Announcement

Collapse
No announcement yet.

PSLF, outside investments, and taxes

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • PSLF, outside investments, and taxes

    Hi! I am currently an M4 that will be starting my neurosurgery residency this summer. I was lucky enough to have the first two years of my medical school covered, but had to take out loans for my last two years at my state school totaling about $80,000 -- significantly less than average. However, as I am going into neurosurgery and planning on adding an extra year at the end for fellowship and would by necessity end up working in an academic hospital, I believe PSLF is my best option.

    For my first year I was planning on consolidating as early as possible (before July) and using last year's tax return to hopefully have $0 payments this first year. However, after that, I want to make sure I continue to minimize my payments to get the most out of the forgiveness. I have a couple of complicating factors that I would love any advice on:

    1. At some point within the next couple of years I will be getting married to my SO who is a captain in the Army. I know I will need to file our taxes separately, so that one isn't too complicated. However, as he is still in the army, our living situation becomes a little complicated, leading to the next points...
    2. I was lucky enough to be gifted an investment account when I was very young that has grown significantly in the past 15-20 years. I would love to pull from this fund for a house payment (while we may not need a down payment per say, we may go with a new build that would require a 5% down, or at the very least closing costs) and furniture. It is also possible I may need to pull from this throughout my residency for big-ticket items.
    3. We decided not to buy a house right off the bat due unstable job situation with the Army. However, I would like to buy a house within a year or two as we will have 7 years in the same location and we plan on having kids during that time.

    I have done the math and pulling out any significant amount of money (say $30,000) could increase my AGI enough to cause my monthly payments on my student loans to increase well over $500. My initial thought was to pull out this money before Dec 31, 2021 as I will only have 6mo of income for that year on my tax returns. However, does anyone else know of any good ways to do this and avoid steep student loan payment increases?

    Thanks to anyone who took the time to read that long post -- appreciate any insight!

  • #2
    After doing a direct federal consolidation, i'd enroll in PAYE to exclude your spouse's income from your student loans. This doesn't give you the subsidies REPAYE does while in your training. But it will likely be more beneficial and keep your student loan payments low.

    Pulling money out of your investment account would likely increase your income and increase your monthly student loan payment. Taking money out of your investment account this year would still keep your payment low since you'll be a resident for half the year. I'd suggest pulling less out in the following years once you start making an annual resident salary.

    If you stay on track for PSLF, the point is to pay the least amount in student loans and maximize your forgiveness.
    Helping student loan borrowers manage their student loans. StudentLoanAdvice.com. [email protected]

    Comment


    • #3
      Probably unnecessary, but.......
      •Your income will go up only by the gains, not the amount withdrawn. Need the cost basis of the donor.
      • Big ticket items is a relative term. Even with a 7 year residency, you still need to delay some gratification. That is soooo tempting since you have investments you can liquidate. The point is renting might not be a bad choice. Need vs want.
      • Ten year’s is a long time to navigate this PSLF taxable income issue as well. How much do your numbers project to be forgiven vs the taxes and interest? For an $80k loan, this is going to get complicated.
      Good luck.

      Comment


      • #4
        So I have done out the math a little. If I am on PAYE, I would pay under $60,000 and get over $65,000 forgiven (as interest accumulates). If I maximize this by consolidating early, I can take one year of payments off and add an extra year of resident payments as a first year attending. That way I only have one year of paying the standard cap (currently under $900). While it certainly is not unreasonable for me to pay it off my first year of being an attending, it seems like a waste to give up free money when I know I will be in an academic center for my career. Additionally, I see it as a way to have more flexibility to start paying towards a Roth or normal IRA, as well as just having a tiny bit more flexible income during residency (time-value of money). But definitely want to hear other people's thoughts and experiences!

        I would also love some insight on how useful it would be to give to an IRA rather than a Roth IRA to minimize these payments. As a member of the military, my SO has a Roth TSP he has been contributing to and that is matched (my residency does not match) so we have at least some retirement funds going to a Roth.

        As far as the deferred gratification--I hear ya! I have read and listened to all the reasons to rent and not buy. However, I am in a little different situation than typically discussed on here with WCI as my residency is not the typical 3-5yrs and my SO has a significantly higher income than me. Additionally, that money was actually given to me with the intention of using it for a downpayment on a home. While I think investment-wise it can grow more money by mostly staying in smart investments throughout my residency and be used for a downpayment when I am fully settled after training, I would like to use SOME of it for the costs of a home. The area I am training in is not a crazy expensive area like SF or NY, and we understand to live within our means, so I think we can do it wisely.

