Personal Finance for PhDs

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Emily

How to Financially Manage a Once-Per-Term Fellowship Paycheck

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In some PhD programs, graduate students on fellowship are paid only once per semester or trimester, between 2 and 4 times per year. This pay frequency engenders unique challenges and opportunities for those PhD students. The less frequent your pay, the more dire the consequences can be if you don’t manage it satisfactorily. This article will walk you through all the areas of financial management that you need to consider when you only receive one fellowship paycheck every three to six months.

financially manage once per semester trimester fellowship

The Good News

Fellowship (and training grant) income is different from most income. I call it “awarded income” as it is technically not given in exchange for work. On the other hand, “employee income” is what you receive for work, such as research (a research assistantship) or teaching (a teaching assistantship).

Some universities use these terms differently, but at the end of the day the way to differentiate them is by what tax form you do or do not receive at tax time. Employee income is reported on a Form W-2, and awarded income is not.

In a typical employer-employee relationship, the employee works and then receives their pay after the pay period has ended, whether that is weekly, biweekly, semimonthly, or monthly.

Because fellowship income is awarded and does not have to follow a period of work, it can be awarded at any time.

Since your fellowship income is awarded once per term, the good news is that you’re receiving that income up front, in a sense. You receive the income near the start of the multi-month period that it is intended to fund, which I’ll call the budgeting period in this post.

That’s the good news: You receive your income at the start of your budgeting period in a sense, instead of at the end of a pay period. That makes the transition onto fellowship income much easier since you do receive a lump sum up front. However, the corollary is that coming off of this type of income can be very difficult—more on that later.

When Exactly Will Your Paychecks Arrive?

As soon as you find out that you are switching to a once-per-term pay frequency, you should inquire about the date on or by which you can expect to receive your paycheck and whether you have to do anything to trigger its payout.

Often, the answer will be vague, for instance a range of a couple weeks or even a month. If it is specific, ask if fellowship pay has ever been doled out late—this is a good question to ask the administration as well as your fellow PhD students.

Then, no matter the information you are given, build into your plans that the pay might come at the end of the stated range or some time after the stated date.

I have heard horror stories from graduate students whose once-per-term fellowship income arrived weeks later than the date they were told, and sometimes that the student had to request a “refund” from the Bursar’s office before it was paid (of which they were not informed in advance).

It’s quite unlikely that an employer would issue their employee’s paychecks late. But again, this is awarded income, so the same rules are necessarily in place.

When it comes to your paycheck dates, play “offense” by being proactive about finding out the above information and taking any steps you are supposed to, but also play “defense” by reserving within your own finances the ability to pay for your expenses for an extra few weeks or month in case your next paycheck does arrive after you expected it to.

In What Amount(s) Will the Paychecks Be?

When you found out that you won your fellowship, you were certainly told its value, i.e., how much money you would be paid over the course of a year.

However, your fellowship award might not be distributed to you evenly throughout the year. If nothing else, it’s common for the summer term to be paid at a lower (even zero!) or higher level than the academic year.

Another consideration is whether you are responsible for paying any fees or similar out of your pocket. In the case of fellowship income, those fees might be automatically deducted from your award before it is distributed to you, which can be jarring if you are not expecting it.

Income Tax

With this type of once-per-term fellowship income chances are good that your university/institute is not withholding income tax on your behalf. (If it is, you can disregard this section!)

If no income tax is withheld from your fellowship paychecks, you have two important money management tasks to accomplish:

  1. Calculate and set aside the right amount of money to pay your eventual income tax bills.
  2. Determine if you are required to pay quarterly estimated tax.

Basically, in step 1, you’re estimating the amount of tax you’ll have to pay, and in step 2, you’re figuring out when you have to pay it (quarterly or yearly).

The best way to accomplish both with respect to your federal tax (you may also be responsible for paying state tax!) is to fill out the Estimated Tax Worksheet on p. 8 of Form 1040-ES. If that seems intimidating to you at all, please check out my resources to assist you and provide workarounds:

Step 1: Estimate Your Tax Bill

Sign up below to receive by email a spreadsheet that helps you with estimating your federal tax due for the year and how much you should save from each of your paychecks. You’ll receive follow-up emails explaining more about how taxes work for fellowships and then be subscribed to my mailing list!

Step 2: Determine If You Must Pay Quarterly Estimated Tax

It’s very common for fellowship recipients, if they are on fellowship for a full calendar year, to be required to pay quarterly estimated tax. Basically, instead of your employer (if you had one) sending the IRS a slice of each of your paychecks automatically, you receive your full pay and have to make manual payments to the IRS.

The Estimated Tax Worksheet on p. 8 of Form 1040-ES will definitively tell you if you are required to pay your estimated tax quarterly or if you can pay your full bill when you file your annual tax return.

