Is Contributing to a Company 401k Worth it as a Travel Therapist?

Written by: Jared Casazza, PT, DPT

What Makes Travel Therapy Different?

Travel therapists are in a unique position with respect to 401k accounts. When working with most travel healthcare companies, therapists will be eligible to contribute to the company sponsored 401k plan. The 401k benefit eligibility will vary company to company, but most companies provide it in some form. However, since many travelers switch between travel companies pretty frequently, it is a common concern whether contributing to the company 401k plan makes sense for them, or if it would just be additional hassle. Unsurprisingly, since most of my articles on FifthWheelPT are finance related, this is definitely one of the top five most common questions I get asked by current and prospective travelers. In addition to wanting to know if using the 401k plan is worth the hassle if switching between companies, I often hear that there is concern about what happens with account once the individual leaves the company or stops contributing to the account.

I hope to shed some light on my thoughts about 401k plans for travelers in this post, but I do not intend this to be specific advice for any of you. This is just what I’ve done and what works for me, but everyone’s situation is different, so be sure to do your own research on the topic as well.

What is a 401k?

First let’s cover the basics of what a traditional 401k plan is and why one would choose to contribute to it in the first place. Most travel companies don’t offer a Roth 401k option, so we can skip over that for now, but if you’re interested in my thoughts on Roth vs. Traditional accounts, you can check that out here.

A traditional 401k is a retirement account that is offered by an employer and allows the employee to contribute pre-tax money to the account from each pay check. The amount contributed is up to the employee, but it is usually based on a percentage of the employee’s taxable income. Since the money isn’t taxed when it’s contributed, it’s able to grow in the account tax free for however long it remains in the account. When withdrawals are made (usually in retirement), the money withdrawn each year is then taxed along with any other earnings (social security, investment income, rental income, etc.). The big benefit of this account is that it allows you to contribute money while working and earning a lot, therefore in a higher tax bracket, and instead paying taxes on the money in retirement while (hopefully) in a lower tax bracket. The money also grows more quickly in a 401k than in a regular investment (brokerage) account since the amount that would have been taxed is compounded. The maximum that an individual is able to contribute to a 401k in 2018 is $18,500, and for 2019 it will be $19,000. Taking advantage of the tax benefits of a traditional 401k (and additionally, a traditional IRA) is a huge part of what has allowed me to semi-retire and travel around this world this year after only three years of full time work as a travel therapist.

401k Employer Match

A 401k sometimes has the added benefit of employer matching. The amount that is matched, if any at all, is determined by the employer and will usually be somewhere between 3%-6% of the employee’s taxable income. The employer can also include a contingency that it is only matched if the employee contributes a certain amount as well. This is the employer’s way of helping the employee have a more secure retirement by contributing to their retirement account. In many companies, the employer match took the place of a pension that used to be standard but has now disappeared in most public sector jobs. An employer match is in no way equal to a pension since the benefit is comparatively small, but any extra money toward retirement is a great thing!

The employer match is great if the company offers one, but for the majority of travelers this will be a moot point. Most travel companies offer a 401k with some sort of employer match, BUT they have a vesting schedule. The vesting schedule determines how much of the employer match you get to keep if you leave the company early, which makes this an incentive for the employee to stay with that employer. Many of the companies require that you have to work between 3-5 years with the company to keep all of the employer match. Some plans will have a tiered vesting schedule: something along the lines of at one year you keep 20% of the matched amount, at two years you keep 40%, etc. However others have a “cliff” vesting schedule: something like if you work three years or more you keep all of the matched amount, but if you leave before three years you don’t keep any of the amount that has been matched. Basically, the 401k employer match is great, but unfortunately it won’t apply to travelers that switch between companies often or that don’t plan to work three years or more as a traveler. In that case, an individual retirement account could make more sense and involve less hassle for the traveler.

Traditional Individual Retirement Account

A traditional IRA (Individual Retirement Account) is another option which has the same benefits as a traditional 401k, and doesn’t require an employer to utilize, and one other big difference, the contribution maximum. A traditional IRA allows a maximum contribution of only $5,500 for 2018 and $6,000 for 2019. If you’re a big saver like me and plan to reach financial independence as quickly as possible and maybe even retire early, then that’s a relatively small maximum each year.

