Minimizing IBR vs Roth

[cortezar]

This is a question regarding minimizing IBR payments vs Roth contributions.

I have just completed my PGY1 year in general surgery. As mentioned in WCI (p49, Ch: Medical School, Section: PSLF), as well as advised by our medical school financial advisor, my wife and I filed separately for my 2015 so that her income would not inflate my IBR. Furthermore, by showing a $0 income as a 4th year medical student, my first 12 payments were $0 (since an IBR plan on $0 income is $0; I've read a number of forums on whether or not these "$0 payments" qualify towards the 120 payments towards PSLF and they do in fact). Ultimately this was very beneficial for PGY1 year -  I saved ~$3500 by not having any real payments, yet they counted toward the 120 required for PSLF. However, during this time I came to find out that the income limit for Roth for married couples is different if you file separately vs jointly. Effectively, you have to make next-to-nothing to contribute to a Roth if you file separately, as opposed to filing jointly in which the limit for 2015 was 183K. So I saved money via loan repayment, but lost it by not contributing to Roth.

Moving forward, I now wonder what Dr. Dahle and others think is the best action plan. It's probably some simple math to work out. 1) I can continue to file separately and my payments will be ~$350-$500 per month during my 7 year residency program but I can only contribute to my traditional, pre-tax IRA and not a Roth. Or 2) we can file jointly which will increase my payments to ~$600-1000 per month but my wife and I can both contribute to a Roth. My conclusion is that the benefit of minimal IBR repayments does not outweigh the benefit of Roth tax benefits, time and the principle of compounding interest.

I appreciate and look forward to hearing from folks, thanks!

 

[jfoxcpacfp]

cortezar wrote:

Moving forward, I now wonder what Dr. Dahle and others think is the best action plan. It’s probably some simple math to work out. 1) I can continue to file separately and my payments will be ~$350-$500 per month during my 7 year residency program but I can only contribute to my traditional, pre-tax IRA and not a Roth. Or 2) we can file jointly which will increase my payments to ~$600-1000 per month but my wife and I can both contribute to a Roth.

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If I understand your situation correctly, I believe you are mistaken (which is good for you). By filing separately, you do not qualify to contribute to a pre-tax TIRA (unless you each make < $10k/year). Instead, you will each contribute to a nondeductible TIRA and convert to a Roth (backdoor conversion), mission accomplished. Of course, if you have pre-tax IRAs in either name already, you will need to either:

• Convert to Roth IRAs in the year you begin using back door for Roth, or


• Leave money invested in n.d. TIRAs until you can convert pre-tax money to Roths.

 

[Sergio Estavillo]

Have you considered REPAYE?  Some potential benefits in selecting REPAYE:

• Filing jointly could reduce your overall tax liability.
  
  
  
  • Filing jointly allows you to claim a student loan interest deduction & TIRA
  
  
  
  


• 50% interest subsidy on any interest accrual for Direct Unsub.  100% interest subsidy for the first 3 year on any interest accrual for Direct Sub, thereafter 50%.


• Monthly REPAYE payments likely manageable;
  
  
  
  • For example, if MFJ AGI = $75k vs MFS AGI = $45K, then
    
    
    
    • REPAYE = $426/month
    
    
    • IBR = $264/month
    
    
    
    
  
  
  
  

[cortezar]

 

Thanks for the reply. I follow what you are saying, but not sure where I was mistaken. You say "By filing separately, you do not qualify to contribute to a pre-tax TIRA (unless you each make < $10k/year)" but I think you are mixing up TIRA and Roth. If not, please correct me as I'm new to some of this, but just want to be on the same page.

TIRA - anyone with income can contribute (ie you cannot make too much to contribute to TRIA) but based on income and filing status, that determines whether it the contributions are tax deductible or not.

Roth IRA - anyone with income and making less than the income limit can contribute (ie you can make too much to contribute to Roth). For 2016 single it's <117K and MFJ <184K to file the max $5,500 per year...less if you make more based on the limits set (http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/roth_ira/contribution_limits). However, if MFS, you have to make <10K to contribute and only if you make $0 can you contribute the full $5,500. This latter situation is the one I'm in.

That said, yes, based on our income we both can contribute to  nondeductible TIRA (since we make too much as MFS to do deductible) and then backdoor Roth, mission accomplished as you said. Though I have to familiarize myself more with logistics of how to do that if that is what we decide.