If this is daunting to you, I recommend that you sign up for my workshop, which assists fellows in exactly your situation. It walks you through how to fill out every single line of the Estimated Tax Worksheet and covers several special scenarios that are common to PhD students, such as what to do when you switch on or off of fellowship midway through the calendar year. I even outline a shortcut method that allows you to skip filling out most of the form and still avoid being penalized by the IRS!

How to Manage Spending

The most common question I hear regarding once-per-semester or once-per-trimester fellowship income is, “How do I budget with this infrequent income?”

Yes, it is a good thing that this money is paid in a lump sum up front, but it does put a lot more responsibility on the graduate student than they may have bargained for.

Budgeting Regular Expenses

A robust budget is even more vital for a fellow in this situation than it is for a person receiving more frequent paychecks. While Americans living paycheck-to-paycheck might experience a few days of austerity when it turns out there is “more month than money,” in your case overspending could require weeks of austerity, which is rather infeasible.

What I mean by a budget in this case is to predict very well the expenses you will incur over the course of your budgeting period plus an extra few weeks or month.

Those expenses include all your regular and necessary fixed expenses (e.g., rent, fixed-rate utilities, insurance premiums, subscriptions) and variable expenses (e.g., groceries, utilities billed by usage). They also include what you project that your regular discretionary expenses will be (e.g., eating out, entertainment, shopping).

Budgeting Irregular Expenses

Irregular expenses are expenses that you incur once per year or a few times per year.

Examples of irregular expense categories are:

  • University bills, e.g., tuition, fees, health insurance premium, textbooks, parking permits
  • Insurance premiums paid yearly or every six months
  • Car maintenance/repairs
  • Travel
  • Electronics
  • Moving expenses
  • Household furnishings
  • Tax

Irregular expenses end to trip up graduate students for two reasons:

  1. The expenses tend to be large relative to a graduate student’s cash flow.
  2. Graduate students are often relatively new to budgeting and managing money, so they don’t have past experience to rely on to predict these expenses.

If a graduate student identifies this kind of expense as a budgeting issue, I recommend that they create a system of targeted savings accounts to help predict and save up in advance for the irregular expenses in their life.

You can read more about how to create this type of system in this podcast episode: How to Solve the Problem of Irregular Expenses.

Essentially, you create a unique savings account for each category of expenses and save regularly into that account, pulling money from it only when you incur a related expense.

The advantage that you have in receiving your income for several months up front is that you can also fund your targeted savings accounts up front, at least for the several-month period that your paycheck covers.

Account Structure

I really believe in setting up checking and savings accounts to serve your needs, not simply following the crowd—hence the system of targeted savings accounts I just reviewed.

While I imagine some people can keep all of their fellowship income in their checking account and draw it down over the course of the semester or trimester without running out of money or making sub-optimal financial decisions… I wouldn’t risk it!

Many graduate students I speak with who have once-per-term fellowship income use a separate savings account to hold the bulk of their paycheck and pay themselves a salary of sorts with a once-per-month automated transfer.

While this system simulates a monthly paycheck, it doesn’t take advantage of the unique property of receiving the large paycheck up front.

Instead, what I would do is set up several accounts (you might need to use two banks for this!):

  • One checking account for your monthly expenses that are fixed or only vary slightly with usage, e.g., rent, utilities, subscriptions. You should set up auto-drafts to pay these bills directly from this account.
  • One checking account for your variable and discretionary spending, e.g., groceries, eating out, entertainment, shopping. You can spend directly from this account and/or use it to pay your credit cards.
  • One savings account that holds the part of your fellowship paycheck that you will draw down.
  • Your set of targeted savings accounts.

Here is how I propose that you use this set of accounts:

  1. When you receive your fellowship paycheck, deposit it into your ‘monthly bills’ checking account.
  2. Calculate using your budget the amount of money you will spend on those necessary monthly expenses throughout your budgeting period; round up or leave some buffer. This amount will stay in this checking account, and all those monthly bills will be paid from this account.
  3. Transfer the rest of the income to the savings account for holding it over the budgeting period.
  4. Fund your targeted savings accounts according to your calculations for your irregular expenses.
  5. Above a certain buffer amount of money, divide the balance in your holding account by the number of weeks in your budgeting period. Set up an auto-transfer to move this amount of money from savings to your variable and discretionary spending checking account. That is the amount of money you can spend that week on the categories it covers.
  6. Pull money from your targeted savings accounts into your checking account as needed to cover your planned-for irregular expenses.
  7. Repeat every time you receive a fellowship paycheck.

While somewhat complex, the advantage of this system is that it helps you make spending decisions across three time frames: yearly (for the targeted savings), monthly (for the monthly bills), and weekly (for the variable and discretionary spending), which are otherwise difficult to synthesize.

Reaching Long-Term Financial Goals

In the budgeting exercise I outlined above, I did not include any line items for saving or repaying debt. While these steps are out of reach for graduate students who are paid only enough to survive (or not even that much), as a fellowship recipient, you might have more financial wherewithal.