If you plan to switch companies often, and therefore won’t benefit from the employer match, and don’t plan on putting $6,000 or more toward your retirement account each year, then foregoing the 401k and choosing an IRA instead could be the best choice. An IRA does have the added benefit of more flexibility between investment choices. With a 401k, the investment choices are usually limited to 10-20 options chosen by the company, whereas with an IRA the investment options are essentially limitless.

Utilizing a 401k and an IRA

For those, like me, that plan to put more than $6,000 toward retirement each year, then contributing to a 401k account in addition to an IRA will likely be necessary even if the individual won’t benefit from the employer match.

Luckily, having a 401k and an IRA is pretty easy, even if you switch travel companies often. (Keep reading below to learn more about that process if switching companies.) I’ve switched between companies on a few different occasions and have always taken advantage of a 401k account if offered, while also contributing the maximum amount to both the 401k and an IRA.

There are income limits where the benefit of an IRA (the tax savings) starts to diminish if the individual is also contributing to a 401k, but the limit is higher than most traveler therapists will make at $63,000 of adjusted gross income (tax free stipends are not factored into this number).

In my opinion, if you plan to save more than $6,000 toward retirement each year, then it makes the most sense to me to contribute the maximum to an IRA, and then any additional money you wish to save would be invested in the 401k. This is assuming that you wouldn’t benefit from the employer match, but if you would, then it would be foolish to pass up that match.

Here is the general order of operations that I have used and that I think makes the most sense:

  1. 401k contributions up to the amount to get the full employer match (if applicable)
  2. IRA contributions up to the maximum ($6,000 for 2019)
  3. 401k contributions up to the maximum ($19,000 for 2019)
  4. After tax investments (brokerage account, real estate, etc.)

If your company doesn’t offer an employer match on the 401k or if you won’t be able to benefit from it due to the vesting schedule of the company, then skip #1.

What Happens to the Money and 401k Account When Switching Companies?

Let’s say that you follow the order of operations above and stay with the same company for your first year as a travel therapist, but then get a better offer from a different company and decide to switch. You knew that you would probably be changing companies eventually, either for a better paying job or a job that your company may not have, so you assumed you wouldn’t benefit from the employer match. You maxed out your traditional IRA and contributed an extra $10,000 to your 401k. Great job!

Now, since the IRA isn’t associated with the employer, it isn’t affected at all by switching companies. That account belongs to you only. But the 401k is affected by switching companies, so you’ve got a decision to make.

Here are your options:

  1. You can have the money paid out to you.
    • This is almost never a good idea since you will not only pay taxes on the money, but also penalties!
  2. You can keep the money in the 401k account of the employer
    • This will occasionally involve additional fees since you no longer work for them.
  3. You can roll the 401k over from your previous employer’s 401k account to your new employer’s 401k account.
    • This could also be a hassle if you don’t plan to stay with the next company very long.
  4. You can roll over the 401k into your already existing traditional IRA account.
    • In most cases, and what I’ve always chosen to do. It makes sense to roll the 401k balance over into your traditional IRA. This gives you the increased flexibility with investment options mentioned above, which usually means lower fees on the investments as well which is a wonderful thing. The account is also yours and not associated with any employer, so you don’t have to worry about moving it around again at a later time. And the accounts work the same way with taxes, and you won’t have to pay penalties.

401k Rollover to Traditional IRA

By rolling the money over into your traditional IRA account, you have essentially contributed the full $16,000 (investment in the IRA to the maximum plus the investment in the prior 401k plan that is now rolled over) to your traditional IRA. This is an easy way to effectively contribute more than the maximum amount to an IRA when switching companies. This simplifies your finances (less accounts to keep track of) and gives you more investment options which are both great things. The rollover process is very simple and can be repeated every time you leave an employer and have a 401k balance with them. I have rolled my 401k balance into a traditional IRA several times and it has never taken more than 30 minutes.