        Comment


        • #5
          Contributing to a pre-tax retirement account (401k,403b,457,IRA), FSA or HSA would lower your student loan payment. Ex. $10,000 annual 401k contribution. $1,000 less paid towards your student loans. Which if invested at a higher rate than your loans are growing could be better for your net worth.
          Helping student loan borrowers manage their student loans. StudentLoanAdvice.com. [email protected]

          Comment


          • #6
            Given the propensity of this site to attract mass accumulators, I suspect that the lower payments in loans will not outweigh the long term tax savings of roth contribution at a typical resident rate vs. the rate you'll pay as a wealthy retiree.

            Someone feel free to do the actual math and correct me if I'm wrong, but if the above example is true (10% savings on the loan payment amount if traditional 401k contributions are made). That savings amount is going to be significantly more than 10% long term from a purely tax savings perspective w respect to roth contributions in residency.

            Comment


            • #7
              Originally posted by ans6fc View Post
              Hi! I am currently an M4 that will be starting my neurosurgery residency this summer. I was lucky enough to have the first two years of my medical school covered, but had to take out loans for my last two years at my state school totaling about $80,000 -- significantly less than average. However, as I am going into neurosurgery and planning on adding an extra year at the end for fellowship and would by necessity end up working in an academic hospital, I believe PSLF is my best option.

              For my first year I was planning on consolidating as early as possible (before July) and using last year's tax return to hopefully have $0 payments this first year. However, after that, I want to make sure I continue to minimize my payments to get the most out of the forgiveness. I have a couple of complicating factors that I would love any advice on:

              1. At some point within the next couple of years I will be getting married to my SO who is a captain in the Army. I know I will need to file our taxes separately, so that one isn't too complicated. However, as he is still in the army, our living situation becomes a little complicated, leading to the next points...
              2. I was lucky enough to be gifted an investment account when I was very young that has grown significantly in the past 15-20 years. I would love to pull from this fund for a house payment (while we may not need a down payment per say, we may go with a new build that would require a 5% down, or at the very least closing costs) and furniture. It is also possible I may need to pull from this throughout my residency for big-ticket items.
              3. We decided not to buy a house right off the bat due unstable job situation with the Army. However, I would like to buy a house within a year or two as we will have 7 years in the same location and we plan on having kids during that time.

              I have done the math and pulling out any significant amount of money (say $30,000) could increase my AGI enough to cause my monthly payments on my student loans to increase well over $500. My initial thought was to pull out this money before Dec 31, 2021 as I will only have 6mo of income for that year on my tax returns. However, does anyone else know of any good ways to do this and avoid steep student loan payment increases?

              Thanks to anyone who took the time to read that long post -- appreciate any insight!
              Finally had a chance to write down my thoughts in a more thoughtful way -

              I am probably the biggest fan of PSLF on this website, but I think you are way too far in the weeds and over thinking your plan:

              1) for the purposes of this exercise, you are not getting $65k forgiven, so forget that number. It's irrelevant relative to this decision. Even if that number was $150k, it doesn't matter and shouldn't change your thought process. Here's why: you have two options, go for PSLF or not. According to your numbers, the go for PSLF route would see you pay $60k over 10 yrs. The pay it off bucket, lets say you can crush it between you/SO while still in residency after 5 years or so, then you pay a total of $85k or so in 5 years. so the difference is more like $25k (plus some accounting for the time value of money). That $25k number is much more the number to focus on - not the $65k you mention.

              2) You say 'pay it off first year as an attending', I say that's weak relative to your 'living below your means' comment - at $80k on a 5 year loan, that's only $1500 or so a month to pay it all off. I don't know your spouses' pay scale, but I can't imagine you two will be making less than $100k a year. With no kids early on, there's no reason you can't pay taxes, live a good life, and spend $18k while still contributing to retirement. Let's say 18k/yr for loans, 20k/yr for taxes, 20k/yr for housing (nice housing for a low cost area!), 24k/yr for spending, 30k for retirement contributions. Totally doable with $110k and some matching in the retirement accounts.

              2) It's been years since I ran numbers myself and my excel is lost to the trash yard in an old computer, but if memory serves me right, you come out on top by doing roth contributions and paying the (much lower) resident tax rate relative to the marginal gain of lowering AGI for PSLF purposes. As mentioned in my comment above, someone show me math that says the marginal gain of lowering loan payments is larger than the 15%+ relative gain between marginal tax rates for a resident relative to an attending/wealthy retiree.

              3) I'd assume the spouse isn't a 'high earner', but if they are you'll likely consistently have to pay more in taxes MFS going for PAYE.

              4) the above is all for advice for a person that doesn't have a decent pool of money sitting on the sidelines. Don't know that amount of course! What good is paying interest when you have the $$$ to apparently pay off a good chuck (if not all?) quickly?

              There is something to be said about simplicity and flexibility. PSLF is neither simple nor flexible. Based on all that I know about your situation and about PSLF, I am going to say that the epoch journey that is PSLF is not the right decision.


