Investing

Combatting Climate Change with Your Finances, Individually and Collectively

March 30, 2020 by Lourdes Bobbio

In this episode, Emily interviews Jewel Tomasula, a graduate student at Georgetown University in biology, specifically ecology and evolutionary biology. Jewel participates in climate change collective action through the Sunrise Movement, through 500 Women Scientists, and at her university. Emily and Jewel discuss how people can combat climate change as individuals and collectively through the lens of personal finance, covering frugal and environmental strategies, socially responsible investing, and leveraging our affiliations with universities. You do not need to be a homeowner or in command of massive capital to explore the advice in this episode.

Links Mentioned in This Episode

Teaser

00:00 Jewel: I think people are maybe a little quick to discount the power that you have as an individual in these collective action movements and just being a body that’s part of this protest really makes an impression on the people who are making the decisions. People we’ve elected can’t ignore you when you were physically sitting in their office or physically outside the building and you’re part of a mass group of people.

Introduction

00:28 Emily: Welcome to the personal finance for PhDs podcast, a higher education in personal finance. I’m your host, Dr. Emily Roberts. This is season five episode thirteen, and today my guest is Jewel Tomasula, a graduate student at Georgetown University in biology, specifically ecology and evolutionary biology. Jewel participates in climate change collective action through the Sunrise Movement, through 500 Women Scientists, and at her university. We discuss how people can combat climate change as individuals and collectively, through the lens of personal finance, covering frugal and environmental strategies, socially responsible investing, and leveraging our affiliations with universities. Listen on for actionable strategies that do not require you to be a homeowner or in command of significant capital. Without further ado, here’s my interview with Jewel Tomasula.

Will You Please Introduce Yourself Further?

01:24 Emily: I am so happy that Jewel Tomasula is joining me on the podcast today. This is a really special one for me because Jewel was the person who worked with me on editing the podcast and creating the show notes in the first three seasons, so really happy to have her back on now as a guest even though she’s moved on from the editor role. And today we are actually talking about kind of one of Jewel’s areas of special interest, which is climate change and climate change collective action. And we will get into how this intersects with personal finance momentarily. But before we do, Jewel, would you please introduce yourself to the audience?

01:50 Jewel: Hi. Thanks Emily. So I am a PhD student at Georgetown University. I’m working on a biology PhD and more specifically my discipline is ecology and evolutionary biology. The ecosystem that I focus on is the salt marshes. And they’re an ecosystem that is really affected by human activities, as well as really important for us adapting to climate change in dealing with sea level rise and salt marshes are important for carbon storage. I look at the resilience of this ecosystem and so I have a very ecology perspective, but I also think about climate change a lot because of the setting of my research.

02:47 Emily: Yeah, that’s perfect. So very strong professional connection as well. What is it that you’re doing outside of your professional capacity in terms of climate change collective action?

02:57 Jewel: I would call myself an active participant in the Sunrise Movement, and also a mobilizer of the 500 Women Scientists network. I wouldn’t say that I’m like a big leader in any sorts, but I’m someone who closely follows along and participates when I can. With the sunrise movement, I participated in a December 2018 action, where we visited out members of Congress and talk to them about supporting a Green New Deal resolution, which hadn’t been formally introduced yet, but it was an initial talking about ramping up climate action and taking on more stringent goals than just the Paris agreement and saying we want a stronger plan for climate action. And then it was a sit in of Nancy Pelosi and Steny Hoyer and McGovern — representatives of the top Democrat offices. That was a really powerful experience, just to be one of hundreds of people that joined together and are taking this action and really showing our representatives that people care about this. And they can’t avoid it when we’re all sitting in the hallway or sitting outside their offices.

04:18 Jewel: I’ve tried to keep up with Sunrise Movement and participate when I can, not that often because I’m doing my PhD work as well. Then with 500 Women Scientists, with other leaders in that organization, we wrote an op ed for Scientific American called “Scientists Must Speak Up for the Green New Deal” and we outlined why scientists should be interested in this resolution and should take it seriously and advocate for it. And then that’s the group that when I go to, and just participating in in strikes or protests, that I usually kind of group up the DC pod of 500 Women Scientists to go together to these actions and support the leaders. And I try to amplify in my offline and online networks what the leaders of the youth climate strikes…their message, and the Sunrise Movement message as well.

05:24 Emily: Yeah, I think you have this interesting crossover identity that you are, identity-wise, compatible with these various friend groups. And it’s nice that you can be an intersection point between them and be, as you were just saying, amplifying messages from one to the other. And back and forth. So that’s great. Thank you for detailing that.