If you are being paid above the local living wage or more than your peers who are not on fellowship, I encourage you to set a monetary financial goal so that you come out of graduate school with more money to your name than you went in with.

If you don’t yet have any emergency savings, make a ‘starter’ emergency fund your #1 goal! Open up yet another savings account and nickname it ‘Emergency Fund.’ Contribute money to it until you reach at least $1,000 and perhaps up to two months of expenses. When you are just getting started with savings, this Emergency Fund can double as your in-case-my-paycheck-is-late fund, but as you create more financial wherewithal, they should add on top of each other.

After that, your goal might be to increase your emergency fund to 3-6 months of expenses, pay off debt, or invest for retirement or other goals.

You can still accomplish these goals with infrequent fellowship income. As you catalog your expenses, write in a savings goal to your budget as well. You can put money from your paycheck toward this goal shortly after you receive it if you’re confident you won’t overspend the money you keep in cash. Alternatively, you can put the money toward your goal near the end of your budgeting period once you’re sure you won’t run out of funds! A combination of the two might be even better: contribute a minimum amount first and set aside another amount as a stretch goal that you can contribute once you near the end of the budgeting period.

Switching Off of Fellowship Income

Just as you looked into the dates of your expected paychecks when you switched onto infrequent fellowship income, you need to ask about the frequency and pay dates of the assistantship or other type of income that you are switching onto when your fellowship ends.

Again, you can expect to be paid at the end of or after the pay period rather than at the beginning. That means you will have to pay for your living expenses for an extra couple of weeks or a month off of your fellowship income before your assistantship income arrives.

For example, if your fellowship was for an academic year and summer, September through August, and you switched onto assistantship pay at the start of the following September, it would be typical for your first assistantship paycheck to come at the end of September or beginning of October. That’s 13 months of living expenses that your fellowship needs to fund, not 12.

How to Manage Income Tax Payments for Your Fellowship or Training Grant Stipend

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Title: How to Manage Income Tax Payments for Your Fellowship or Training Grant Stipend

Format: Live workshop (in person or remote)

Intended Audience: Graduate students and postdocs receiving stipends/salaries not reported on a Form W-2 (i.e., fellowship, training grant)

Length: 90 minutes

Timing: Year-round

Summary: This workshop shows graduate student and postdoc fellows exactly how to handle paying income tax on their stipends/salaries, whether through the quarterly estimated tax system with their annual tax returns. Every participant should leave the workshop knowing whether they are required to pay quarterly estimated tax to the IRS in 2020 and in what amount and how to repeat this calculation in subsequent years.

Outline:

  • How the IRS views fellowship/training grant income
  • Best practices for saving for your tax bill
  • What is quarterly estimated tax
  • Who does not have to pay quarterly estimated tax
  • Special scenarios: married filing jointly, switching on or off of fellowship, under age 24
  • Walk-through of Form 1040-ES’s Estimated Tax Worksheet
  • How to pay quarterly estimated tax if required
  • How Q1 and Q4 are different
  • State estimated tax

Back to Speaking home page.

How and When Will I Receive My Stimulus Check?

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In this episode, Emily explains how and when the stimulus checks from the CARES Act will be sent to qualifying individuals. She points to new IRS tools to help you track your payment and ensure that your payment arrives in a timely fashion. A minority of citizens and residents may need to submit their 2019 tax returns or other information prior to receiving their checks.
 
Links Mentioned in the Episode
 
stimulus checks PhD
Welcome to the Personal Finance for PhDs Podcast: a higher education in personal finance. I’m your host, Dr. Emily Roberts.
 
This is Season 5 Bonus Episode 2, and in this episode I will answer the question: How and when will I receive my stimulus check?
 
I’m recording this on April 15, 2020. The Coronavirus Aid, Relief, and Economic Security Act aka the CARES Act was signed into law a little less than three weeks ago, and one of the major components of the bill was economic impact payments aka stimulus checks sent to qualifying individuals.
 
Stimulus checks have just started arriving in people’s bank accounts this week. In fact, my family’s stimulus check showed up this morning.
 
If you are expecting a stimulus check but it hasn’t arrived yet, you are probably quite anxious to know when it will come and if there is anything that you need to do to hasten the process, so that is the subject of this podcast episode.
 
For most Americans, the stimulus check will be delivered automatically, without having to take any action. However, some people do need to take steps to receive the payment or to receive it sooner.
 
While you’re listening to this episode, I suggest you go to the URL IRS.gov/coronavirus/economic-impact-payments. That link will be in the show notes for this episode as well.
 
On that page you will find a link to the Get My Payment tool, which was launched earlier today. That is where you can check on the status of your stimulus check so you know when it will arrive. You can also provide the IRS with your banking information to enable direct deposit.
 
