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Why the Roth IRA Is the Ideal Long-Term Savings Vehicle for a Grad Student

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You’re a graduate student with the means and desire to save for your future. What is the best way to do so? If you have taxable compensation, the Roth IRA is an awesome choice. IRAs confer long-term tax advantages so your money grows at its maximum possible rate. The Roth version of an IRA is very well-suited for people who currently have a lower income than they expect to have in retirement. And if you decide that your goal is not saving for retirement after all, you can still access your money!

Further reading: Even Grad Students Should Have a Roth IRA


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Tax Advantage of the IRA

If you keep your investments in a taxable account, whenever a taxable event occurs (like you sell an investment or receive a dividend) you will have to pay tax. Year after year, those taxes erode the gains in your account. In any given year, this may seem like a nibble, but when you consider that you will stay invested for decades, taxes become quite a big bite.

As a simplified example, compare the account balances of two people who invest $5,000 per year at a 10% rate of return over 40 years. The person whose account is not subject to tax ends with $2,434,259.06. The person who pays a 20% tax on the gains yearly ends with $1,398,905.20, 43% less!

The way to keep from paying tax on the gains in your account is to use a tax-advantaged retirement account. This deal does presume that you will not access your money until retirement (exceptions are below). There are many types of tax-advantaged retirement accounts out there, but they all depend on your workplace offering them to you or you being self-employed. Virtually no universities extend their 403(b) benefits to graduate students. Luckily, there is one tax-advantaged retirement account that is independent of your workplace or self-employment income, which is the IRA (Individual Retirement Arrangement).

The IRA is a wonderful vehicle to invest through. As it is independent, you can open this type of account at just about any brokerage firm and can put just about any type of investment inside of it. The world is your oyster when it comes to investment choice inside an IRA. In 2021, you can contribute up to $6,000 per year to an IRA.

You do need “taxable compensation” to contribute to an IRA. Starting in 2020, non-W-2 fellowship income is considered “compensation” for the purpose of contributing to an IRA. As long as your grad student stipend is taxable (it is for US citizens and residents, but may not be for non-residents covered by a tax treaty), it can be contributed to an IRA.

Further reading: Fellowship Income Is Now Eligible to Be Contributed to an IRA

Pay Tax Now, Not Later with the Roth

Tax-advantaged accounts currently come in two flavors: traditional and Roth. The main difference between the two is when you pay income tax on your money. While your money is inside the IRA, it grows tax-free, as discussed above. But you also get a tax break upon either contribution to or withdrawal from the account.

With a traditional IRA, you take an income tax deduction on the money you contribute to the account and pay ordinary income tax on the distributions you take in retirement. With a Roth IRA, you pay your full income tax on the money you contribute and do not pay income tax on the distributions.

When choosing between the traditional and Roth, the idea is to pay tax when you will be in a lower tax bracket. The typical graduate student has a low income during graduate school but expects a higher income later in life and in retirement. Therefore, the Roth option is the more popular for graduate students.

The Roth promises that you will pay tax on your IRA contribution now at your marginal income tax rate (likely 15% or lower) and never pay tax on that money again, no matter how much your investments grow!

Flexibility for Non-Retirement Goals

I’m an advocate of clearly defining your goals and choosing investments appropriate to your time horizon. For this reason, I think that you should only contribute to an IRA if you intend to use the money in retirement. But the Roth IRA rules allow for some flexibility. If the idea of absolutely not being able to use your investments for anything other than retirement is preventing you from starting to invest, you should know that you can access much of the money in your Roth IRA early should you change your mind about your goal.

Usually, when you pull money out of an IRA early, the distribution is subject to a 10% penalty. However, there are big exception categories for the Roth IRA. You can remove the contributions you made to your Roth IRA at any time without penalty. When it comes to your earnings, your distribution becomes qualified and therefore not penalized if you use it for the purchase of a first home (up to $10,000) or for higher education expenses.

So if you want to invest for the long-term but the idea of absolutely not being able to touch your money until retirement puts you off, rest easy that the Roth IRA is a great option for you. If your financial goals change in the next few years, you do have the ability to use the money in your Roth IRA for something other than retirement.