For those travel therapists that are saving a significant amount toward retirement each year, I think that this is the best option with all things considered. I max out my IRA, contribute as much as possible to my 401k, and then roll the 401k into the IRA each time I leave a travel company to give myself the most investment options and to keep my financial life as simple as possible, while still contributing over $20,000/year to the accounts that wouldn’t be possible with a traditional IRA alone.

If you do this as well then you’ll want to make sure that it is a direct rollover. More information on the different types of rollover can be found here.

Conclusion

I know that for those of you that aren’t very familiar with saving and investing, this can all sound intimidating, but it really isn’t very difficult and takes minimal time to figure out and implement.

For those travel therapists that don’t plan to save more than $6,000 toward retirement each year, then just foregoing the 401k and choosing an IRA instead is the most simple option. For those that want to save more than $6,000 per year and also switch companies often, it’s worth the extra effort to contribute to the company’s 401k plan once you’ve maxed out your IRA for the year and roll that 401k over each time you leave a company. Once you’ve done it once it’s a piece of cake and will take you no time.

Above all else, make sure that you’re saving for retirement in some capacity no matter what account(s) you choose to utilize!

Remember to do your own due diligence before implementing anything that I talk about, since this is not intended to be specific advice for you. Thanks for reading and I hope that this post helped to clarify things for you.

If you have any questions about this post or anything else travel therapy related then contact us and we’ll do our best to help you out. If you need assistance finding a good travel therapy company or recruiter then reach out to us and we can help you there as well.

How do you currently handle your retirement accounts as a travel therapist? Let us know in the comments!

 

Paying $0 in Federal Taxes and $0 in Student Loans Payments as a Travel Therapist

Written by: Jared Casazza, PT, DPT

Managing student loans as a new grad therapist, or even as a seasoned clinician, is one of the most common concerns that I’ve heard over the last few years. In addition, paying down student loans is also the most common reason that I’ve encountered for why new travelers choose to take travel contracts. Some of my most popular articles of all time on FifthWheelPT have to do with how I’ve chosen to manage my student loans, and this was also the topic of a recent post on this site, Travel Therapy: Paying Off Student Debt… or Not?

Today I want to talk about how it’s possible to pay $0 in federal taxes while also having a $0/month student loan payment while on an income driven repayment plan as a travel therapist. I will ignore state taxes, since this will differ for each individual based on the state in which they work and the state in which they have their tax home. I will also ignore FICA taxes since they are owed every dollar of income earned regardless of income level.

Some of the terminology and ideas in this post may get complex, so if you’re confused, check out the post linked above on Student Loans, as well as some of the links contained in that post for more background info.

Before I start, I do want to say that this is not meant to be personal advice for your individual situation, as I am not a financial advisor or accountant and have no formal training on these topics. This is information that I’ve learned from reading and researching over the past few years and implemented in my own situation, but everyone’s situation is different and tax laws change regularly. If you’re interested in doing anything similar, then do your own research or reach out to a licensed professional for help, as this post is meant for illustration and entertainment purposes only!

Alright, now with that disclaimer out of the way, let’s look at how I would plan to keep my federal taxes and student loan payments both at $0 for the foreseeable future as a full time travel therapist!

Example Situation Information

Let’s say that I’m a 26 year old new grad traveler, single tax filer, without any kids or dependents. I’m a DPT who’s home state and tax home is in Virginia. My primary goal as a travel therapist is to earn and save as much money as possible in order to increase my net worth as quickly as possible, to get to a point where I can transition into either part time work in a single location or taking fewer travel contracts each year to have more free time for family, other hobbies, or leisure travel. To do this, I invest heavily in tax deferred retirement accounts to decrease my tax burden and my student loan payment, which both allow me to save even more for the future. I have student loans of $100,000 with an average interest rate of 6%. After reading more about the various income driven repayment plans, I’ve decided that REPAYE will make the most sense for me financially, and that I plan to eventually qualify for student loan forgiveness. I also understand that half of my accumulated interest is subsidized each month while on the REPAYE plan, so the lower my monthly payment (ideally $0), the lower my effective interest rate will be!

