The Income Based Repayment plan and Roth conundrum. MFS or MFJ?

[docdrizzy]

I am an incoming Intern in IM. My loans are $300000+. Naturally I went with the IBR plan and enrolled in a 10 year public service loan forgiveness. I should be making ~55,000 a year intern year. Here is the problem: my wife does not have student loans and makes ~80,000. I would be saving $700 a month if I file married filed separately. The problem is that if I do this then I cannot open a Roth IRA account. Are there any way around this or any alternative options for me?

[ENT Doc]

You can just contribute to a traditional IRA, which has a deductibility limit of $10K for married filing separately.  So you do a TIRA, non-deductible.  Then backdoor Roth it.  Make sure you account for all costs when doing married filing separately - FICA, federal, loans, etc.

https://www.irahelp.com/slottreport/contributing-ira-when-you-are-married-filing-separately

 

[docdrizzy]

Awesome! Thank you!

[DMFA]

docdrizzy wrote:

I am an incoming Intern in IM. My loans are $300000+. Naturally I went with the IBR plan and enrolled in a 10 year public service loan forgiveness. I should be making ~55,000 a year intern year. Here is the problem: my wife does not have student loans and makes ~80,000. I would be saving $700 a month if I file married filed separately. The problem is that if I do this then I cannot open a Roth IRA account. Are there any way around this or any alternative options for me?

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Roth is never the problem because there's backdoor Roth.

The biggest problem with MFS is with disparate incomes.  The MFS brackets are just half the MFJ brackets, hence the higher income will get disproportionately taxed at a higher rate.  However, at those low numbers, it shouldn't make *too* much of a tax difference, and if you're certain you're not paying the debt anyway (PSLF), then it *might* not be a bad idea.  Once you make more money, though, the tax disadvantage to MFS might become prohibitive.

Why IBR?  IBR is almost never the best way to go.  Why not PAYE?  The payment is 2/3 as much (AGI-1.5pov)/120, as opposed to (AGI-1.5pov)/80.

If there's any chance you may have to end up paying the debt, such as if you decide you don't want to be fully committed to a full-time W-2 employee of a nonprofit after training (for you, seven years if you don't do fellowship), and you can afford monthly payments, then you should consider doing RePAYE instead to prevent the additional accrued interest thanks to the 50% unpaid interest subsidy.

Other than that, the MFS/PAYE/PSLF stack would probably be a good one for you to do, then once you lose your partial financial hardship, start doing MFJ (you can stay in PAYE).

I can do math if you want, but that's the basics of it.  If you're 100% certain you can be all of: W-2 employed, full-time, and nonprofit, and certain enough Betsy Devos doesn't rob you, and while one spouse doesn't make too much more than the other, then the MFS/PAYE/PSLF stack is *probably* the good way to go.  Otherwise the hedge is RePAYE.

[docdrizzy]

Thank you for the advice! Oops I did make a mistake i am PAYE. I am hoping the government doesn't screw me so I plan to MFS at least during residency. Also plan to implement a backdoor roth. My residency offers a Roth 403b, but I think i'll max out the roth IRA before touching the 403b

[jfoxcpacfp]

docdrizzy wrote:

Also plan to implement a backdoor roth. My residency offers a Roth 403b, but I think i’ll max out the roth IRA before touching the 403b

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You are not passing up matching funds, are you? If not, I agree with your attack plan.

[DMFA]

Oh, and I beg your pardon for being off-topic and silly, but *The* Income-Based Repayment Plan? What's with the definite article? Did you go to *The* Ohio State University or something? :-D

[jfoxcpacfp]

DMFA wrote:

Oh, and I beg your pardon for being off-topic and silly, but *The* Income-Based Repayment Plan? What’s with the definite article? Did you go to *The* Ohio State University or something? ?

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That was cruel and unusual  :P . I'm going to be really careful in the future.

[DMFA]

Using *The* is something I'm very silly about at work. I'll emphasize it like *The* nephrotic syndrome, *The* syndrome of inappropriate anti-diuretic hormone, *The* Mycobacterium avium complex...if you watch college sports you'll sometimes notice schools (particularly OSU) pretentiously emphasize the *The* when mentioning it. Here's an example: http://www.foxsports.com/ohio/story/dayton-paper-tweaks-ohio-state-with-headline-032114

[legobikes]

i prefer indefinite articles; as in, I have made An Art.

It is an problem.

 

I had a NICU attending who would pronounce abnormal A-B-normal, then extend to words where it didn't make sense. Shoulder A-B-duction.