Climate Change and Personal Finance

05:50 Emily: I think that now we’ll get to the point where I want to say a couple of words about why we’re even talking about climate change on a personal finance podcast. Because maybe, you know, you say, well, Emily, this isn’t a good fit. This is about money, why are you talking about this? Or like, Emily, this is too political, why are you covering this topic? You don’t usually cover politics. And that’s not at all my intention, but the reason that I think about climate change in the way that it intersects with my business is because within personal finance and what I do a lot is thinking about the long-term — in my own life and the lives of my clients. When I talk about like investing and the power of common interest, I’m throwing out 50 years as a timeline that we should be looking over to think about our money. And over 50 years, over many decades — as you said, we’re already seeing effects of climate change and certainly over to 2030 and beyond that point, this is something that I think should be factored into our financial plans. As well as whatever motivation you might have to care about this as a human being specifically, it intersects our finances in this longterm planning aspect and also short-term planning.

06:56 Emily: There is this wonderful sort of synergy between frugality and conservation, or environmentalism and minimalism. A lot of the strategies that you might use to reduce your carbon footprint or be more environmentally focused in general are also ones that dovetail really, really well with being frugal in general or being a minimalist in general and not consuming so much. And so I just think whether you’re focusing first on reducing your carbon footprint or focusing first on frugality, you’re going to end up probably doing a lot of things that will benefit both facets, just naturally by the choices that you make. Because, as we’ll go through in a few minutes, there are a lot of things you can do that are good for your wallet and good for the planet. That’s kind of why I wanted to bring this up because there’s just this wonderful overlap. Not only should you be thinking about your own finances and what’s best for you in the long term. Maybe you can also direct your finances and your life choices in a way that’s compatible with being more sustainable long-term, as well. Jewel, can you just start, just make a couple of comments here — what can people do as individuals to reduce their carbon footprint?

08:13 Jewel: I think you outlined that so well about how we have to think about our personal finances in the long-term and that’s good for us, that’s a healthy thing, but if we’re going to be doing that, we also need to be thinking about the state of our environment and how sustainable our economy is as a whole and how that might be changing over the long term. I would hope that our economy is going to look really different in 50 years, that’s what my big hope is. And so this question of the individual carbon footprint and your responsibility there, it really centers on the power you have as a consumer. That’s often what you see in articles. If you can just Google how to go green and you can find lots of options and lots of suggestions, but I feel like they hardly ever take into account what power you actually have as a consumer and your dollar. If you’re someone with a constrained income and you only have a few hundred dollars of discretionary spending every month, if even that, it looks really different than somebody who has a lot of discretionary income, and the power you have with that.

09:33 Emily: Can I just jump in to ask — something I see for example in these how to go green suggestions is make your home more energy efficient. And so I’m thinking, okay, well I’m a renter, I have absolutely no influence over this. When I become a homeowner, I would love to think about that, but it’s not something for me in the here and now. Is that the kind of thing that you’re talking about that people just have differing degrees of influence over their own lives in terms of especially how much discretionary income they really have?

09:58 Jewel: Yeah, exactly. I live in the state of Virginia and there’s essentially a monopoly with Dominion Energy and you don’t have very much choice over where your power comes from. You see a lot of these lists and it’s like install solar panels or make your home energy efficient. And I’m like, I live in an apartment. But it is really empowering to think about, even if you have a constraint income, where you do have power in your budget and your spending and trying to direct that as much as you can towards the way we want the world to look like — a more ethical world with healthier and safer communities. I think part of that is if you are living in an apartment, there’s only so much you can do, but maybe you can live closer to work and you can take out that transportation part of the carbon footprint because you’re walking or you’re taking public transit.

The Impact of Individual’s Choices

10:58 Jewel: With individuals, the big things I think for anyone are your diet and transportation. If there’s ways that you can alter those to have a smaller impact, a smaller footprint, then those are two big things. Meal planning is one that I’ve been engaging with more recently, especially since starting grad school. My partner and I found that that’s also part of frugality and really making a difference in our personal finance wellness. Meal planning makes a difference and also really reduces our food waste. It made a big difference in how much for wasting, not just in food but also in the plastic that comes with food. If you’re not having take out all the time or just getting pre-prepared meals, there’s like a lot of packaging waste that’s produced there.

11:52 Jewel: I guess something that I care about with having that zero waste is that I have really minimized how much I use. That’s kind of in that minimalism that you talked about. Kind of that buy nothing new or going to thrift shops or just holding onto things and repairing them if they break. There’s still clothing alteration shops and shoe repair shops out there and so that’s something that I utilize. Those things aren’t always the most frugal, necessarily. Sometimes it is cheaper to just buy a new pair of shoes, but if I have a pair of shoes that I can get fixed, then that’s more in the mindset. Just because it is just as cheap to get a new pair, they are still a good pair of shoes. Those kinds of things I’ve really built into my budget and I think a lot of PhD’s could think in those terms as well and just rejecting our disposable consumer system that we have. Those are some of like the individual actions I think people could look towards.