Income, Taxes, and Student Loan Payment

As a traveler, I work about 48 weeks per year while spending a month at home each year as a vacation and to spend time with family and friends. My taxable pay on contract is $21/hour, with tax free stipends received for lodging, meals, and incidentals while on assignment traveling. In this situation, assuming I work 40 hours each week, my yearly taxable pay would equal $40,320. (21 x 40 x 48 = 40,320) The 40 hours a week is a safe assumption since I always make sure to have a 40 hour guarantee in my travel contracts (as we recommend that other travelers do)!

If I were to not try to optimize this situation at all, I would have a federal tax bill of approximately $3,208 for the tax year of 2018. I would also have a monthly student loan payment of $184, which is equal to $2,208 for the year. That’s definitely not bad but I want to do better. I’d rather keep that $5,416 in my own retirement accounts to grow and improve my net worth! Below are pictures of both the taxes and the student loan payment for this scenario. The student loan table was generated using the federal student loan website’s repayment estimator and the tax chart was generated using SmartAsset.com.

student loan repayment initial.png

income taxes initial.png

Optimized Scenario

The key to paying less in taxes and having a lower monthly income driven student loan payments lies in reducing your Adjusted Gross Income (AGI). One of the easiest ways to do this is to contribute to tax deferred accounts such as a traditional 401k, a traditional IRA, or a Health Savings Account (HSA). These accounts are very advantageous because not only do they reduce your tax liability, they also benefit you in the future through the money growing in the accounts over time (provided the money is invested wisely). For my purposes, I want my AGI to be low enough that I don’t owe anything in federal taxes and I have a student loan payment of $0. However, the two numbers to achieve these goals are unlikely to be the same, so this takes some research on my part.

In 2018, the standard deduction is $12,000, which means that any income up to that amount is taxed at 0%. but you can actually go higher than this amount before owing any money in federal taxes. In my situation in this optimized scenario, by contributing to retirement accounts, I also qualify for the saver’s credit. This means that as long as I contribute at least $2,000 to a retirement account and have an AGI below $19,250. I get a $1,000 tax credit that will completely wipe out any federal taxes owed at that income level. As far as federal taxes for a single traveler without kids who contributes at least $2,000 to retirement accounts are concerned, $19,250 is the sweet spot to owe nothing. This is assuming that no other deductions or credits are available to be claimed, which in the scenario above would be true.

To have a student loan payment of $0, $19,250 is a little too high and will still lead to me having a $10/month payment. That definitely isn’t bad at all, but I can do better while only contributing a little more to the tax deferred accounts mentioned above. After playing around with the repayment estimator, I find that to have a $0 student loan payment on the REPAYE plan, the highest AGI that I can have is $18,809.

student loan repayment $0

This means that if I’m able to reduce my AGI from $40,320 down to exactly $18,809, I will achieve my goal of paying $0 in federal income taxes while also having a $0 student loan payment!

Implementation

Reducing your AGI by almost $22,000 may sound difficult, or even crazy. For most people who make only $40,000/year, that would probably be the case. However, travelers are different.

Since we receive tax free stipends which usually cover most, if not all, of our living expenses, living on a taxable income of $18,809/year isn’t nearly as hard. In fact, my girlfriend Whitney and I have each lived on much less than this each year since we began traveling, and we have met and mentored dozens if not hundreds of others that do as well. If you live an expensive lifestyle in a high cost of living area, then this might not be possible for you. But if your primary goal is to keep as much of your money as possible, while saving and investing for the future by living a modest lifestyle to achieve financial independence as quickly as possible, then this is 100% doable!

Implementing this strategy is fairly straight forward. Utilizing the tax deferred accounts mentioned above, I would need to contribute $21,511 to reach the $18,809 AGI amount talked about above. Here’s the course of action that I would take:

Since an HSA is an extremely valuable account to save for future medical expenses, or even to use as an extra retirement account, that is the first account that I would want to contribute to. I choose to utilize a high deductible health insurance plan through my travel company specifically to have access to this amazing account! The contribution limit for a HSA for a single individual is $3,450 for 2018. So I would contribute the full $3,450. ($21,511 – $3,450 = $18,061 still to contribute).