Between the tax-advantaged status, the option to pay tax now at a low rate and never again, and its flexibility to be used for multiple goals, the Roth IRA is just about a perfect retirement investing vehicle for graduate students! The only thing I would change about it is for the contribution limit to be higher. But grad students with taxable compensation have very good reasons to contribute to a Roth IRA

Why You Should Invest During Grad School

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Graduate school is a financially challenging time even if you are fully funded. Your stipend isn’t intended to do much more than pay your basic living expenses. You are likely young and relatively inexperienced with managing money, especially for long-term goals. You’re short on time to learn about financial best practices, and you may even be suffering from analysis paralysis. Investing may be either the furthest thing from your mind or yet another item languishing on your “To Do” list.

I believe that if you fully understood the benefits of investing right now, you would be chomping at the bit to get started. If you have the means, investing for the long term is one of the best possible uses for your money during graduate school. Of course you should cover your basic living expenses and live a little, but you can simultaneously begin building your lifetime wealth. It’s worth starting to invest during graduate school even if you can only put away a small amount or a small percentage of your income. Your status as a graduate student is even an investing advantage in some ways!


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Below are four reason why you should start investing for the long term during grad school.

The Time Value of Money

In investing, time matters a ton. There are three key components to increasing your wealth: how much money you invest, what you invest in (i.e., the return you get), and for how long you invest. The first and third are the most important, believe it or not, because they are the most under your control.

Compound interest, or the time value of money, is the magic element that makes investing so powerful. Well, it’s not magic, it’s math – exponential growth. Here’s how compound interest works: Assume that your invested money gives a modest return each year. In your first year, your money grows by that return. In your second year, your money grows again, plus you get growth on last year’s growth. In the third year, you get growth, growth on growth, and growth on growth on growth. This continues (on average) for the entire period you are invested. Growth on growth ad infinitum!

One of the most powerful actions you can take for your net worth is to get the compound interest clock ticking for you as early as possible. Say, for example, that you need to invest regularly over 40 years to fund your retirement. Would you rather start that clock right now or wait until you’re done with your training?

You might think that starting to invest during graduate school is a big sacrifice that won’t amount to much because you won’t be able to save nearly as much now as you will on your future Real Job salary. This is a dire misconception!

Let’s take Tom as an example graduate student. Tom receives a $30,000/year stipend and invests 10% of it every month throughout his five years in graduate school. Over those five years, he contributes $15,000. Given an 8% average annual rate of return (very reasonable for a long-term investment), at the end of graduate school Tom’s account balance has grown to $18,353.49. If we leave that sum of money alone to continue to compound at 8% (no additional contributions), the balance grows tremendously. After 40 years, it has become $398,720.79! That’s an extra $400,000 for Tom’s retirement that he wouldn’t have had if he hadn’t started investing during graduate school.

Ingraining Positive Saving Habits

Incorporating regular long-term investing into how you manage your money during graduate school creates a powerful habit. Not only are you experiencing the benefit of compounding interest on the money you invest during graduate school, but you have created a habit of investing that will carry forward throughout your whole life. In fact, by doing so you have changed your identity to that of an investor!

Investing during graduate school is a sacrifice, of course. But to be honest, it’s going to be a sacrifice at whatever point in your life you start to invest. People always think that it’s going to be easier to start saving later, when x, y, and z in their life has changed; this mindset is not unique to graduate students. Yes, in a few years you’ll have a Real Job’s salary, which will make saving easier, but perhaps you’ll also experience other life changes like having a family or want to pursue other financial goals like buying a home, which will add financial constraints.

If you start investing during the objectively difficult period of graduate school, you’ll always be able to say, “I was able to save during graduate school, so of course I can continue to save now.”

Tax Advantages

Another big argument in favor of starting to invest during grad school is the tax advantages. In this case, having a low income actually works in your favor! (And not because of the Saver’s Credit.)

Graduate students with taxable compensation are eligible to contribute to an individual retirement arrangement (IRA). An IRA is a wonderful vehicle for anyone with the goal of saving for retirement. The big upside to using an IRA (or 401(k), 403(b), etc.) is that your money won’t be taxed while it’s growing inside the IRA. If your money were invested outside the IRA, the yearly taxes would essentially erode your rate of return and lower your balances.