If you received a tax refund last year by paper check, chances are the IRS does not have the ability to directly deposit your stimulus check into your bank account. The same goes for if in the last two years you paid additional tax along with your tax return, which is common for fellowship recipients who don’t have automatic income tax withholding. In that case, you should use the Get My Payment tool to submit that information. If you’re eligible for a stimulus check but don’t have that direct deposit information on file, you’ll likely wait several months to receive your paper check rather than just days or weeks for the direct deposit.
 
 
If you were not required to file a tax return in 2019 or 2018, you should go to the other link on the webpage I referenced, which is called Non-Filers: Enter Payment Info Here and fill out the application. It is a very short form to collect your information so that IRS can issue the payment. You do not need to take this step if you receive Social Security retirement, disability, or survivor benefits or Railroad Retirement and Survivor Benefits.
 
For some of the younger members of my audience, perhaps 2019 was the first year in which you were ever required to file a tax return. In that case, according to the Get My Payment webpage, you do have to file your 2019 tax return to get your stimulus check. If you need help doing that, you can find all my best resources at PFforPhDs.com/tax.
 
Now, let’s say you qualify for a stimulus check but for some reason you don’t receive it or the one you receive is not as large as it should have been. You can rectify this on your 2020 tax return.
 
The stimulus money is technically a new refundable credit for 2020 paid out in advance of the tax filing season. Therefore, on your 2020 tax return, you can show that you should have received more of this stimulus money, and the IRS can add the missing money to the tax refund you receive in spring 2021.
 
If you are not sure if you are eligible for a stimulus check or have other CARES Act-related questions, I recommend purchasing the webinar I gave last Saturday, April 11. You can find the webinar page at PFforPhDs.com/CARES.
 
I’ll leave you with one final note about scams. IRS scams have run rampant in recent years, and the stimulus checks are an enormous opportunity for scammers. Please be vigilant against phishing or scam attempts both for yourself and your elderly loved ones, who are particularly vulnerable. The IRS will not ask you for your personal information via phone, text, email, or social media. Don’t open unexpected emails that appear to be from the IRS. Please report phishing attempts directly to the IRS.
 
That’s it for this episode! I’ll catch you again on Monday for our next regularly scheduled interview.
 
Listeners, thank you for joining me for this episode!
 
pfforphds.com/podcast/ is the hub for the Personal Finance for PhDs podcast. There you can find links to all the episode show notes and a form to volunteer to be interviewed. I’d love for you to check it out and get more involved!
 
If you’ve been enjoying the podcast, please consider joining my mailing list for my behind-the-scenes commentary about each episode. Register at PFforPhDs.com/subscribe/.
 
See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps!
 
The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC.

How to Improve Your Finances While Social Distancing

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Now that we’re a few weeks into our new normal of social distancing / isolation / quarantine, you may find yourself with the time, ability, and willingness to work on your personal finances*. Below are my top suggestions of activities you can engage in while social distancing that are highly likely to improve your finances in the short or long term, helping you to save money, pay off debt, and invest more money.

*If this sounds preposterous to you, this article isn’t for you right now! Keep taking care of yourself, your loved ones, and your community. If you want to know how I’m getting on without my regular childcare, listen to this podcast episode.

This is post contains affiliate links. Thank you for supporting PF for PhDs!

social distancing finances

Read a Personal Finance Book

Reading (or listening to) a book is the most time-efficient way to consume high-quality, curated personal finance content. I started my personal finance journey with a few cornerstone books (some of which appear on the list below) before moving on to blogs and podcasts. Reading a book is a great way to get a firm foundation—if you choose the right book.

In normal times, I would suggest that you check your local or university library first for the books you are interested in before considering purchasing. Personally, I know my local library branches are closed, but ebooks are still an option.

The list below includes some of my personal favorites and suggestions I received in response to a Twitter prompt. The knowledge you’ll glean from any one of these books is worth incalculably more than you would pay for them if you do decide to purchase!

Catch Up on a Podcast

For fascinating interviews with financially successful people and in-depth discussions of particular financial strategies, I turn to podcasts. (Podcasts are the one thing I have more of in my current life than I do in my regular life!)

Personally, I am a Completionist, so I prefer to listen through the full archives of most podcasts that I decide to subscribe to. Now that you have the time, here are a few of my favorite personal finance podcasts and other popular ones in the space. Listen to a couple of the recent episodes; maybe you’ll decide to commit to the archive!

File Your Tax Return

I am a major tax return procrastinator. My husband and I usually start working on our tax return in April and submit it barely under the deadline. Confession: This year, with the filing deadline extension to 7/15, we haven’t even started yet.

I do think that preparing your tax return is a good social distancing activity if you have the capacity. You can put an evening or two’s worth of uninterrupted time blocks to work with your tax software or even manually prepare your return (that’s our preferred method).