13:02 Emily: Let me jump in there because I have a couple of comments about what you just said, which I thought was great. In terms of like the food that you eat, you’re talking about reducing waste, which is awesome. I think I read, years and years ago, I think there’s a book called American Wasteland*, which is about food waste. And I think it said that 50% of food is wasted, like that we grow in America doesn’t get into people’s stomachs. Most of that does not happen in your refrigerator, it happens prior to that point. Again, not something you necessarily have influence on, although I guess we can choose where we source our food from. So maybe getting it more from like local farmers or something rather than conventionally grown agriculture.

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

Emily: And also, I guess I’ve been seeing these advertisements for ugly produce and like similar sorts of services like that where it’s food that wouldn’t make it to the grocery store, you can still buy that and eat it because it’s perfectly good. It just doesn’t look pretty enough to be in the grocery store. There’s different sourcing things you can do around that as well, and you were just saying about packaging. That also reduces packaging, all that kind of stuff. You didn’t mentioned what you eat, but I know that one of the major things that you can do is reduce your consumption of meat and dairy, particularly beef. I think beef is one of those big offenders in terms of greenhouse gas emissions. Food selection can also go into that. And it’s really difficult to change your diet, I know that. There’s all kinds of things that influence why you eat what you eat, but to the degree that you’re able to, think about addressing that in terms of less beef, lamb consumption, and dairy.

14:35 Jewel: It’s a really personal thing, that’s something that I’ve experienced. I would say I’ve spent the last 10 years of my life trying to be vegetarian. And it’s a really personal and often a cultural thing too. Food is how you connect with your family often. I get really excited with plant based diets. I have a special spot in my heart for plants and so I think it’s so cool what we can do with plants. I have like a personal excitement about plant based diets and then from the frugal side, meat is often more expensive, especially beef. When we do have beef every now and then, it’s always what’s on sale. If we’re getting it on sale, it’s not really part of the driving demand for beef, in a way.

15:30 Emily: I see what you’re saying.

15:31 Jewel: Right. That’s thinking about what’s the power of your dollar here and having beef is part of it. I have looked into what they say the average American consumption of beef is and it’s a little absurd. It’s not healthy for us as a culture to be eating that much beef, for our own bodies, as well as for our environment. That’s very justified and that’s one of the first things to cede. But if you’re someone really constrained in your income then you’re probably not eating very much meat anyway and I know there are calls for meatless Mondays and stuff. When we do meal planning — and this is me and my partner — my partner is environmentally minded, he still has the attachment to meat and that cultural element that we’re kind of working through.

Jewel: I’ll just be honest there, I’m the one that pushes more for plant-based foods and he’s still like, “Oh, but the meat, it tastes good. And it’s part of how I know how to cook.” That’s just the expectation that your plate has like a meat and then a veggie and a potato. It’s like a very ingrained American conception. But we’ve been looking at our weekly meal plans and it’s only meat for one meal a day typically and often the meat is a small part of the meal. That is something that has changed as we’ve started being more intentional with our meal planning. If you just think meatless Mondays, that’s three meals out of your week that don’t have mea. I would say for everyone, if you can have two meals a day without meat, that’s kind of a big win right there and you’re probably a lot less than the average American. We definitely do need to change this expectation that every meal should have meat in it.

17:39 Emily: Yeah. And I don’t actually think that’s a historically accurate view of the American diet. But anyway, you’re right in that it is sort of in the cultural zeitgeist. A larger point that I wanted to make about what you were just saying is that, as you were just saying earlier, as a consumer and especially if we’re talking to graduate students and postdocs and people who have a smaller degree of control over their finances and their lives — make the changes that you can and that you’re willing to and do what you can. It’s okay if for the time being you cannot change your diet because of whatever else is going on in your life, or you cannot change where you live to start taking public transit. Maybe you can choose one of these areas to make a big shift in and worry about the other ones later. It’s good like to make even a small change, like you were just saying with meatless Mondays or having two meals a day that are meaningless or whatever. It’s not that you have to become completely vegan or completely vegetarian to make an adjustment from where you are today. It’s just about making some degree of progress in that area. Were there any other individual actions that you wanted to discuss?

Being Mindful with Where You Keep Your Money

18:47 Jewel: Yeah, I have one more that I’ve been exploring recently, but I do want to mention two articles that I’ve found can really be like light bulb awakening for the nuance of this issue. One of them is titled “What We Should Really Do for Climate” by Samuel Miller McDonald and that’s published in The Trouble. The other is “I Work in the Environmental Movement. I Don’t Care If You Rrecycle” by Mary Annaise Hegler.

19:16 Emily: I think actually read that one.

19:17 Jewel: Yeah. And honestly, anything by Mary Hegler is on point. That one’s in Vox. Those are two I think that are really helping to increase awareness and making you understand how constrained this can be and how to feel that individual responsibility but also to channel it and grapple it with it better and understand how income plays in and how we kind of just need the whole system to change. How trapped you can feel, but also what personal empowerment you can find in it. Along those lines, something I’ve been looking at just this summer that kind of just slipped by me before was where my money is actually kept in my bank — who I’m letting have my money while I’m waiting to use it. And also looking into investing and trying not to be a typical like 20-something grad student who just puts off investing.

