money if you're vested
  
  
  • Start an individual 401(k) for moonlighting for "employer" contributions
  
  
  
  

Complicated stuff, but complexity is just simplicity in series (or is it parallel...?).

[Craigy]

How much cash on hand?

You need to refinance those student loans.  You'll get a better rate if you have no other monthly payments (ie, your tiny car note) than the student loans.

Pay off that tiny car note asap and then refi your loans once the car note rolls off your credit report.

Then just apply all your extra cash to the refi'd student loan.

[midwestpulmdoc]

Thanks everyone. I didn't think about the fact that the government will eventually tax my 403(b) at some later date. I think I'll knock off the car loan and either enter repaye or refinance privately.
Thanks!

[jsr52]

Is your 403b ROTH or PRE-TAX? Sounds like it is pre-tax, If you are only contributing 50/month to it, why don't you take your extra-moonlighting money and earmark it for 403b contributions, if you know in advance you will be moonlighting x shifts/months just increase the % that comes out of your fellowship paycheck. Seems like it would make more sense to max out your 403b before opening an i401k (but would love to hear others thoughts on this). I also assume they don't give you a match.

[DMFA]

jsr52 wrote:

Is your 403b ROTH or PRE-TAX? Sounds like it is pre-tax, If you are only contributing 50/month to it, why don’t you take your extra-moonlighting money and earmark it for 403b contributions, if you know in advance you will be moonlighting x shifts/months just increase the % that comes out of your fellowship paycheck. Seems like it would make more sense to max out your 403b before opening an i401k (but would love to hear others thoughts on this). I also assume they don’t give you a match.

Click to expand...

The 403(b) is only a deduction for federal withholding. You're still on the hook for FICA (SS 6.2% and MCR 1.45%, total 7.65%). [edited, inaccurate portion deleted by author]

So unless you get a great match, or your holding options in the 403(b) are better, you would probably get more from an "employer" indie 401(k) contribution.

[since you're W-2 employed and not self-employed, it's a moot point anyway]

[spiritrider]

A self-employed individual still pays SE tax on employer contributions. Schedule SE is based on net business profit which is not reduced by the employer contribution of the self-employed individual. That is a deduction on line 28 of Form 1040.

 

[midwestpulmdoc]

I should've mentioned a few things:

1) My moonlighting income is paid on a W2 so no self-employed income...for now.

2) $20K will be my estimated extra take-home pay, my total pay (fellowship and moonlighting) will be probably around $120K in 2017. Again, all on W2

3) No match for 403(b) contributions

I do have a better grasp of what to do next so thanks for all the advice. I'll knock off the car loan and put the rest in my 403(b) while minimizing student debt interest accrual until I get my attending salary in 2 years.

Thanks!

[DMFA]

spiritrider wrote:

A self-employed individual still pays SE tax on employer contributions. Schedule SE is based on net business profit which is not reduced by the employer contribution of the self-employed individual. That is a deduction on line 28 of Form 1040.

 

Click to expand...

I was thinking of another situation which was taking an S-corp distribution, which doesn't even apply in this situation (neither to sole prop nor 401(k)). Thanks for pointing that out

[DMFA]

midwestpulmdoc wrote:

I should’ve mentioned a few things:

1) My moonlighting income is paid on a W2 so no self-employed income…for now.

2) $20K will be my estimated extra take-home pay, my total pay (fellowship and moonlighting) will be probably around $120K in 2017. Again, all on W2

3) No match for 403(b) contributions

I do have a better grasp of what to do next so thanks for all the advice. I’ll knock off the car loan and put the rest in my 403(b) while minimizing student debt interest accrual until I get my attending salary in 2 years.

Thanks!

Click to expand...

Sounds like a good plan. Of note, 20% of income would be $24,000, which fits nicely with maxing the 403(b) at $18,000 and the Roth IRA at $5,500. Go for it!