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 When withdrawals are made (usually in retirement), the money withdrawn each year is then taxed along with any other earnings (social security, investment income, rental income, etc.).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:
- 401k contributions up to the amount to get the full employer match (if applicable)
- IRA contributions up to the maximum ($6,000 for 2019)
- 401k contributions up to the maximum ($19,000 for 2019)
- 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:
- 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!
- 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.
- 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.
- 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.
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!