When you open an IRA, you have the option to make it a traditional IRA or a Roth IRA. With a traditional IRA, you take a tax deduction on the money you contribute and pay ordinary income tax on the IRA distributions in your retirement. With a Roth IRA, you pay your full tax on the money you contribute and the distributions are tax-free.

For the typical young graduate student in the 15% (or lower) marginal tax bracket who expects a much higher income post-graduation, a Roth IRA is a fantastic choice. You pay your 15% income tax on the money you contribute to your Roth IRA, and that money is never subject to income tax again! It’s a great idea to add to a Roth IRA when you’re in a low tax bracket like while in graduate school. If you do have a higher income after graduation and a higher marginal tax bracket, you’ll either pay a higher tax rate to contribute to a Roth IRA or switch to a traditional IRA. When you consider that some people contribute to Roth IRAs when they are in much higher tax brackets, a 15% tax rate seems like a deal!

Even if you do not have taxable compensation, your low tax bracket is still an advantage for long-term investments. If you are in the 15% tax bracket, you have 0% federal tax on long-term capital gains and qualified dividends. This means that investing outside an IRA is not such a terrible fate because of your low tax bracket as long as you use a tax-efficient investing strategy such as index fund investing.

Further Reading: Fellowship Recipients Can Save for Retirement Outside an IRA; How Fellowship Recipients Can Save for Retirement (video)

Post-Graduation Flexibility

If nothing else, having money increases your options. Exiting graduate school with savings and investments gives you more flexibility when it comes to financially motivated decisions like where to work and how to live. If you already have a nest egg compounding in your corner, you can consider the lower-paying job that fulfills your passion or the high cost-of-living city that you love. You are no longer hamstrung into maximizing your salary and minimizing your lifestyle so that you can compensate for the opportunity cost of your graduate training.

Further reading: What We Did in Graduate School to Enable Our Risky Career Decisions

I hope that considering all the benefits of investing has motivated you to start investing or increase your contributions during grad school! It’s amazing to graduate with not only a degree but also sure financial footing.

How Much of Your Stipend Should You Spend on Rent?

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A version of this article first appeared on GradHacker.

There are a few different versions of the “rule of thumb” regarding how much of your income to spend on housing. No more than 25-30% of your take-home pay seems to be the consensus, with a few outliers. But as a graduate student receiving a stipend, does this guideline apply to you? How should you figure out how much to spend on housing? Clearly, whether your university is in a high cost-of-living or a low cost-of-living area will have an enormous impact on how much you need to spend.

For some graduate students, this rule of thumb is unfortunately useless and discouraging. In certain high cost-of-living areas, rent can be 50% or more of a stipend. But even in pricey markets, it’s worthwhile to take a hard look at yourself and your surroundings to make the best choice you can among your limited options.

But, other graduate students are in an area that offers them a degree of choice in how much of their stipend to spend on rent. They have the opportunity to evaluate the range of reasonable choices and decide what is best for them, given their values and other financial goals.
Whether you are moving to a new city to start grad school or are several years into your program already, you should evaluate your housing costs to make sure you are spending the right amount of money and getting the right amount of value for you. To do so, you have to evaluate both yourself and your environment and, ultimately, balance your budget.

Evaluate Yourself

Since housing is the biggest component of most Americans’ budgets, you should use a mini-financial planning process to help you determine where housing falls on your priorities list. Start by determining your top life values (family, freedom, creativity, health, achievement, etc.). Then, set goals for your finances that help you fulfill those values. Once that high-level picture starts to come into focus, you can figure out where housing falls on your priorities list. What aspects of housing—space, location, safety, privacy, amenities—help you fulfill your values or are otherwise very important to you? What attributes are non-negotiable and what are you willing to let go of in favor of a lower price? This process can bring a lot of clarity because it helps you directly compare differences in the price of housing with your other financial goals.

One of the first and biggest decisions you will make is whether or not to have a roommate/housemate. Some graduate students are so tired of living with other people that they won’t consider it no matter how much cheaper it would be, while others may be excited about how a roommate would benefit their lives as well as bottom lines. If you’re on the fence, price out both options and ask yourself if having $X more per month to put toward other areas of your finances is worth the (reasonable) potential downsides such as noise/distractions, differing standards for common areas, reduced privacy, or personality clash. Living with another grad student in your same year or area of study who understands the demands of your program could be a great option.

