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Minimizing IBR vs Roth

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  • DMFA
    replied
    RePAYE:

    • Payment = (AGI – poverty level for fam size) / 120

    • 50% of unpaid interest each month is subsidized

    • Interest does not capitalize while in the plan (but it still accrues, you just don’t pay interest on interest)

    • Spousal income is always counted in AGI

    • No monthly payment cap


    PAYE:

    • Payment = the lesser of (AGI – poverty level for fam size) / 120 or 10-yr std at time of entering plan

    • Interest does not capitalize until you no longer have a partial financial hardship (if calc’d payment > 10-yr std)

    • Interest capitalizion is maxed at 10% of intial principal (e.g. if prin was $150,000, its max at capitalization is $165,000)

    • Can exclude spousal income by filing taxes separately

    • Monthly payment capped at 10-yr standard


    Attached is the slide from the lecture I give to our students and residents on the subject.

    Leave a comment:


  • cortezar
    replied
    Thanks for the input. I agree with you that the certainty of PSLF is unknown. With regards to this, I think one has two options: 1) you can plan on PSLF (make minimal payments in anticipation of having forgiven as much as possible) with the risk that PSLF legislature will change (and even if it does, hopefully those in will be grandfathered and changes will affect new graduates) or 2) you can not plan on PSLF and begin to pay off debt ASAP. However sitting in the middle with moderate payments out of concern for changes in legislature. However, being on the fence and making moderate payments isn't worthwhile - either you are in or you're out. Yes, interest accrues, but if forgiven, not a big deal. So with that risk, I'm aiming to make minimal payments PAYE and spend ~30K in payments during 7yrs with hope that the rest of my loans (and accrued interest) are forgiven.

    Can someone explain REPAYE better for me? Not finding good comparison between it and PAYE online.

    Leave a comment:


  • Sergio Estavillo
    replied
    My initial thoughts given the $141k debt are too much risk, not enough reward in pursuing PSLF combined with MFS PAYE.  As I have stated in this forum, I feel there will be modifications to PSLF in next several years.

    In pursuing your current strategy of PSLF, reducing your PAYE payments by filing separately, you're increasing your tax liability and experiencing significant interest accrual. I estimate that during your 1st PAYE annual period, with $0 payments, you've accrued approximately $9,500 in interest.  After 5 years, assuming MFS AGIs of $0, $26k, $54k, $56k, and $58k, total interest accrual ~ $38k.  Should there be PSLF modification that encourages you to pursue a different repayment strategy, the accrued interest could capitalize.  This, along with the annual increased tax liability by filing separately, would have me rethink this strategy.

    A couple other options:

    • REPAYE to mitigate the interest accrual, benefit from some interest subsidy, file jointly to lower tax liability while still pursuing PSLF, or

    • Refi with a commercial lender in an effort to secure a lower interest rate.

    Leave a comment:


  • cortezar
    replied
    I have 141k In debt, she has none.

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  • Sergio Estavillo
    replied




    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.
    Click to expand...


    My apologies...I should have asked several more questions:

    • What's your total federal student loan debt?

    • Does your spouse have any federal student debt? If so, how much?

    Leave a comment:


  • cortezar
    replied
    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.

    Leave a comment:


  • Sergio Estavillo
    replied


    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.
    Click to expand...


    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.

    Leave a comment:


  • cortezar
    replied
    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.

    Leave a comment:


  • jfoxcpacfp
    replied


    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.
    Click to expand...


    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.

    Leave a comment:


  • DMFA
    replied





    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.
    Click to expand...


    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.

    Leave a comment:


  • jfoxcpacfp
    replied


    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.

    Leave a comment:


  • DMFA
    replied




    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.
    Click to expand...


    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.

    Leave a comment:


  • jfoxcpacfp
    replied
    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.

    Leave a comment:


  • jfoxcpacfp
    replied




    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?
    Click to expand...


    That is correct.

    Leave a comment:


  • cortezar
    replied
    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?

    Leave a comment:

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