Jewel: I have been using Wells Fargo just because that’s the bank that my parents set up for me and I never really thought about it. Even when I was learning about how Wells Fargo is funding oil pipelines and doing other shady stuff, I just didn’t think about it and didn’t think about taking my money out of there. That’s something I’ve like just done and I’m transitioning to using a bank called Aspiration. They are an online bank that tries to make themselves an accessible option that’s not using any of the money for fossil fuels or gun manufacturing either. Those are two of their big things and building that social awareness into their whole model. It’s nice to have a bank that’s like thinking about this ethically. They also have sustainable investing options. I have $2,000 in there now, but I put in $1,500 and so over two years — I think it’s a little over $1,500 that I put in, so it’s grown like a few hundred dollars over two years. And you actually get to set your own fee for that. They have what’s called a pay what’s fair fee. I had it set pretty low and so over two years I’ve only paid just under $10 in the fees and you could set it to zero actually, if that’s something you really need to do, just to start trying investing.

21:52 Emily: That’s interesting. I hadn’t heard about that model before. And even Wells Fargo’s actions that you just mentioned — I know that they’re sort of blacklisted because of their like consumer protection fails, but I didn’t think before about the way that they’re using just the cash you have with them at any point. I’ll have to take a look at my bank and see how they’re ranking on this metric.

Commercial

22:21 Emily:

Emily here for a brief interlude. Tax season is upon us and while no one loves this time of year, it’s particularly difficult for post-bac fellows, funded grad students, and postdoc fellows. Even professional tax preparers are often thrown for a loop by our unique tax situation. And don’t get me started on tax software. I provide tons of support at this time of year for PhD trainees preparing their tax returns. From free articles and videos, to paid at-your-own-pace workshops, to live seminars and webinars for universities and research institutes. The best place to go to check out all of this material is pfforphds.com/tax that’s P F F O R P H D dot com slash T A X. Don’t struggle through tax season on your own. Visit my website for the exact information you need in the most efficient form available. Now back to the interview.

Socially Responsible Investing

23:24 Emily: Okay, great. So you thought about where your cash is. I know we also wanted to talk a bit about investing, about what’s called socially responsible investing or SRI. This is something that you’re learning about, that I’m learning about right now, so can you start making a couple of comments about that?

23:41 Jewel: My understanding is that there’s a spectrum. Maybe it’s with typical investing group like Fidelity or Vanguard and they just have options that are more socially minded and you can pick those options as well, but it’s still focused on growing your money. And then —

23:59 Emily: Oh, we should say more generally that socially responsible investing is not just about these environmental causes. It could be about like social justice or working conditions or the sort of sin areas, like tobacco and firearms and those kinds of areas. Depending on your exact social preferences, you can make different choices within these groups. But continue, I just wanted to say that SRIs they cover more categories than we’re talking about today. But yeah, go on.

24:31 Jewel: Yeah, kind of this overall ethical minded. Like “Is what I’m investing in doing harm to other people that I’m not necessarily seeing every day? Is there harm or sketchy things being done out in the world with where I’m investing my money?” And that empowerment say, “no, l want my money to be supporting the things that do good in the world and not the things that are doing harm.” And that’s bigger or more encompassing than just environment or carbon emissions. It’s about how the people are treated as well. There’s someone more typical — I guess I don’t know if that’s more typical options, like through Fidelity or Vanguard. They’re big investing options. But then there’s kind of the filter out options since that’s what I have, where it’s still performing pretty well.

Jewel: Through Aspiration, they have these pretty accessible investing options. The deposit you have to make is pretty low, they have where you can set your own fee. I think for someone starting out in investing it’s something accessible, and it’s also passive, like you’re not having to pick out each stock that you want to invest in. It’s a diversified portfolio already, but they do have, I think I was looking at it, Amazon and Facebook are part of their portfolio. Some people might think that those companies are a little sketchy, but then what they do have filtered out are anything with fossil fuels and gun manufacturing and some of these other big sin stocks, as you had mentioned before. And then with socially responsible investing, there is the option to pick out the specifics stocks, but then it’s not passive anymore, and that’s something that I don’t have any experience with and it’s a little like out of my realm at this stage in my life that I would look into.

26:38 Emily: Yeah. Long time listeners definitely know that I teach the strategy of passive investing versus active investing. And so when we’re talking about getting into the socially responsible realm, it is a bit more active, because you’ve decided, you the consumer, and also the person running the fund or whatever, have to look into, okay, it’s not just a strict definition on what are the biggest companies in the US, it’s more like, okay, we have some criteria that we’re evaluating these companies on and some are not going to make the cut. So it’s a little bit more active in that sense, but it can still be a fairly passive approach if you go with a managed fund, because their criteria can be rather fixed.