Evaluate Your Environment

Your best resource for finding appropriate housing options is other graduate students. I have found that grad students are quite willing to divulge what they pay in rent, and widely polling can give you a great idea of the market. If you haven’t yet moved to your city, start by emailing students you met during your visit weekend, students in your (prospective) lab/group, or students in departmental leadership positions. But you don’t have to keep thinking “inside the box,” either, if it seems that grad students flock to the few most popular options. Where in your city do other young professionals or people with an income similar to yours live?

In addition to asking around, check your university’s website to see 1) if housing is offered to graduate students (and at what price and priority) and 2) if your university makes off-campus housing recommendations or maintains a housing database of its own. Searching on Craigslist is usually a good way to find housing and/or roommates, and you can also check listings on Trulia, PadMapper, apartments.com, etc. Which database is best to use to search for housing will vary somewhat by city.

Be sure to consider various types of housing. In Durham’s housing market, my observation is that the least expensive option is renting (or buying) a single-family home with several other people and the most expensive option is renting a luxury apartment near campus. In some cities, on-campus housing may be the least expensive option, and by talking with your peers you may discover the best practices for getting your foot in the door.

Balance Your Budget

Ultimately, when reconciling your own priorities with the realities of the housing market, your expenses need to be less than your income. If you are simply locked into high housing costs no matter how low a priority it is for you, the rest of your budget is going to be affected. But one additional factor to consider is how housing cost might play against other needs like transportation and utilities costs. Perhaps a higher base housing cost can become more palatable if it means you can live car-free or have low utility bills. For example, are you able to keep your total needs spending to 50% of your net income (recommended in All Your Worth: The Ultimate Lifetime Money Plan*), or at least minimize the whole category?

[* This is an affiliate link. Thank you for supporting PF for PhDs!]

If you live in a city where you have good housing options across a reasonable range of prices, this is the situation where the rule of thumb might come in handy. Calculate what 25-30% of your household take-home pay is and look at what that will get you. If you are tempted to spend more than 30% of your income on housing and don’t have to, ask yourself if it’s really that important and if you are going to be able to meet your other financial goals. Certainly, you can spend less than 25% if you are so inclined!

Revisit the Question

If you are renting, you aren’t locked into the housing decision you made at the start of grad school. In fact, you’re likely to make a better decision about housing after you have gotten to know your city and have seen where other grad students live. Your priorities and income may also change with time. It is valuable to periodically re-run this analysis on yourself and your environment to determine if moving is warranted.

I have personally benefitted from re-evaluating the cost of my housing during graduate school. My husband lived in the same apartment for his first five years of grad school and really loved it. But the city changed during those five years, and the area he was renting in no longer seemed like the only option. When the apartment complex tried to raise our rent 6% year-over-year (the rent increases in the previous 5 years had summed to about 10%), we took it as an opportunity to shop around. We ended up moving to a townhouse with the same square footage closer to our university (reducing our commuting costs) for an 11% decrease in rent. The only downgrade was that our new community didn’t have a clubhouse gym, but that wasn’t much of a sacrifice, as we had access to our university’s gym. I count that move as one of the best financial decisions we made to reduce our spending during grad school.

For your stipend, is housing in your city expensive, reasonable, or inexpensive? Where does housing fall on your priorities list? Have you been able to find a good deal in your city?

Basic and Stretch Financial Goals for Graduate School

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A version of this article originally appeared on GradHacker.

It may seem counter-intuitive, but graduate school affords you an excellent opportunity to grow financially, whether that means growing in your money management skills or growing your net worth. There is no need to wait until after you land a “real job” to put in the effort to improve your financial picture.

Basic Financial Goals

All graduate students, whether they are being supported by stipends, loans, family, savings, or some combination, have the ability to set and reach basic financial goals during graduate school. In fact, graduate students have already overcome one of the biggest hurdles that prevents people from succeeding with personal finance: they are future-focused. Graduate students are making an incredible sacrifice in the short term to invest in their future careers. Often, success in personal finances comes down to the same type of decision-making and commitment: to put the good of ‘future you’ at least on par with what is good for ‘present you.’