If you are expecting a refund, file ASAP to receive your refund ASAP. It’s your money! It should be working for you, either by paying expenses if you’ve experienced an income drop or going into savings, debt repayment, or investing if you income has stayed steady.

My tax workshop, How to Complete Your PhD Tax Return (and Understand It, Too!), comprises videos, worksheet(s), and live Q&A calls. Please consider joining through the appropriate link:

Network

One of the upsides of physical social distancing for some people is the chance to connect remotely with a different set of people than usual. (I am highly envious of this! I had high hopes to reconnect with old friends during this time… My children’s insistence on derailing all adult conversations has dashed those hopes.)

Instead of limiting your Facetime/Zoom calls to your family and friends, consider reaching out to people in your professional network.

In a general sense you should be networking like this all the time, but the motivation intensifies if you are coming up on an expected transition point in your PhD career or you think your job/position is at risk and you might need to look for another soon.

An excellent, low-risk group to network with right now is people who graduated from (or otherwise left) your PhD program in recent years. You can reach out over email to see what they’re up to and schedule a call if that is mutually agreeable.

If you reach out to someone and don’t receive a response, don’t take it personally! People are dealing with a lot right now. Just cast a wide net, and appreciate the people who are able to give you some of their time right now.

Oh, and always ask at the end of an interesting conversation if the other person can recommend one or more people for you to connect with next!

Explore Career Options

As a spin off of networking, right now is also an incredible time to work on exploring your career options. Yes, the academic job market looks abysmal right now, but—upside?—it’s been trending that way for decades, so there are lots and lots of PhDs established in non-academic careers that might be of interest to you.

A great first place to go for resources is your university’s career center. (Check on this even as an alum—you may have access to resources from all the universities/colleges you’ve graduated from.) The robustness of their resources for PhDs in particular might be strong or weak, but some of their resources for undergrads will still be helpful.

The career center may have assessment tools, instructional resources for job seekers, recordings of past live events, and opportunities to meet one-on-one with staff. If you know they have a resource that is not currently available online, submit a request that it is made available.

Two platforms for PhD job seekers in particular are Beyond the Professoriate (Aurora) and Versatile PhD. If your institution has a subscription, access the platform through its login mechanism, but if not you can sign up as an individual. Beyond the Professoriate has an upcoming online career conference as well.

To combine networking with exploring career options, set up informational interviews with people in careers you’d like to learn more about. From my experience on both sides of informational interviews, they can be quite enjoyable and beneficial for both parties!

Invest in a Frugal Strategy

Most of us are practicing forced frugality these days in a few areas of our budget. I’d wager that your discretionary spending was down in March from where it was February and that April will be lower than March. There are lots of possible uses for that freed-up cash flow, but consider one more: investing in a frugal strategy.

One of the major, legitimate complaints about frugal practices is that they take some capital to get started with. I’ve heard “Frugality is only for the rich,” for example. This is not the case for every frugal strategy, but it is for some. Well, now that you have some capital, what frugal strategies can you ‘invest’ in that you know will pay off with decreased spending over the long term?

I’ll give you one tiny example: Last December, I ‘fessed up—to myself—that my family (which includes two tiny children, one of whom is still in a high chair) was consuming paper towels at a positively alarming rate. We were buying the huge packs from Costco for $20 each half a dozen times per year. This didn’t sit well with me from a financial or an environmental perspective, so I purchased these microfiber cloths (12 for $12—now I wish I had doubled it!). They work far better than paper towels, our paper towel consumption rate dropped like a rock (we’ve probably made up for that initial investment twice over by now), and they haven’t substantially added to our laundry load. (Again, two tiny children—we already do a ton of laundry, including cloth diapers.) These towels were absolutely a frugal investment. Bonus: Not having the pressure right now of needing to buy this particular paper product before we run out when it is in short supply is a load off my mind!

Ask yourself: Are there any frugal strategies I’ve wanted to try but haven’t yet because of the up-front investment of capital? Can I use my newfound cash flow right now to establish one of the strategies? And if it wasn’t money but rather time was your limiting factor before: What frugal strategy did you never have time to initiate, but you can put in the time now to make it a habit?

Here are a few ideas for similar frugal/environmental investments, gleaned from this Twitter thread:

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Clear Out Your Closets, Etc.

My mother, a retired empty nester, has undertaken as her social distancing project clearing out the basement storage area of the home my parents have lived in for 30 years. It’s a massive project, and it is made more difficult by the closure of some of the places you might normally go to resell, donate, recycle, or trash your old possessions.

I do think a spring cleaning/clearing out is a good activity for right now. This might positively affect your finances if you are willing to hold on to the valuable items long enough to resell them. (You might be able to resell currently, but I suspect the demand will be relatively low.) If nothing else, it will benefit your mental health and will reduce the amount of work you’ll need to do leading up to your next move.

Close Old Financial Accounts (and Open New Ones?)

Spring cleaning can apply to your finances as well as your home!