Emily: And again, they’re not trying to market time and they’re not like picking and choosing necessarily individual companies that are in or out based on whims. It’s all based on sort of an investing plan that’s been laid out in advance. So it can still be a fairly passive strategy, in terms of the important aspects of passive investing, like being well-diversified and not trying to market time and so forth. It’s a little bit more active than like classic passive investing strategies, but still fairly passive overall, or at least it can be. And really I think that it’s so difficult as an individual to do all the research that is necessary to pick individual stocks when you’re trying to evaluate them on these metrics that we’re talking about, that SRIs care about. So I do think it’s a really good idea to go in with a larger fund where there’s a professional, a set of professionals doing that kind of research for you. And as long as you are selective about which fund you go into and make sure that it matches up with your values, then you should be good to go and it’ll be fairly passive on your end.

28:18 Jewel: Yeah, and I’ve been trying to think in terms of like, I really appreciate that Aspiration just has a whole values model behind what they’re doing, as opposed to just being a bank that’s all about the money, no matter who or where is getting hurt, or just what’s good for business.I feel like it’s part of that system change. Let’s have institutions that are actually accountable, and that care about the well-being of communities instead of institutions that are about the bottom line with profit.

28:57 Emily: Before we started recording this episode, I sent you another podcast episode that I had listened to from “How to Money,” which is another great personal finance podcast that I’d definitely recommend. Episode 97, “Socially Responsible Investing” is where they went over this model that I was really learning about for the first time, that there are gradations within social responsible investing. And I think you’ve already covered two of them — what’s called ESG, environmental, social and governance, and then also SRI, socially responsible investing. Those are more about…They’re pretty similar to like your classic like mutual fund where it is largely driven by what’s going to be best in terms of like the profit and bottom line for the investor, with differing degrees of sensitivity towards these social issues that you might care about. And then the final category was impact investing where the goal of impact investing is not necessarily get a great return, although maybe that will happen, but the goal is really to influence the world through with the companies that you invest in. The profit thing is secondary to the mission. Do you do any impact investing at this point?

30:07 Jewel: No. It’s a little out of my realm, as someone who’s at the grad student stage, where I’m just trying to actually invest instead of not investing in. I could bring up here that if you go into the real job that offers the 401k, that’s a great plan and you need to do it, but I am trying to take this time in my life where I don’t have that option, where I don’t have employer match, I don’t have the 401k option and it opens me up to try other investing options. I’m trying to look at it that way, but still with that passive investing, where I can just pick a managed fund and make contributions to it. That impact investing is interesting and I don’t know if I would manage to get there in the future, because you have to really pay attention and do research.

31:06 Emily: Well I think there could still be impact investing funds that you go into. It’s just that they’re going to be composed differently than like the SRI or the ESG types of funds. But I totally agree with you, I think that’s an amazing point that when you have an employer and you’re being provided a 401k or 403b, especially if there’s a match involved, you really do need to use that in terms of your own personal finances. That is the best place for your retirement money to be. But when you have an IRA, either because you don’t currently have access to a 401k, or you haven’t in the past, but any IRA money that you have is completely self-directed. So if you want to invest inside SRIs with your IRA money and do whatever is offered to you through your 401k, that’s a really good balance that you can strike as an individual. And as graduate students, postdocs, we start out probably only having access to an IRA. So the core and the part of your investments that are growing the most over time because you started them the earliest, those are the ones where you can have like the most discretion over where they go. And every time you leave a job, you close out your 401k or 403b, you can roll that money into your IRA and still have that total discretion over how it’s invested. I really love that you made that point.

Collective Action

32:15 Emily: We’ve kind of moved from talking about individual actions and diet and transportation and so forth to now we’re talking about investing, which is something you can do as an individual, but you’re really banding together with other individuals when you go into these funds and you choose SRIs over conventional investments. What are some other things that we can do as individuals but that is joining together with other people for this collective action around climate change?

32:40 Jewel: With collective action, I think the understanding there is that there are some decisions made at the collective level with the idea that they’re accountable to you as an individual. We have voted people in that should be accountable to us as voters or there are people working on behalf of the community that should be accountable to the community members. Whether it’s elected officials or a board of trustees at university or at another institution that you are associated with, those people are making the decisions on behalf of everyone else, but they should be accountable to you and you have power in holding them accountable. That’s where you as an individual have the chance to use your voice and to pay attention.

Jewel: Maybe starting with, since we were talking about investing, there’s also the question with universities and where they have their investments and their endowments. If you’re a PhD, you have an association within a university, whether you’re currently there or you’re an alumni and you have power in influencing how the university is using their money. Especially I think when you’re an alumni, when you can say, I’m not going to donate to you. Or you can contact the university, or be part of a movement. I think people are maybe a little quick to discount the power that you have as an individual in these collective action movements. Just being a body that’s part of this protest really makes an impression on the people who are making the decisions. The people we’ve elected like can’t ignore you when you are physically sitting in their office or physically outside the building and you’re part of like a mass group of people. Paying attention to those and joining anyone you can and just even voicing support and talking about it amongst your coworkers and your family is an important thing. If you have the right to vote, where you are able to use your vote, in the US, paying attention to what kind of plans the candidates have and how firm they are in their belief and voting for those candidates and then not stopping at voting. Actually realizing that you have power as a constituent to go and meet with them and join as a group to go meet with them.