Here are a few examples of basic financial goals and why you should work on them during graduate school:

  1. Track 100% of your spending: If you have never paid attention to how you use your money, you will be surprised by what tracking reveals. Tracking alone can actually change how you spend because of your higher level of awareness. You can track your spending manually (pen and paper, Excel, Pocket Expense, Every Dollar) or automatically (Mvelopes, You Need a Budget, Mint, GoodBudget).
  2. Budget: Be the boss of your money. Tell it where it’s going to go and what it’s going to do. Exercising this kind of control over the small amount of money under your purview now will help you control larger amounts later. Furthermore, you can use your budget to help you meet other financial goals.
  3. Discern the difference between needs and wants: No one is living high on the hog while in graduate school, and many students flirt with the poverty line. When your income is low, you are forced to figure out your priorities quickly. The upside to this process is that you can carry that knowledge forward into your post-grad school life and use it to avoid wasteful spending and lifestyle inflation.
  4. Monitor your credit: Everyone should practice the basic financial hygiene of monitoring her credit reports at least once per year. The purpose is to ensure that all your accounts are being properly reported to the credit bureaus and to catch identity theft early on. You might also take an occasional peek at your credit score (for free), but that’s not as vital.
  5. Build an emergency fund: Emergency funds are important even for people who are in debt. An emergency fund stands between something bad happening in your life and something bad happening in your life plus serious financial consequences (e.g., credit card debt). A starter emergency fund size might be just $1,000, and you can build up the size of the fund to meet your unique needs.
  6. Learn about personal finance: We all should take the time to learn a bit more about such an important topic, and there are plenty of easy-to-digest resources in the form of books (e.g., Get a Financial Life: Personal Finance in Your Twenties and Thirties*), websites (e.g., Get Rich Slowly), podcasts (e.g., Stacking Benjamins), etc. Learning more can both motivate you to set other goals and show you how to reach them.

[* This is an affiliate link. Thank you for supporting PF for PhDs!]

Two of the basic financial goals I set during graduate school were tracking and budgeting. When I was single, I budgeted and manually tracked my spending using Excel. After I got married, I switched to using my husband’s preferred automatic tracking and budgeting platform, Mint, which really aided our communication and coordination around our finances. These practices helped us to align our spending with our values and gain peace of mind, which maximized the satisfaction we gained from the use of our money during grad school.

Stretch Financial Goals

Some graduate students may desire to go beyond these basic financial goals to set ‘stretch’ goals for themselves during graduate school. If achieved, stretch goals positively impact your net worth. (It is also likely that some of the basic goals will improve your net worth, but that is not their primary intent.) Whether one will set stretch financial goals during graduate school is a personal decision, but a student who understands the power of compound interest is likely to strive to preserve or increase her net worth as much as is reasonable during graduate school (i.e., don’t sacrifice your degree progress!).

  1. A stretch financial goal for a graduate student taking out loans for his education may simply be to minimize the amount of debt he is taking out. This could be achieved by reducing his living expenses, finding an on-campus job that provides tuition benefits, or working part-time.
  2. A stretch financial goal for a student living on a stipend plus loans or familial support may be to forgo taking out debt by living within what her stipend provides or making up the difference between her stipend and living expenses with additional paid work.
  3. A stretch goal for a grad student receiving a livable stipend may be to more aggressively save/invest or pay down debt.

This type of goal lends itself very well to the SMART description of goal setting: Specific, Measurable, Attainable, Relevant, and Time-bound. Money itself is easily measured, and it is straightforward to set specific and time-bound goals, e.g., save $3,000 into an emergency fund by August 2016. The aspects of SMART goal setting that will take more consideration are making the goals relevant and attainable.

The goals you set must be relevant to what you really want out of life. It will bring you no satisfaction to set and achieve a financial goal that you don’t care about and that doesn’t impact your well being in the short- or long-term. Give yourself some time to consider what you want money to do for you during and after graduate school, and then translate those ideals into SMART financial goals.