You may very well have old banking or credit accounts that you no longer use or have need for. If you can close the old bank accounts without going anywhere in person, do so! Some people like to keep old credit card accounts open because length of credit history and utilization ratio play into your credit score. However, if you have a high credit score already, you should consider closing the accounts you don’t need; maybe just keep the single oldest account open. The suggestion to close old accounts goes quintuple for any accounts that charge you a fee.

In the same vein, now is a great time to join (aspects of) your financial accounts with your spouse or partner if you have decided to keep joint money. My husband and I decided to join as much as we could after we got married, and the months-long process involved researching and opening new accounts, waiting for money to transfer, and closing old accounts. Again, it’s a great social distancing activity as long as you don’t have to go anywhere in person. (Another reason online-only banks are my preferred institutions!)

If you’ve never looked into it before, you could put your free time into figuring out how to generate extra income from credit card or banking rewards. Please keep in mind that offers might be somewhat different during social distancing than they were before (or will be again). Before you open any new accounts, triple-check that you can meet the minimum spending requirements or transfer amounts given your (presumed) lower level of current spending.

Further Listening: How to Make Money without Working: Credit Card Rewards and 529s

Plumb Your Values/Dream

If you’ve been able and willing to slow down and reflect, this pandemic might have granted you new insight into what you want for your life. I don’t think you should be making any life-altering decisions in this stressful period, but lean into your different perspective and deepen your introspection.

What is truly important to you? What are the aspects of your life that make you feel fulfilled? What can you change about how you manage your finances to better support those aspects?

Further Reading: Determining Your Values and Financial Goals While in Graduate School

Get Coaching, Take a Course, or Join a Community

One way you can invest in yourself right now is to establish a relationship with a coach, join a community, or take a course focused on an area of personal or professional development. Spending money on this kind of endeavor makes it much more likely that you will actually take the necessary steps to ensure your financial success.

If your chosen area is finances, consider how you and I could work together. I offer one-on-one financial coaching, and I am also going to open up the doors to my program, The Wealthy PhD, in May 2020. Through both avenues, you will have individualized access to actionable knowledge, inspiration, and accountability. If you feel confident in your income security, this is the perfect time to firm up your financial plans and even take advantage of the unique opportunities this period affords.

If finances aren’t your preferred area of focus right now, I also recommend checking out the services offered by my colleagues:

  • Dr. Jen Polk coaches PhDs on their careers
  • Dr. Katy Peplin’s community Thrive PhD supports graduate students around the mechanics of graduate school and their mental health
  • Dr. Katie Linder offers podcasts with actionable tips, coaching and courses for academics on productivity and related topics
  • Dr. Echo Rivera offers courses and coaching on effective presentation design & presenting with data for academics, scientists, and researchers (grad students through PhDs)

If you do commit to working on your professional or personal development in one of these other areas, I’m confident that there will be an indirect positive effect on your net worth! Perhaps at that point you’ll be ready to directly work on your finances with me.

How have you improved your finances while social distancing?

Our Lives and Finances Under Social Distancing: A Self-Employed PhD and a Grad Student

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In this episode, Emily and Lourdes discuss their lives and finances during the coronavirus pandemic. Emily is balancing running her business with caring for her two small children (while her husband also works full-time), and Lourdes is adjusting to working on her PhD remotely and virtually never interacting with other people face-to-face.

If you would like to work (remotely!) with Emily in any of the following ways, please email her:

Lourdes’s previous budget breakdown podcast episode: This NDSEG Fellow Prioritizes Housing and Saving for Mid- and Long-Term Goals

Fellowship Income Is Now Eligible to Be Contributed to an IRA!

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In this episode, Emily explains the new legislation that allows non-W-2 fellowship income to be contributed to an Individual Retirement Arrangement (IRA). Up until 2019, fellowship or training grant income (reported on a Form 1098-T or Form 1099-MISC or not reported at all) was not eligible to be contributed to an IRA. Certain legislation, the Graduate Student Savings Act (GSSA), which fixes this problem, has been proposed a few times since 2016, but never passed. However, at the end of the 2019 Congressional session, the text of the GSSA was passed and signed into law as part of an omnibus spending bill (H.R. 1865). PhD trainees who are newly eligible to contribute to an IRA should consider their overall financial status and goals to determine whether to contribute and in what amount.

Links Mentioned in this Episode

taxable compensation fellowship IRA

Intro

Welcome to the Personal Finance for PhDs podcast: a higher education in personal finance. I’m your host, Dr. Emily Roberts.

This is Season 4 Bonus Episode 1, and in this episode I will update you on recent legislation that has a major positive impact on the PhD trainee population.

Specifically, starting on January 1st, 2020, the definition of “taxable compensation” for the purpose of contributing to an individual retirement arrangement or IRA was  updated to include taxable fellowship income not reported on a W-2.