Jewel: I mentioned being part of the Sunrise Movement action in December. That started with us going to our representatives office. I went with a group of people who are Northern Virginians to representative Tom Steyer’s office and we talked with the staff there. Then about a month later we got an email that our representative had changed his attitude towards the green new deal because of what we had come and said to him. You can all see more immediate change and impact just by like stepping up a little and using your voice and being part of movements. But you could also look in your communities and see what kind of like actions are happening there and any time that you can like hold systems accountable or change systems and think about how can your community be more resilient. I think it’s part of that power that is a little under utilized by people in their 20s. It’s definitely growing. And that’s really exciting to me but I think we could use more people. We could always use more people at least paying attention.

36:34 Emily: I like what you brought up there and it goes back to what we said near the beginning of the episode of like you as an individual can be part of groups at different levels. You’re a voter and you have representatives at both the national and also the state and the local levels and you vote for the people that you want to be in office. But then also once they’re in office, you still have influence with them, to some degree, over the decisions that they’re making once in office. They’re still supposed to be representing you. And then not only are you a voter, but you’re also a member of an academic community with your university, maybe multiple different universities. And then you also are a person who lives in your community and like you, you’re using your identity in terms of what age you are, to be affiliated with one movement. And also like you’re a scientist, you’re affiliated with another movement. I think we can all think about the various facets of our identity, and where we live and so forth, and the different groups that intersects with, and to see, as you were just saying, sort of see what’s going on in our own communities at these various levels and start participating as you feel comfortable, or as you see there’s something to participate in to make your voice heard. I really appreciate that. It’s not something I’ve been involved with personally to this point, but I’m definitely now going to be looking for more of those opportunities.

37:50 Jewel: I think just following your representative on social media or signing up for their email is really enlightening and just like a way to see what are they actually saying about these issues or what kind of bills are they introducing? That’s a really simple way that raises your awareness by a lot and shows you the opportunities to go to a town hall or to call them up. That’s one really simple thing.

38:18 Emily: The larger point around a lot of the discussion we’ve had today is you can evaluate where you are now and what you’ve been doing and you don’t have to keep doing the same thing. You don’t have to give into inertia of “well, I’ve always eaten this way” or “I’ve always lived in this place” or “I’ve always kept my money here.” Now that you are aware, if you weren’t already, that these various different areas impact how sustainable your lifestyle is or where you’re putting your money and what it’s doing in the world, now that you have a little bit heightened awareness about that, you can reconsider and make changes where you’re able to.

38:52 Emily: Jewel, thank you so much for coming on the podcast today. This is a real treat for me.

38:57 Jewel: Yeah. Thank you Emily.

Outtro

38:59 Emily: Listeners, thank you for joining me for this episode. PFforPphDs.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, here are four ways you can help it grow. One, subscribe to the podcast and rate and review it on Apple podcast, Stitcher, or whatever platform you use. Two, share an episode you found particularly valuable on social media or with your PhD peers. Three, recommend me as a speaker to your university or association. My seminars covered the personal finance topics PhDs are most interested in, like investing, debt repayment, and taxes. Four, subscribe to my mailing list at PFforPhDs.com/subscribe. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs. 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. Podcast editing and show notes creation by Lourdes Bobbio.

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

December 30, 2019 by Emily

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

IRS Publication 590A (p. 6, old definition of taxable compensation)
The Graduate Student Savings Act Fixes a Major Flaw in Tax-Advantaged Retirement Accounts
House Resolution 1865
IRS Publication 970 (p. 5, definition of fellowship)
Everything You Need to Know about Roth IRAs in Graduate School
One-on-One Financial Coaching
The Wealthy PhD

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.

If you’ve been enjoying the podcast, here are four ways you can help it grow:

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

Two, share an episode you found particularly valuable on social media or with your PhD peers.

Three, recommend me as a speaker to your university or association. My seminars covered the personal finance topics PhDs are most interested in, like investing, debt repayment, and taxes.

Four, subscribe to my mailing list at PFforPhDs.com/subscribe. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs.

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.

Can and Should an International Student, Scholar, or Worker Invest in the US?

December 9, 2019 by Lourdes Bobbio

In this episode, Emily interviews Hui-chin Chen, a Certified Financial Planner specializing in advising globally mobile professionals through her business, Pavlov Financial Planning. In the interview, Hui-chin answers the questions: Is it permissible for an international student, postdoc, or worker to invest while in the US, and if permissible, is it advisable? Hui-chin and Emily discuss several factors that could impact the answers to these questions: whether the person desires to stay in the US long-term, the type of visa they are on, what type of income they have (W-2 vs. fellowship/training grant), and whether they have access to a tax-advantaged retirement account, such as a 401(k), 403(b), or IRA. Listeners to this episode should come away with clear next steps to further evaluate whether and where to invest while living in the US.