To avoid burnout, the financial goals you set must also be attainable. You will just become frustrated if you set a goal that requires you to have an amount of cash flow available that is impossible or unlikely in your current situation, so you should select challenging but achievable goal numbers for your life.

Stretch financial goals boil down to ones that improve your balance sheet (assets minus liabilities). On the ‘increasing assets’ side, you can set a short-, mid-, or long-term savings goal and choose appropriate investment options for your time horizon and risk tolerance. On the ‘decreasing liabilities’ side, you can set a goal to pay off your debt ahead of schedule, perhaps using the debt snowball or avalanche method. To achieve these goals or to reduce your living expenses overall, you may set a variety of other SMART goals, like reducing your spending within a given category through budgeting, tracking, and frugality.

One of the ‘stretch’ financial goals I set during graduate school was to save for retirement consistently. I started out saving 10% of my gross income into my Roth IRA, but over time wanted to do even more. Eventually, my stretch goal became to max out my Roth IRA every 12 months. I did not achieve this goal during graduate school, but I did end with a 17.5% savings rate, which definitely aligned better with my values than not saving at all or sticking with 10%.

Grad students shouldn’t treat this period as an exception from their overall financial lives. Even if you are taking on debt or have a lower income than you had before or expect to have after grad school, you have the ability to set and achieve basic financial goals that will help you develop positive financial habits and even stretch financial goals that will help you grow your wealth.

What is a basic or stretch financial goal you are currently working on or would like to set for yourself during grad school?

Simultaneously Earn Extra Money and Advance Your Career

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In my final year of graduate school, I participated in a leadership program at my university. In the course of this program, all the participants worked on group projects, the subject of which was how to improve graduate student and postdoc career development. My group decided early on that we would focus on how trainees could participate in internships to gain work experience.

A version of this post was originally published on GradHacker.

Instantly, our group uncovered a culture clash: I was coming from an engineering program in which internships were fairly encouraged and some students even consulted or started their own companies. Two other group members were in the biological sciences, where the farthest you were allowed from the bench was Woods Hole, MA. The fourth group member was in a humanities program and insisted that 100% of his classmates got tenure-track teaching positions and therefore would be totally uninterested in any career development aside from teaching (a claim the rest of us found dubious).

Ultimately, we were able to agree on a project that helps students gain relevant experience outside of academia by thinking beyond internships to volunteering, part-time jobs, freelancing, launching new programs, taking courses, etc. The process of collecting testimonials on these career-developing experiences opened my eyes to the many ways grad students can advance their careers, even if their advisors or programs frown upon it.

Since I’m a money-minded person, I was particularly interested in the examples of grad students who earned money from their career-developing experiences. That really seems to be the best of all options—gaining relevant work experience and some extra cash, of course in balance with dissertation work. Internships are the most obvious way to accomplish this, since they often pay more than assistantships, but I found that many grad students had strategically chosen a variety of non-internship experiences that also fit the bill.

Below are a few examples of students who landed or created career-developing work experiences that also paid them. These examples are drawn from our Think Beyond Internships project from last spring (not specifically paid experiences, but many are) and my series on side jobs (not specifically career-developing experiences, but many are).

1) Summer intern

Alice completed a paid summer internship at a medical device company doing work related to her dissertation research, which confirmed for her that she wanted to pursue an industry career after her PhD. In addition, she gained “great contacts and references,” and “it was also really helpful to see the way PhDs were viewed at a big company … and understand the corporate mindset.”

2) Weekend consultant

Kathayoon created her own consulting practice evaluating zoos and aquariums, which was in line with her dissertation work. She found her first client through a mentor, and then more clients approached her; she traveled on weekends to complete the evaluations. Consulting helped her “build a lot of important skills … make connections to people in [her] field who acted as study subjects for [her] dissertation, and … get a job after graduation.”

3) Part-time analyst

Adam worked on a part-time, hourly basis as a research analyst for an investor relations firm, writing reports and updates. Not only was this a paid position that “made [him] realize how underpaid [he] was as a graduate student,” but he took a full-time job at the company after he finished his PhD. He said, “The best part was that I had an opportunity to try out my job before starting full-time. How else do you know if you want to launch a career in a certain field?”