That’s the takeaway point for those of you already in the know about this issue: Your taxable non-W-2 fellowship income is now eligible to be contributed to an IRA. You can open a Roth or traditional IRA on January 1 or following and put in the $6,000 maximum contribution if you like, assuming your taxable fellowship income is at least $6,000 in 2020. If that’s all you need to know, feel free to stop this episode now, but please share it with your peers as you go.

In the rest of this episode, I will review the prior definition of taxable compensation and how it negatively impacted the PhD trainee community and then explain the recent legislation that changed the definition for 2020 and forward. At the end of the episode, I’ll point you to a few resources to help you in your investing journey.

1 The Prior Definition of Taxable Compensation

The federal government offers a few different tax incentives to encourage individuals to invest for their retirement.

When you invest money inside a tax-advantaged retirement account, you don’t have to pay tax on the growth in your investments as you would for a regular taxable investment account and you also can take a tax break on either the amount of money you contribute to the account or the amount of money you withdraw from the account in your retirement.

Most of the tax incentives are offered through workplace-based retirement accounts, such as a 401(k) in the private sector or a 403(b) in the nonprofit sector. However, there is one type of account that can be opened outside of your workplace, and that is the Individual Retirement Arrangement or IRA.

You as an individual can go to just about any brokerage firm and open an IRA, and it’s not at all connected to where you work. The contribution limit for an IRA is $6,000 per year if you’re under age 50.

The restriction the federal government places on IRAs is that you have to have what’s called “taxable compensation” in a given calendar year to contribute to an IRA. Your overall income also has to fall under certain limits to contribute.

The old definition of taxable compensation was as follows. Think of a two-column list. The left-hand column is types of income that are considered taxable compensation, and the right-hand column is types of income that are not considered taxable compensation. I’m not giving you the exhaustive lists, but just an idea.

In the left-hand list, taxable compensation, you had:

  • W-2 income, such as you would receive from being an employee,
  • Self-employment income,
  • Alimony,
  • Etc.

In the right-hand list, not taxable compensation, you had:

  • Rental income,
  • Interest and dividend income,
  • Pension or annuity income,
  • Taxable scholarship and fellowship income not reported on a W-2,
  • Etc.

This was specified in the tax code. So if your fellowship or training grant income was reported on any kind of tax form other than a W-2, such as a 1098-T or 1099-MISC, or not reported at all, it was not considered taxable compensation for the purposes of contributing to an IRA.

That means that if you went an entire calendar year with only non-W-2 fellowship income, you would not have been able to contribute to an IRA in that calendar year.

This was really tough news for a lot of people in our PhD community. The irony was that students and postdocs who won outside fellowships often received a higher income than their employee peers, so they perhaps had more money available to invest, but they were barred from using an IRA to do so.

Now, there were a couple workarounds. Keep in mind that the contribution limit to an IRA is $6,000 or the amount of your taxable compensation, whichever is lower.

First, the calendar year and the academic year do not line up. So if your funding source switched between W-2 and non-W-2 between academic years, you would still have at least a degree of IRA eligibility in that calendar year.

Second, if you were married and your spouse had taxable compensation, you could contribute to a spousal IRA, up to their amount of taxable compensation or the overall $12,000 per year limit for two IRAs, whichever was lower.

Third, if you had a side hustle, that self-employment or W-2 income would give you some eligibility.

As a last resort, if you truly didn’t have access to an IRA in a calendar year, you still had the option to invest for retirement in a regular taxable investment account. If you chose a tax-efficient investing strategy, such as passive index investing, you probably would not have much of an additional tax burden due to the favorable tax rates for long-term capital gains and qualified dividends. However, this tax advantage was not widely recognized.

The effect of this law was that many PhD students and postdocs who had the financial means to invest for retirement were prevented from contributing to IRAs, and they likely didn’t try to invest instead in a taxable account. The law sent the message that PhD trainees were not supposed to be investing for retirement and were not worthy of being extended the same tax break that employees were. This had an overall dampening effect on the financial ambition of PhD trainees, which in my opinion was a very serious problem.

2 The Legislation That Changed the Definition

All that has changed now. In essence, the new legislation moved taxable scholarship and fellowship income not reported on a W-2 from the right-hand column to the left, from being explicitly excluded from the definition of taxable compensation to being explicitly included in the definition for graduate students and postdocs.

The origin of this legislation was the bipartisan Graduate Student Savings Act or GSSA, first introduced in 2016 in the Senate by Senators Elizabeth Warren and Mike Lee and in the House by Congressmen Joe Kennedy and Luke Messer; however, it was not passed at that time. The GSSA was re-introduced in 2017 and 2019 and eventually included in the bipartisan SECURE Act in 2019, none of which passed.

You can learn more about the GSSA in Season 4 Episode 9 of this podcast, in which I interview Abby Dove, a graduate student who as a science policy fellow worked on getting a scientific advocacy group to endorse the GSSA.