 

 

[DMFA]

Anyone can *contribute* to a TIRA.  It's a question of whether you can *deduct* it (i.e., a "pre-tax" one like Johanna says).  Of course, if you want to do a Roth conversion (the "backdoor"), you don't want to deduct it anyway.  All you do is transfer your TIRA to a Roth.  I had to fill out a simple form and email it to my bank, and it took a week.  At Vanguard, it's as simple as clicking a button.  It's no hassle whatsoever, just a few steps, and it's super worth it.  Filling out the tax forms (IRS form 8606) is easy if you don't have any pre-existing TIRA, SEP, or SIMPLE - it's all either $5500 or $0.

I can't think of a situation in which IBR is superior to RePAYE and/or PAYE unless you weren't eligible for one or the other (which is unlikely unless your loans are from before 2007).  PAYE is basically IBR with 1/3 lower payment.

[cortezar]

Yea I should clarify that I do PAYE. I was lumping PAYE, ICR and IBR all under IBR plans. Should have been more clear.

So it sounds like I can keep filing separately to minimize PAYE payments and can backdoor to take advantage of Roth, right?

[jfoxcpacfp]

cortezar wrote:

Yea I should clarify that I do PAYE. I was lumping PAYE, ICR and IBR all under IBR plans. Should have been more clear.

So it sounds like I can keep filing separately to minimize PAYE payments and can backdoor to take advantage of Roth, right?

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That is correct.

[jfoxcpacfp]

My "Quote" function is not working so I am using copy and paste:

You said, "However, if MFS, you have to make <10K to contribute and only if you make $0 can you contribute the full $5,500. This latter situation is the one I’m in."

If you have no earned income, you cannot contribute to any kind of IRA. You can contribute only the lesser of earned income or $5,500. Sorry I missed this in the first read, was concentrating on the MFS issue. And when you are MFS, you cannot have a spousal IRA, only when filing jointly.

[DMFA]

jfoxcpacfp wrote:

My “Quote” function is not working so I am using copy and paste:

You said, “However, if MFS, you have to make <10K to contribute and only if you make $0 can you contribute the full $5,500. This latter situation is the one I’m in.”

If you have no earned income, you cannot contribute to any kind of IRA. You can contribute only the lesser of earned income or $5,500. Sorry I missed this in the first read, was concentrating on the MFS issue. And when you are MFS, you cannot have a spousal IRA, only when filing jointly.

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Thanks - I realize I shouldn't have said *anyone* since I'm not used to addressing people without incomes.  Fortunately it still applies to cortezar since he does have an income; I'm assuming since he filed separately then his wife has one too, or there's no point to filing separately.

[jfoxcpacfp]

DMFA wrote:

Thanks – I realize I shouldn’t have said *anyone* since I’m not used to addressing people without incomes.  Fortunately it still applies to cortezar since he does have an income; I’m assuming since he filed separately then his wife has one too, or there’s no point to filing separately.

Click to expand...

My quote function returned :-)

@cortezar stated his income was zero (therefore IBR pmts zero), so not sure what you mean.

[DMFA]

jfoxcpacfp wrote:

DMFA wrote:

Thanks – I realize I shouldn’t have said *anyone* since I’m not used to addressing people without incomes.  Fortunately it still applies to cortezar since he does have an income; I’m assuming since he filed separately then his wife has one too, or there’s no point to filing separately. 

Click to expand…

My quote function returned

@cortezar stated his income was zero (therefore IBR pmts zero), so not sure what you mean.

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He used zero as his income to calculate his income-driven payment based his prior year's AGI as a 4th-year medical student.  He must have had to recertify since then (which is what the thread is about, how to calculate his income for the payment).  He's a PGY2 resident now (just finished PGY1), so he gets paid.

[jfoxcpacfp]

DMFA wrote:

He used zero as his income to calculate his income-driven payment based his prior year’s AGI as a 4th-year medical student.  He must have had to recertify since then (which is what the thread is about, how to calculate his income for the payment).  He’s a PGY2 resident now (just finished PGY1), so he gets paid.

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I see. I have re-read more carefully given what you have just explained. I was only focusing on his statement referencing situation he is in. Thanks for clarifying for me.

[cortezar]

That is correct. I'll have income to show this year. Sounds like backdoor it is - will provide me a Roth and minimal PAYE payments.

I guess the last "downfall" is less tax write off and less of annual return with MFS as opposed to MFJ but stil outweighs in long run compared to higher PAYE payments.

[Sergio Estavillo]

cortezar wrote:

I guess the last “downfall” is less tax write off and less of annual return with MFS as opposed to MFJ but stil outweighs in long run compared to higher PAYE payments.

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Do you mind me asking what's your wife's 2016 estimated W2 income?  I'm still not convinced MFS pursuing PAYE in your best financial interest.  Also, I assume as a 2016 PGY2 your gross income ~ $54k.

[cortezar]

I don't mind at all and appreciate you thinking into it. Yes I'll make 54k as PGY2 and she will make 49k this year.