4) Freelance editor

Julie and Amy freelanced for a scientific journal article editing company as contract editors. They edited articles related to their fields of study on a pay-per-assignment basis. Because of this this experience, Julie “read much more widely than [she] ever would have on [her] own and… [thought] more critically about what [she is] reading.” She also noted the networking benefits to working for her company. For Amy, “the contract job was perfect because [she] learned a lot and could do as much or as little as [she] wanted.”

5) Semester-long science policy fellow

I participated in the Christine Mirzayan Science & Technology Policy Fellowship after I finished grad school, but many of the other fellows in my class were current graduate students. We worked at the National Academy of Sciences for 12 weeks, learning about careers in science policy, gaining relevant work experience, and networking like crazy. The fellowship was designed to give graduate degree-holders a taste of science policy; they know that some of the fellows will pursue careers in science policy, but others will take their experience back to academia or into other sectors. My mentor agreed to serve as a reference for me for future positions, and many of the other fellows were able to stay on at the Academies after the fellowship or landed other science policy positions in DC. We received a stipend for participating in the fellowship.

I hope these examples have excited you about the possibility of finding paid work that also advances your desired career path. Before I conclude, I offer three tempering notes:

1) Some graduate programs explicitly disallow outside work in their assistantship or fellowship contracts, so you should check whether being paid will get you in hot water with your funding source or advisor. However, I think the spirit of this exclusion is more important than the letter. The point as far as I can tell is that your program wants you to make progress on your dissertation at a reasonable pace and not get distracted by outside commitments. But are a few hours of paid work a week really any more or less of a distraction than many other activities graduate students engage in (socializing, hobbies, self-care, raising children, etc.)? I think you should use your own judgment in how to balance your main goal of completing grad school with your side job and other pursuits and discern when you might need to refocus more or solely on your graduate work. In my own observation, some programs that state their students are not allowed outside employment will actually encourage work that is related to the student’s thesis topic.

2) All of the examples above and most in Think Beyond Internships involve students in STEM disciplines. I am hoping that is selection bias because the vast majority of my group’s contacts were STEM grad students and that students in other disciplines are also able to find paid, career-advancing work. I would love to hear from some non-STEM graduate students who have engaged in this type of work in the comments below.

3) Even if you aren’t able to find a job that combines both purposes of advancing your career and paying you, you can still achieve the goal that is more important to you (or both, through separate experiences). You can volunteer your time in such a way that advances your career (there are plenty of examples on Think Beyond Internships), or you can earn some extra money from unrelated work.

I wish you all the best in both setting yourself up for your post-grad school career and generating some extra cash flow!

Did you have paid outside work during graduate school, and if so what did you do? How strict is your department in disallowing students from working? How have you advanced your career during graduate school, aside from your dissertation work?

Fellowship Recipients Can Save for Retirement Outside an IRA

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Congratulations on your fellowship! Winning a fellowship that pays your stipend during graduate school is a great honor and achievement. A fellowship stipend may even be larger than the base stipend provided by the department, giving you additional discretionary income. While you might have an enhanced ability to save for retirement in terms of your cash flow in comparison with your peers, unfortunately you may be excluded from using a tax-advantaged retirement account like an Individual Retirement Arrangement (IRA).

 

The advantage that an IRA offers is tax-free growth on your investments over the several decades until you are of retirement age. This allows compound interest to have its maximum effect of growing your investment balances exponentially, unburdened by the drag of paying tax on the growth and dividends. However, only “taxable compensation” can be contributed to an IRA. As fellowships are not reported on W-2s, they are not considered taxable compensation for this purpose. If your only income in a calendar year is fellowship income, contributing to an IRA is not an option during that year.

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Save for Retirement Outside an IRA

While IRAs confer great benefits, they are not the only way to save for retirement. Instead of opening an IRA at a brokerage firm, you can open a normal taxable investment account. If you like, you can buy the same funds that you would have put inside your IRA. The important component is that you have designated that your investments are for retirement, not whether they have a tax-advantaged status tied to retirement. Your investments will be subject to the drag of taxes while in the investment account, but the burden can be made fairly light.