              Comment


              • #8
                These are all great things to keep in mind. I think more people are probably in the situation you are talking about if they're both coming from medicine or some graduate degree. There are a couple of things that make my situation a little more unique.

                1. 100% agreed, I have done the math out and considering NO INTEREST accruing, I would end up paying ~$30,000 less if I go the PSLF route. Paying it off immediately would save me lots of headache and simply things, agreed. But $30,000 of semi-free money, while allowing my other account to grow still is still something worth considering in my mind.

                If anyone would like to see the table for their own purposes, here is my approximation...
                PGY1 PGY2 PGY3 PGY4 PGY5 PGY6 PGY7 FELLOW ATTENDING ATTENDING ATTENDING
                January $ - $ 301.00 $ 321.00 $ 342.00 $ 360.00 $ 380.00 $ 400.00 $ 425.00 $ 492.00 $ 893.00
                February $ - $ 301.00 $ 321.00 $ 342.00 $ 360.00 $ 380.00 $ 400.00 $ 425.00 $ 492.00 $ 893.00
                March $ - $ 301.00 $ 321.00 $ 342.00 $ 360.00 $ 380.00 $ 400.00 $ 425.00 $ 492.00 $ 893.00
                April $ - $ 301.00 $ 321.00 $ 342.00 $ 360.00 $ 380.00 $ 400.00 $ 425.00 $ 492.00 $ 893.00
                May $ - $ 301.00 $ 321.00 $ 342.00 $ 360.00 $ 380.00 $ 400.00 $ 425.00 $ 492.00 $ 893.00
                June $ - $ 301.00 $ 321.00 $ 342.00 $ 360.00 $ 380.00 $ 400.00 $ 425.00 $ 492.00 $ 893.00
                July $ - $ 301.00 $ 321.00 $ 342.00 $ 360.00 $ 380.00 $ 400.00 $ 425.00 $ 492.00 $ 893.00
                August $ - $ 301.00 $ 321.00 $ 342.00 $ 360.00 $ 380.00 $ 400.00 $ 425.00 $ 492.00 $ 893.00
                September $ - $ 301.00 $ 321.00 $ 342.00 $ 360.00 $ 380.00 $ 400.00 $ 425.00 $ 492.00 $ 893.00
                October $ - $ 301.00 $ 321.00 $ 342.00 $ 360.00 $ 380.00 $ 400.00 $ 425.00 $ 492.00 $ 893.00
                November $ - $ 301.00 $ 321.00 $ 342.00 $ 360.00 $ 380.00 $ 400.00 $ 425.00 $ 492.00 $ 893.00
                December $ - $ 301.00 $ 321.00 $ 342.00 $ 360.00 $ 380.00 $ 400.00 $ 425.00 $ 492.00 $ 893.00
                Yr Sum $ - $ 1,806.00 $ 3,732.00 $ 3,978.00 $ 4,212.00 $ 4,440.00 $ 4,680.00 $ 4,950.00 $ 5,502.00 $ 8,310.00 $ 5,358.00
                Cumulative $ - $ 1,806.00 $ 5,538.00 $ 9,516.00 $ 13,728.00 $ 18,168.00 $ 22,848.00 $ 27,798.00 $ 33,300.00 $ 41,610.00 $ 46,968.00
                2. This would probably have been my thought if my SO was going to be able to live with me right away and had 0 debt. However, he is still in the Army and we may be living separately for one to three years. This means that rent number is actually double plus travel costs to see each other hopefully 1/mo long distance or 2/yr overseas. Not to mention, he has been on his own with money since he graduated college and therefore has things like a car payment and etc from before he even met me. We are saving for other things like trips and a wedding and etc.

                Other 2. With those numbers people have been saying, I completely agree. Seems like a Roth pays out in the long run. I will likely plan to max out a Roth IRA throughout residency and if I want to save extra to give to my Roth 403b. Nothing is matched, unfortunately.

                3. Definitely not a "high-earner" -- he does fine on a typical military officer salary, though! However, a very large chunk of his income is already non-taxable.

                4. So it is technically enough to pay it off, however, almost all of it is gains and having an income over 40,000/yr would mean paying long-term capital gains tax on this which would make it maybe not even enough. Secondly, this would mean it is not available for any down payment or furniture costs for the future. It could also theoretically grow at the same/maybe slightly faster rate of the interest of my student loan payments. So if I keep the majority in, I would at the very worse case scenario come out even?

                I mean I really do think paying it off quickly would be the simplest way to go. But if you offer me $30,000 of free money, I think that is probably worth a little extra of my free time to do?

                This honestly also just shows how unique everyone's situation is and is probably why WCI suggests hiring someone!

                Comment

                Working...
                X