How to lower AGI in residency?

[FutureDoc44]

Hi all- looking for tips on how to lower my AGI in residency.

I'm an M4 graduating with 200k in debt, going into an academic specialty with 3yr training period and likely 200k starting. I'll be pursuing academics regardless but PSLF is a bonus. When I graduate residency I'll run the numbers and see what makes sense in terms of PSLF vs refinancing, assuming my debt may be closer to 250k. But for now I'm thinking REPAYE in residency (I'm 26, not married/no kids) and looking for ways to lower my AGI. My understanding is that this will mostly apply to PGY2/PGY3 because as an intern I'll be making $0 payments toward the 120.

Read some of these suggestions on blogs but I've seen some conflicting info. Appreciate any advice. Thanks!

1. Retirement accounts- I know a 403b would be ideal because it is not taxed up front and therefore would lower the AGI. Seems like most residency programs don't offer or don't match these, however. I know a Roth IRA is a great option due to the low salary in residency so likely I'll try to max out the $6000/yr but also know that this won't lower my loan payments.

2. Student Loan interest- I read that I can deduct $2500 from my gross income because I'm paying student loans?

3. HSA- Seems like a great option and I'd consider maxing this out the yearly $3650 however also seems like most residency programs don't offer high deductible plans so unlikely to qualify for this.

4. Standard deduction- I'm a bit confused on this. Seems like I should be able to deduct the $12950 from my gross to lower the AGI, however I haven't seen this mentioned on any of the PSLF articles I've been reading. Seems like that would be a no-brainer way to lower the AGI. What am I missing here? I'm a newbie to paying real taxes...

Between the pause on interest payments due to COVID and virtual interview season, I'm pretty thankful that my loans aren't higher. Trying to be smart and efficient about this going into residency when I know I'll have less time/energy to devote to strategizing these things. Thanks for the help!

[CordMcNally]

How much could your payment change with various changes in your AGI?

I would probably look at it through the opposite lens. I would look at saving/investing money in tax efficient ways (although at your marginal rate the tax savings won't be huge in residency) to help build my financial future and if my payment is a bit lower than that's a bonus. Make sure you have an emergency fund, then save up to any 403b match by your employer, then Roth/HSA, then the rest of your 403b. Now is also a good time to look at what insurance you need now and possibly in the future.

[JBME]

1) from the doctor blogs I read, most residency programs do have 403b plans so I'm not sure where you're reading that most do not. I also believe that most residency programs do NOT have a match, or the vesting period is longer than the residency so even if you get a match, when you finish residency your match money isn't yours. But yes contribute to a 403b and that's a key way to lower AGI.

2) Just be aware that in order to take this deduction it's subject to an income limit so you have to make sure you're under the limit. Google for the limit. You're probably under but you should check.

3) Like #1, where are you reading that HSAs aren't likely in residency? Maybe just worry about this when you match into residency and see if it's an option. If it is, consider using it to lower AGI.

4) Going from my memory, standard deduction on tax form 1 is calculated after AGI is established.

[FutureDoc44]

Hi JBME - thanks for the response.

1) I misspoke. I meant that most residency programs have 403b plans but don't match them. I guess I'm debating if it's better to invest in an unmatched 403b instead of a Roth IRA while in a low income tax bracket (if unable to do both). I'll have to look more at that and do the math when I actually match and can look at my contract closely. But thanks for clarifying that 403b WOULD lower my AGI.

2) On a quick google search of a few sites, looks like it's 70k which I'll be well under in residency

3) I read that you're only eligible for HSA if you have a high deductible health plan which is apparently uncommon in residency. Something else I'll look closer after match day like you said.

4) Gotchya- makes sense.

Thanks for your help, really appreciate it!

[FutureDoc44]

Hi CordMcNally- thanks for your thoughts. Interesting way to look at it. I like the idea of utilizing both the 403b partially then the Roth. I had it in my head to max out one or the other but this would straddle both the benefits of a Roth in residency and lowering the AGI for loan payments.

With no dependents I'm thinking the insurances I'll need in residency are health/disability/auto/renters.

Thanks!

[CordMcNally]

If you get no 403b match then I would probably focus on maxing out the Roth at this point. I'm not sure if having a high deductible option is that uncommon. I had one along with an HSA in residency.

[JBME]

Hi JBME - thanks for the response.

1) I misspoke. I meant that most residency programs have 403b plans but don't match them. I guess I'm debating if it's better to invest in an unmatched 403b instead of a Roth IRA while in a low income tax bracket (if unable to do both). I'll have to look more at that and do the math when I actually match and can look at my contract closely. But thanks for clarifying that 403b WOULD lower my AGI.

2) On a quick google search of a few sites, looks like it's 70k which I'll be well under in residency

3) I read that you're only eligible for HSA if you have a high deductible health plan which is apparently uncommon in residency. Something else I'll look closer after match day like you said.

4) Gotchya- makes sense.

Thanks for your help, really appreciate it!

bear in mind that plenty of 403b plans these days have a Roth 403b component as well. Still probably better to do your Roth IRA contribution but if you aren't interested in lowering AGI and you have the ability to save beyond $6k in your Roth IRA, you may find a Roth 403b is an option and can contribute to that to get more money in your Roth bucket. When residency is done, you can roll over the Roth 403b money to your Roth IRA. Since it's roth-to-roth there are no taxes due on this rollover.

[NumberWhizMD]

bear in mind that plenty of 403b plans these days have a Roth 403b component as well. Still probably better to do your Roth IRA contribution but if you aren't interested in lowering AGI and you have the ability to save beyond $6k in your Roth IRA, you may find a Roth 403b is an option and can contribute to that to get more money in your Roth bucket. When residency is done, you can roll over the Roth 403b money to your Roth IRA. Since it's roth-to-roth there are no taxes due on this rollover.

Only follow-up I have on this is to check on your investment options with the program. My program had horrible options with high fees, and I wish I would've had better financial knowledge at the time to choose the Roth IRA instead. Just something to consider.

Also echoing above that there are residencies that offer a high deductible plan (mine did). If you are young and otherwise healthy, I would personally choose this option. We had one child during med school and one in residency, so our healthcare costs were higher (and we ended up with a PPO plan instead). Now that we can afford the out of pocket costs, even with another child on the way, we went for the HSA.