New attending - pre-tax versus post-tax contributions for first year

[Nebulus2017]

Hi everyone,

 

I was hoping to get your thoughts on how to spread our investments for the first year as an attending.

 

The private group has a self-directed pension plan that allows up to 54k of pre-tax investment (no match provided), thus lowering our taxable income. On the other hand, my wife and I have been doing 11k/year Roth IRA and wanted to keep that up. We also wanted to start putting away 6-7k/year in a 529 for our daughter.

 

Given the salary and our expected costs (including debt repayment), we will not be able to do all of these things. At first I was going to put ~20k into the pre-tax pension, max the backdoor Roths (x2, so 11k), and do the 529...

 

Now I'm wondering if we should just max the 54k of pre-tax pension to get the tax benefits, and skip the Roth/529 for this year. The following years my income will increase, and so we can start to add those in as we go.

 

Thoughts?? Max the pre-tax and skip post-tax investing for 1 year, or split our investing monies between the two?

 

Thanks!

[DMFA]

Nebulus2017 wrote:

Hi everyone,

 

I was hoping to get your thoughts on how to spread our investments for the first year as an attending.

 

The private group has a self-directed pension plan that allows up to 54k of pre-tax investment (no match provided), thus lowering our taxable income. On the other hand, my wife and I have been doing 11k/year Roth IRA and wanted to keep that up. We also wanted to start putting away 6-7k/year in a 529 for our daughter.

 

Given the salary and our expected costs (including debt repayment), we will not be able to do all of these things. At first I was going to put ~20k into the pre-tax pension, max the backdoor Roths (x2, so 11k), and do the 529…

 

Now I’m wondering if we should just max the 54k of pre-tax pension to get the tax benefits, and skip the Roth/529 for this year. The following years my income will increase, and so we can start to add those in as we go.

 

Thoughts?? Max the pre-tax and skip post-tax investing for 1 year, or split our investing monies between the two?

 

Thanks!

Click to expand...

What bracket will you be in?

How quickly are you repaying the debt?  It's great and important that you want to repay it quickly, but assuming it's properly structured (lowest rate/term at which you can afford payments), that should be balanced with tax-advantaged investments and your own individual risk tolerance.

First thing I'd sacrifice would be the 529 - yes, it's important, but there are many other ways to get money for college.  Next thing I'd *probably* give up is the backdoor Roth, but that depends on your bracket.

[jz]

we should just max the 54k of pre-tax pension to get the tax benefits, and skip the Roth/529 for this year. The following years my income will increase, and so we can start to add those in as we go.

Agree with your priorities.   Lower your AGI , and possibly your tax bracket first. 529 after tax money is lowest priority.

[Nebulus2017]

Hi DMFA,

 

Thanks for the prompt reply. I was leaning the same way.

 

The job is a 3-year partnership tract - Year 1 = 255k, Year 2 ~330k, Year 3 ~410k, Partner ~500k. So the income bracket will be a moving target...

 

We have ~130k student loan debt combined currently around 5% (variable rate), going to refinance once I start in July and have the income to support full payments (currently on a resident repayment plan).

 

Thoughts?

[DMFA]

Wow. That debt is nothing. $130,000 at 3.25% (average fixed rate) for 5 years is $2,350.40/mo, or about $28,200/yr. At that income, you could easily be able to do that 5-year refi, max tax-advantaged retirement accounts and use taxable to get up to your retirement goal (such as the 20% rule-of-thumb), and chip away at a 529 with a rather nice standard of living. Plus, once the student debt is gone, you can put that into whatever you like.

[Nebulus2017]

DMFA,

 

I see your point, but we do live in a HCOL area and have another 50k of debt to my parents for a house downpayment.

 

So between a moderate sized mortgage, high real estate taxes, paying back the two loans, and just living, I don't think we'd be able to do 54k pension pre-tax + 11k Roths + large 529 payments all at the same time.

 

And while some might argue for this hyper aggressive approach, I'd add that my salary will double within 3 years, and by year 2 or 3 we will be doing all of the above. No need to make the first year, at the lowest pay, feel too tight. Wouldn't you agree?

[Zaphod]

I would definitely scale in to everything based on priority and growing into your income.

Max out 54k priority

refi to 10yr for now, can always over pay as soon as possible

do 529s, taxable when higher income, start crushing those loans in years 3, 4, 5.

[Dreamgiver]

With your income I disagree with you, you should be able to do all 3, maybe lessen the 529 contribution, but the other stuff is a no-brainer.

[Craigy]

My big question is what exactly is this pension.  Is it actually a pension, what are the investment options, etc.

Assuming it's a good plan, eventually you should commit to maxing the $54k pretax account.  If you do it immediately, you won't feel the pain.  IMO you should start out contributing something, even if it's just half that, to ensure that you start the habit today which will only get harder to start as the years go by.

If you have the $11k left over at the end of the year for Roths, do that too.  You'll probably have the money.  I just made my backdoor roth contributions just a few days ago.  I like to plan ahead, but I also don't want to be in a cash bind.  Let the money pile up on its own.

[Hank]

Qualified funds are a use-it-or-lose-it proposition.  If you don't max our your qualified funds in a given year, you don't get to take a mulligan and fill up that space for this year three or five years from now.

You can always pay more than the minimum on the student loans, you can't go back and fill up a maximum you missed for qualified funds.

I'd max out the qualified funds, pay the min on the student loans, and pay back the down payment loan per the terms of your agreement with your parents.  Beyond that, consider picking up some locums gigs or extra shifts at your main gig and throwing additional funds at your debts.

Mom and Dad won't say anything, but they might be miffed if you buy a nice new car or go on a fancy vacation before you've paid them back.  Make paying back the family loan a priority, invite them on your next vacation after you pay back the $50K, retire the student loan debt, and ramp up the 529 contribution.