Links Mentioned in This Episode

Teaser

00:00 Hui-chin: I would actually recommend the default is think about, well, if I had the extra money I can invest for the long term, I don’t really need the money — why not? So there has to be a really good reason why you don’t do it.

Introduction

00:21 Emily: Welcome to the Personal Finance for PhDs Podcast for higher education in personal finance. I’m your host, Dr. Emily Roberts. This is season 4 episode 17 and today my guest is Hui-chin Chen, a certified financial planner specializing in advising globally mobile professionals through her business, Pavlov Financial Planning. In this interview, Hui-chin answers the questions: Is it permissible for an international student, postdoc, or worker to invest while in the US and if permissible, is it advisable? We discussed several factors that could impact the answers to these questions. One, whether the person desires to stay in the US long-term. Two, the type of visa they’re on, F-1, J-1 or H-1B. Three, what type of income they have, that is W2 versus fellowship or training grant. And four, whether they have access to a tax advantage retirement account such as a 403B, 401k, or IRA. I’ve wanted to help the international graduate students in PhDs in my audience think through these questions and scenarios for a long time and I’m so grateful to Hui-chin for giving us her expertise in this area today. Please consider sharing this episode with your friends and peers. Without further ado, here’s my interview with Hui-chin Chen.

Will You Please Introduce Yourself Further?

01:42 Emily: I am so delighted to have joining me on the podcast today Hui-chin Chen. She is a CFP. Her business is Pavlov Financial Planning. She is an expert in this area of international students, postdocs, workers living in the US and what can we do investment wise? I know this is a question of high, high interest in my audience. I get this question every single seminar I deliver at universities. Can I invest in the us? Should I invest in the US. What kinds of accounts can I use? So Hui-chin is here to help us answer these questions as best we can. It’s a very complicated and detailed area, but you know, we’re going to work through it over the next 30 minutes or so. So Hui-chin, thank you so much for, for joining on the podcast and please tell us more about yourself and your business.

02:29 Hui-chin: Well, thank you for having me Emily and I think you covered like all the high levels. Like you said, I’m a CFP, a certified financial planner and I focus my work on clients and international planning needs, whether they’re immigrants to the US, people who are temporarily working in the US that migh leave or US citizens that become expats. So sort of like your listeners who are technically expats from other countries. So I deal with international complexities day in and day out for my clients, so I’m happy to answer any questions you might pose today.

03:05 Emily: Yeah, I mean I have been searching high and low for an expert, just like you. Will you please mention your blog name, your website name.

03:12 Hui-chin: Yes. You can read more about just in general financial planning topics for global and mobile people on moneymattersforglobetrotters.com and if you want to learn more about my business or working with me, it will be on pavlovfp.com.

03:29 Emily: Great. And you have a YouTube channel as well, right? What’s the name of that?

03:32 Hui-chin: Yes. Well there’s no name because I just record more like a series of different topics. The most recent one I recorded, I call it “Welcome to the USA: personal finance edition”. I think some of you might be interested or your spouses who accompan you to the US while you study or work and they may or may not be able to. So it goes through a lot of the different steps of understanding the US system that will be helpful if you eventually do want to stay in the US.

04:04 Emily: Yeah, perfect. Tell me just a little bit more about yourself — when did you arrive in the US, where are you from, why did you come here and those kinds of things.

04:12 Hui-chin: I first arrived full time in the US in 2004 for my graduate degree in public policy and management. I did consider going into a PhD, but I did not eventually and I basically stayed. Since then, I found a job in the US, I continued my work and then I met my husband in grad school, but after working separately for a few years, decided to get married and he got a job posting overseas in different countries. So I also have a very personal interest in working with people from all over the world because, for example, right now, I’m actually not physically in the US, we’re somewhere else. So.

Investing in the US as an International Student

04:58 Emily: Okay. Yeah. Fascinating. Oh my gosh. I really hope people follow up with you about this. So what we decided to do with this interview was to answer two broad questions, which are the ones that hear during seminars. The first is am I allowed to invest in the U S is this permissible? Secondly, is it advisable for me to invest in the U,S while I live here? Now the second question is a lot thornier than the first, I understand, so we’ll kind of go through a few different, aspects of this question that might affect the first question or the second.

Is it permissible? Yes!

05:33 Hui-chin: All right, so you’ll have to prompt me later for all these different questions. I’m going to answer the easiest one which is whether, as an international student who is not a US citizen or a green card holder, can I invest through a US based account? The answer is yes. And the United States is one of the few countries that’s very friendly to foreign investors investing directly in the stock markets and the US also has one of the largest stock markets. A lot of foreign companies come to list in the U S. dot. Markets. So really, even if you were not in the US, even if you were just like live in your home country and you want to open a US brokerage account, you can actually do it.