The next $5,500 (the contribution limit for IRAs in 2018) would go into a traditional IRA account. I prefer maxing out an IRA before a 401k due to the increased number of investment options available in the IRA compared to a 401k. Having more options for where to put the money will ultimately mean lower fees paid and more money in retirement. ($18,061 – $5,500 = $12,561 still to contribute).

At this point, I would have $12,561 left that I would put into the 401k plan offered by my travel company. I refuse to work with any travel company that doesn’t offer a 401k because of how valuable I find being able to contribute to these tax deferred accounts to be. A 401k has the largest limit of the accounts talked about above at $18,500 for 2018. I wouldn’t even need to max out the 401k completely since contributing just the $12,561 would get me to my goal, but if my income happened to be higher for some reason (possibly working overtime on a contract, or having other sources of income) then there would still be some wiggle room to contribute more and still achieve the magic AGI amount of $18,809.

Conclusion

As a traveler, it’s possible to have both a $0 federal tax bill and simultaneously have a $0 income driven student loan payment. Subsequently, this will allow the traveler to utilize the money saved to invest for the future and possibly achieve financial independence more quickly.

The key to achieving this is the traveler reducing his/her AGI by contributing to tax deferred accounts (401, traditional IRA, HSA). The magic AGI needed in the scenario above to reach this goal is $18,809, with anything below that amount being unnecessary. In the scenario above, using this strategy and putting the $21,511 needed into the tax deferred accounts would save the individual $5,416 between federal taxes and student loan payments, which is a 25% savings on the amount put into the accounts in the year contributed! Instead of that money being paid to the federal government and the student loan servicer, it would be invested and subsequently compounding tax-deferred over the years.

Being able to do this is relatively unique to travelers, since many of our expenses are reimbursed tax free while traveling, making living on the much lower AGI completely feasible; whereas, someone without the tax free stipends may struggle. Whitney, Travis, and I here at Travel Therapy Mentor have all taken advantage of tax deferred accounts to reduce our tax burdens while traveling, which we believe is a smart way to not only save money on taxes but also to set yourself up for a financially comfortable future!

Thanks for reading and making it through all of that! Do you take advantage of tax deferred accounts to reduce your income taxes and student loan payment while traveling? Let us know in the comments below! Reach out to us with any questions or for clarification on anything mentioned above. If you’re getting started with travel therapy and you need help finding a good recruiter/travel company, then send us a message to get our recommendations!

Travel Therapy: Paying Off Student Debt… or Not?

Written by Jared Casazza, PT, DPT

How and Why I Got Started with Travel Therapy

I first decided that travel therapy was the direction I wanted to go just after finishing my first year of physical therapy school. I had spent a significant amount of time researching average PT salaries for my hometown and wasn’t happy with the numbers I was finding, especially when factoring in the amount of debt I knew I would have after graduating.

With this low salary to high student debt dilemma in the forefront of my mind, I was looking for a solution to help bridge the gap. Coincidentally, soon after I started looking into ways to increase my salary, in my first clinical after that first year of school I met a travel DPT who told me how much he was making and I was shocked! What really stuck out to me was that he was working the same job as all the other permanent PTs at the facility, but making almost twice as much as they were! Before that, I didn’t how anything about travel PT, but after meeting him and learning more, I was certain that would be the path I would take, at least for a few years to pay off my debt.

What I Chose to Do About My Student Loans

Fast forward two years and I was just finishing up my last clinical and two weeks away from graduation. I had already made contact with several travel therapy recruiters and was looking for Travel PT jobs to start as soon as possible after graduation. In the meantime, I decided that I should use a conservative estimate of what my travel income would likely be to start planning out a budget and a goal to completely repay my student loans.

I determined that in just two years of traveling and living frugally, I could easily repay my full $100,000 in debt!

Compare that to the standard 10 year repayment, or perhaps around 5 years working hard to pay it down aggressively while working a permanent job! My plan was that after that two years of paying off my loans aggressively while traveling, I would divert all the money that had previously been going toward my loans into investing in retirement accounts and brokerage accounts for the future.

But wait. That’s not the end of the story.