1) You can choose tax-efficient investments. Plenty of people have long-term investments in taxable investment accounts, so minimizing taxes is somewhat of a solved problem. Taxes on investments are not like income taxes when you have a job; they don’t occur every year like clockwork. Taxes only come into play in an investment account when there is a taxable event like selling an asset or receiving a dividend. Reducing the frequency of your taxable events reduces the frequency at which you have to pay tax. There are also two tax rates, and which one you fall into partially depends on how long you have held the investment (a longer holding period gives the lower rate). One of the best ways to minimize your tax burden is to employ a buy-and-hold strategy. The best investment strategy for graduate students (passive investing) is also a tax-efficient strategy, so you don’t have to sacrifice your returns or more of your time to minimize the tax burden in your taxable account.

2) Your low income tax bracket is currently an advantage when it comes to taxes on investments. The two investment tax rates that apply to capital gains are long-term capital gains (for investments held more than one year) and short-term capital gains. The two investment tax rates that apply to dividends are qualified dividends and non-qualified dividends. Short-term capital gains and non-qualified dividends are taxed at ordinary income levels, i.e., your marginal tax bracket. Long-term capital gains and qualified dividends are taxed at a lower rate. If you fall into the 15% marginal tax bracket or lower, as the majority of graduate students do, your federal long-term capital gains and qualified dividends tax rate is 0%. You may still have to pay state tax on your long-term capital gains and qualified dividends, but your federal tax rate is as low as it can get.

If you employ a buy-and-hold strategy, you can minimize your tax burden on your investments to the point that it is only slightly worse than it would have been inside an IRA (depending on your state tax).

How to Save for Retirement Outside of an IRA

The process for saving for retirement in a taxable brokerage account is very similar. You choose a brokerage firm, open an account (in this case, a taxable account, which is the default, instead of an IRA), and buy investments with a lump sum or ongoing contribution. If you want to make things easy on yourself, use the same brokerage firm and investments for your taxable account that you would have (or do) for your IRA. One of the advantages of saving for retirement outside of an IRA is that you are not subject to the $5,500 yearly contribution limit.

How to Transfer Your Investments into a Tax-Advantaged Vehicle

In a future year, you may have the opportunity or desire to shift the assets in your taxable brokerage firm into a tax-advantaged retirement account like an IRA, 401(k), or 403(b). While keeping your investments in a taxable brokerage account is not a bad short-term solution, over the long term it is more advantageous to keep them inside a tax-advantaged vehicle if possible, especially as you move up in tax brackets and start paying tax on your long-term capital gains and qualified dividends.

In each year that you are eligible to contribute to a tax-advantaged retirement account, determine how much money you would like to contribute from your income. Most people save a set amount or percentage from each paycheck to dollar-cost-average their investment purchases. If you have any contribution room left above this goal amount, sell that amount of your assets in your taxable account and increase your contribution to your tax-advantaged retirement account commensurately.

For example, perhaps later in graduate school you receive W-2 pay and plan to contribute 10% of your income to an IRA, which amounts to $2,500. In that year, you will have $3,000 of additional contribution room for a total of $5,500. At the beginning of the year, you can sell $3,000 of assets inside your taxable account and buy an additional $3,000 of assets inside your IRA. Then, set up an automatic withdrawal to contribute $2,500 over the course of the year.

As another example, perhaps you do not have access to a tax-advantaged retirement account until you start your first post-PhD job. If your salary is $80,000 and you plan to contribute 10% to your 401(k), you have $10,000 of contribution room remaining for your first year (for an $18,000 total contribution limit). You can maximize your contribution rate to your 401(k) and sell $10,000 of assets inside your taxable investment account to supplement your salary during your first year.

Having no taxable compensation in the course of a calendar year does not prevent you from saving for retirement. You can still save and invest in a taxable brokerage account. You will forgo the tax-advantaged status of an IRA, but that is not a big sacrifice when you are in a low tax bracket. Once you have excess contribution room in a tax-advantaged retirement account, you can ‘transfer’ some of your taxable assets into it. Don’t let the type of pay you receive dissuade you from working toward your long-term financial goals!

Further viewing: Webinar: Retirement Investing in a Taxable Investment Account

Are you saving for retirement outside of a tax-advantaged retirement account?