Ultimately, in the closing days of the 2019 session, the text of the GSSA was included in an omnibus spending bill along with the rest of the SECURE Act, passed by both chambers of Congress, and signed into law by the president.

I’ll read to you exactly the change that was made in House Resolution 1865, and I’ll link it from the show notes.

“SEC. 106. CERTAIN TAXABLE NON-TUITION FELLOWSHIP AND STIPEND PAYMENTS TREATED AS COMPENSATION FOR IRA PURPOSES.

(a) In General.—Paragraph (1) of section 219(f) of the Internal Revenue Code of 1986 is amended by adding at the end the following: “The term ‘compensation’ shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.”

(b) Effective Date.—The amendment made by this section shall apply to taxable years beginning after December 31, 2019.”

There you have it! The definition of “taxable compensation” for the purposes of contributing to an IRA now includes taxable fellowship income for graduate students and postdocs. However, by my reading, it seems that taxable post-baccalaureate fellowships have not been included in the definition.

That language of “aid the individual in the pursuit of graduate or postdoctoral study” reflects the definition of a fellowship from IRS Publication 970, which reads quote “A fellowship grant is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research” end quote.

3 What to Do Now

This change is really good news for the PhD trainee community overall, but it may or may not materially change anything for you. If you now have access to an IRA in 2020 when you otherwise would not have, what should you do? I imagine that PhD trainees fall into one of three groups.

First, some PhD trainees should not be investing for retirement right now, so having access to an IRA doesn’t really matter. This is the case if you don’t have the available cash flow to invest or have other, higher-priority financial goals, such as paying off high-interest debt or saving up cash.

Second, some PhD trainees are ready and able to invest but don’t have pre-existing savings or investments. Maybe they have recently finished paying off certain types of debt or saving up sufficient cash, and they now have cash flow available for investing. This is the group that can open up an IRA and set up a regular savings rate into it; this is called dollar cost averaging. With a $6,000 per year limit, your regular monthly contribution to the IRA can be up to $500, which would be a great savings rate for a graduate student or postdoc.

Third, some PhD trainees have already been saving or investing outside of an IRA and are eager to contribute a lump sum of money to an IRA. You are permitted to contribute the full $6,000 in one go if that’s your preference. Then, throughout the year, you can direct your ongoing savings rate to a taxable investment account or other financial goals.

One question I’ve already received a few times is whether fellowship recipients will be able to contribute to a 2019 IRA. In general, you are allowed to contribute to your prior year’s IRA up until tax day of the subsequent year, and this is a strategy I recommend to anyone who has not yet maxed out their IRA for the prior year. However, since the text of the bill says the change will go into effect after December 31, 2019, my reading is that the old definition of taxable compensation will apply to 2019 IRAs and the new definition will apply to 2020 IRAs.

If you’re not sure what your unique next steps should be or if what I spoke about today even applies to you, I am available to coach you. I can’t recommend specific funds, but we can work together to determine your next financial goal, increase your savings rate, and figure out which high-level investing strategy is most appropriate for you.

You can set up one-on-one coaching with me by going to PFforPhDs.com/coaching. Another excellent option is to participate in my upcoming program, The Wealthy PhD, through which you will receive course content, individual and group coaching, and community with your peers. You can find more information about The Wealthy PhD at PFforPhDs.com/wealthyPhD.

I would be absolutely delighted to shepherd fellowship recipients who have never before invested through the process.

As for additional resources, I have many, many articles on investing on my website, and I have linked several updated ones from the show notes. You can find the show notes for this episode at PFforPhDs.com/s4be1 for season 4, bonus episode 1.

For international students and postdocs, I would also recommend listening to Season 4 Episode 17 of this podcast, which answers the question of whether it is permissible and advisable for international students, postdocs, and workers to invest while living in the US. Keep in mind that I recorded this episode prior to the definition of taxable compensation changing.

Finally, if you need to take a big step back because you were surprised to hear that your fellowship and potentially scholarship income is taxable, I recommend listening to Season 2 Bonus Episode 1 of this podcast, titled Do I Owe Income Tax on My Fellowship?

Thank you for joining me for this special bonus episode. Please spread the good news about IRA eligibility to your peers also receiving fellowship or training grant income by sharing this episode with them!

Outtro

Listeners, thank you for joining me for this episode.

PFforPhDs.com/podcast is the hub for the Personal Finance for PhDs podcast. There, you can find links to all the episode show notes and a form to volunteer to be interviewed. I’d love for you to check it out and get more involved.

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One, subscribe to the podcast and rate and review it on Apple podcast, Stitcher, or whatever platform you use.

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See you in the next episode, and remember, you don’t have to have a PhD to succeed with personal finance—but it helps.

The music is Stages of Awakening by Podington Bear from the Free Music Archive and is shared under CC by NC.