I wouldn't want to miss out on any tax credits or deductions from your state for the 529.  Likewise, don't miss out on the chance to lower your taxable income and squirrel away funds in tax-favored accounts.  (Qualified funds often have advantages for asset protection too.  That's just icing on the cake.)

[Nebulus2017]

Zaphod, Hank, and Craigy - Great points, thank you. Yes this is a use it or loose it vehicle. 54k/year max, no catch ups.

 

My take away is that I'll max the pre-tax 54k, then pay down debt, and then roth IRA since the 529 have minimum tax advantages in our state.

 

 

Dreamgiver - easier said then done when living in a HCOL area. I'd also argue that it's silly to feel so tight monetarily during year 1 when my salary will keep going up each year. We're looking at homes between 1-1.5M, because that's what they cost around here in the towns with good school systems. That mortgage/RE tax puts you at 6-7k/month. Another 3-4k fixed costs for insurances, utilities, home costs, oil, propane, misc, etc, then car costs, then 2k/ loan repayment, etc etc.

So no, where I live with a reasonable quality of life, doing all three and then some is not possible. Best of luck to you if you are single, living alone, and extremely frugal/not enjoying life. Some of us like to spread out the pain

[Dreamgiver]

I just offered you my free opinion. I know what I am talking about. Take it or leave it. And no, I am none of the things you assumed.

Also, on your current salary, you cannot afford those houses. Once you make partner, you can afford to be on the lower end of the spectrum you presented.

[DMFA]

Yeah, can you define "pension?"  Is it a 401(k)?  Because that's not really a "pension."  A pension is more of a defined benefit plan.

How quickly do you want to pay back your parents?  $2k/month to get it done over 2 years?

Starting at $255k, assuming all W-2:

• Maximize the retirement plan pretax $55k = $200,000


• Standard deduction $24,400 = taxable income $175,600 = income taxes due $30,723 (24% bracket) [also, the mortgage I guessed on also has interest of $29,759 alone, so you'll probably be itemizing...and idk if you have kids for child tax credit, etc]


• State taxes = ? [idk where you are]


• SS tax $7,960.80 [6.2% on first $128,400]


• MCR tax 1.45% on $255k = $3,697.50


• Post-tax income: 200,000 - 30,723 - 7,960.80 - 3,697.50 = $157,618.70 = $13,134.89/mo

Now, expenses:

• Mortgage of $750,000, 30-yr fixed @ 4%, property tax 2.0%, est ins cost 0.5% = $5,143.11/mo [obv plug in your own numbers here, these are guesses]


• Pay back parents = $2,000/mo [idk how fast you want to do this]


• Backdoor roth x2 = $11,000/yr = $916.67/mo


• Total of these: 13,134.89 - (5143.11 + 2000 + 916.67) = 131,134.89 - 8,059.78 = $5,075.11 left

How much do you want to put toward your loans [SoFi best fixed rates used for reference, yours may vary]:

• 5-yr @ 3.25% = 2,350.40/mo ($11k interest paid)


• 7-yr @ 3.92% = 1,772.16/mo ($19k interest paid)


• 10-yr @ 4.38% = 1,339.48/mo ($31k interest paid)

We'll assume 10-yr, so now you're at $5,075.11 - 1,339.48 = $3,735.63 left between other expenses (food, cars, insurances, etc), so that right there might be a bit much before you factor in life and disability insurance premiums.

...so you'll need to fill in the blanks and make some edits yourself, but this is how you start setting up a budget/plan for the things you want to do.  Set your W-4 for withholding accordingly so it accurately reflects the taxes you'll be due.

Use these functions in Excel to help you:

• =-pmt(3.25%/12,60,130000) - calc payment of a loan with rate of 3.25% APR paid monthly, 60 periods (5 years), present value of $130,000.  Without the - sign in front of the function it will return a negative number


• =-cumipmt(4%/12,360,750000,1,12,0) - calc the cumulative interest of a loan with rate of 4% APR paid monthly, 360 periods (30 years), principal $750,000, start period 1, last period 12, payment calc'd at end of period) to figure the amount of mortgage interest paid across 12 months (so if you buy the house starting in July, you'd start in period 7 and go through month 19)

...anyway, that's probably a bit more than you really wanted in order to get started, but that's how you figure this stuff out.  Good luck.  Lmk if you don't understand anything I've written or have more questions. Cheers

[Nebulus2017]

Dreamgiver,

 

Fair enough. I would just suggest that you take a more flexible approach to other people's financial situations. Saying you're advice is "a no-brainer" is demeaning, presumptive, and will be in many situations incorrect.

 

I agree that if I am living in a LCOL area and have great public schools with a decent home costing 400k, then it's a "no brainer" given my salary, current savings, risk tolerance, expected/desired # of working years, retirement nest egg goal, etc etc.

 

But when a decent home in the right town costs 1-1.5M, then you have to change the numbers a bit. Similarly, many people living in NYC and spend 50-70% of their income on housing. This is an extreme example and I would never wish to live there. But we all have reasons for what we're doing and where we live. My wife and I have family in this area, the job is fantastic, and I got the offer - we would give up a lot of happiness to move to, say, AL, where COL is 1/4 and pay is 50% higher.

 

So we are where we are. We have accepted the HCOL and appreciate what that buys us. Since the COL is now essentially fixed (and high), we have to work around that. Hence why I think I like the "graded" approach (start moderately and INC each year until partner) will work best for us.

 

Thanks again for your thoughts - you're right, I did ask for then. Just didn't appreciate the implied condescension.

 

 

[Peds]

live like a resident.

it is a no-brainer.

no one else on this thread has said to not do these things as fast as possible.