I started to wonder what I would be passing up in investment returns if I paid off my student debt quickly instead of putting that money into investment accounts right away. I figured out that for my scenario, it actually wouldn’t make sense for me to aggressively pay off my debt when instead I could invest the money and yield a higher average return. So instead, I decided to utilize the tax benefits of being a traveler to enroll in an income-driven repayment plan, while choosing to invest the majority of my savings early in my career rather than pay down all my debt early. I eventually wrote several blog posts about this decision and all the factors I took into account to come to that conclusion (check them out here, here, here and here!).

Whether or not to pay off your student loans quickly, invest, or do a combination of the two is a very individual decision and one that you should spend some time considering. However, one thing is for certain, working as a travel therapist can set you up to have a lot more financial choices and opportunities compared to working a permanent position.

I’m going to highlight below the benefits that travelers have when it comes to student debt!

Higher Income

This one is a no-brainer and something that every traveler, or prospective traveler, is aware of. Travel therapists make more money than permanent therapists, and in some cases the difference can be huge. Making more money makes it much easier to pay down large amounts of student debt, which is one major reason people decide to pursue travel therapy in the first place.

There are undoubtedly some “cons” that go along with the financial “pros” (check out the top 5 pros and cons of travel therapy here) of being a travel therapist, and everyone’s situation is different, but overall it’s a good situation for most therapists. For travelers who are dead-set on getting rid of their student debt as quickly as possible by making big payments each month, travel therapy is hard to beat!

Tax Advantages

The tax advantages that come with taking travel assignments outside the area of your tax home are a big reason for the increased pay that travelers receive. Getting tax free stipends for meals, housing, and incidentals is what ultimately leads to the much higher net pay that travelers enjoy… provided that they are eligible. The tax free stipends combined with a slightly lower taxable hourly pay rate means that less money goes to federal, state, and FICA taxes. This is especially the case when considering federal taxes which are marginal in nature, meaning that having the lower taxable pay makes a big difference in the total effective tax rate paid.

Income Driven Repayment Plans

As I mentioned above for my own situation, a big advantage for travelers as far as student loans go is the increased likelihood of eligibility for income driven repayment (IDR) plans, and more specifically, REPAYE. Since the income driven repayment plans are based on adjusted gross income (AGI), this will benefit travelers because AGI is lower due to the lower taxable income mentioned above. Therefore, most travelers will have a very low monthly student loan payment on an IDR, sometimes even $0/month depending on how many weeks per year the traveler works. The reason that REPAYE is particularly advantageous in this scenario is due to the fact that under this plan, half of the accumulated interest (due to the monthly payment not covering the interest accruing each month) is subsidized. For someone with a $0/month payment, this means that their effective interest rate is cut in half while on the REPAYE plan! This is something that simply wouldn’t be an option for almost all permanent full time employees due to having a higher taxable income, with a subsequent higher income driven monthly payment, which negates most of the benefit of having the accumulated interest subsidized under REPAYE. As a traveler, having your interest rate significantly reduced in this manner can easily tilt the decision to pay down debt or invest in favor of investing and keeping the debt. This was a big factor in my decision to keep my student loan debt and invest all of my savings instead.

If you’re someone that is ultra conservative with your finances, is very debt adverse, or doesn’t trust yourself to actually invest the money that would have been used to pay down your debt, then this is probably not the best choice for you. On the other hand, if you’re a natural saver, like me, and want to optimize your money, then this is an option that shouldn’t be overlooked while traveling.

Conclusion

There are a few financial advantages that travel therapists have over permanent full time employees when it comes to repaying student debt. Of most importance to everyone is making a significantly higher after-tax income each year due to the tax advantages of traveling. Additionally, there is also a big opportunity to be had in the form of income driven repayment plans, especially REPAYE, which offer a lower monthly payment for those travelers that can trust themselves to invest their extra income instead of paying down their student debt quickly.

Whether you plan to pay your student debt off as quickly as possible or plan to pay the minimum and eventually shoot for loan forgiveness while investing heavily for your future, travel therapy is a great way to reach your goal!

What is your plan for your student loans? Are you planning to pay them off as quickly as possible or invest your extra money instead? Let us know in the comments below! If you’re interested in getting started with travel therapy and would like assistance then reach out to us and we’d be happy to help!