06:24 Hui-chin: It’s not only permissible, it’s actually a sometimes recommended way to invest, especially if your home country gives you very little access directly to investing equity on your own. A lot of countries don’t even have what we call retail access, like in the US. In a lot of places you have to invest through insurance contracts or very expensive mutual funds. So investing directly as a retail investor, that means that you’re as an individual, not going through an advisor, just like open your own account and start investing, it’s actually a great opportunity to do so. Now you’re in the US, it’s a lot easier. It’s easier for you to find information like that instead of doing it in your home country and tried to find those kinds of information. So that’s the long answer. But the short answer is it’s definitely permissible to do so. Right now you’re in the US and you can invest no matter what kind of income that you have. We’re talking about just a normal broker brokerage account, so it doesn’t give you any tax advantages. It’s just for somebody who wants to buy some ETFs or even just stocks. For example, if you really like Apple, you want to buy Apple stocks, you’re totally permissible to open a brokerage account online and pressures that Apple stocks with whatever money you have, either from your work in the US, from your grants, from your fellowships, or from your wealthy uncle back home who wired you some money. Those are all possible ways to invest.

Opening a Brokerage Account

08:06 Emily: So I think there may be, you can tell me if this is the case, I think there may be a distinction between something being permissible under the law and being, will I actually find a brokerage firm who will work with me? Because what I hear from international students and scholars is, and I never know if this is the rumor mill or if it’s actually their own experience is, “well it’s difficult to find a brokerage firm to approach who will work with me.” Is that the case? Is it, I can walk up to any brokerage firm and you know, as an international student or scholar or worker and open whatever. Or is it like, Oh well some of them might, by policy, be excluding certain types of people from you know, opening accounts.

08:51 Hui-chin: That’s a good question. Sort of at the practically, how does that work? So the first scenario is that if you have, for example, if you actually pay social security, now you have a social security number and you’re technically getting your income and you’re an employee of your university, then, for example, if you go onto Vanguard, that’s all the information they ask for. So at Vanguard, if you provide those two types of information, you will be able to open the account and plus you have a US address because you’re currently living in the US, so you actually do not need to already be a green card holder or something in order to have it processed through it. It doesn’t mean that if you eventually decide to leave the U S and if Vanguard finds out, they will want to close the account. So that’s one scenario.

09:43 Hui-chin: The other scenario is that I know some people because their totalization agreements, they don’t even have a social security number or they choose not to have one in the US and so in that case, even though you’re physically in the US and you have a US address through your apartment or on campus, it’s basically you’re considered a foreign, like how you file taxes as a nonresident alien, you can be a foreigner. So in that case, if you still have pretty close ties with your home country and you do decide to go back, you can actually open an account like your just a person living overseas, but in that case it is pretty much dependent on the brokerage company being willing to work with you because every brokerage company, like Schwab or Fidelity or TD Ameritrade, it’ll have their own internal list of which countries residents they were willing to do business with. So you’re basically declaring to them, I am a resident of some other country, would you would do business with me? And then they may or may not. So that’s another way to go about it.

10:59 Emily: Got it. So, okay, an international student or scholar who does not have an SSN, when they actually try to go and open a taxable brokerage account, what should they say to customer service? I’m a resident of X country, but I’m living in the US currently, will you work with me? Is that the question that they need to pose?

11:22 Hui-chin: Yeah, the question will really be, I’m a resident of another country, because if that’s the case, you’re providing an address of that country. You may be able to provide a us mailing address, but that’s not the address that’s associate with the account. So if they know that you are foreign customer, they will have different tax reporting, different tax withholding. Instead of filling out a W9, you fill out W8-BEN, all the different things, so it’s whether you want to be considered as a foreigner to the US institution or somebody who’s a US resident.

12:01 Emily: Got it. So in the case where someone does have an SSN, probably because they’ve been employed W2 employee for at least part of the time that they’re here, would you say that it’s totally fine to then present yourself as a US person? Even if you’re still technically a non resident alien for tax purposes, even though you have the SSN, but let’s say you’re a nonresident alien for tax purposes, is it okay to go ahead and use that SSN and be like, I’m a US person?

12:26 Hui-chin: Well, that’s the tricky part because you are still for tax purpose, like your dividend capital gains interest will be taxed differently. So you do need to report, you need to write a W8-BEN instead of W9. So I would just give an example on how easy it is to actually open an account. For example, on TD Ameritrade’s website they actually ask what kind of visa you have. So I’m just saying that usually in those kinds of applications, if you have a SSN, you have a US address, you have a US employer, it’s most likely those online retail brokerage account, they will allow you to open the account. But you also need to make sure that they know that for tax purposes you need to fill out a tax form as a non resident alien.

Investing during Short-term vs. Long-term Stays in the US

13:17 Emily: Got it. Okay. I think that’s very clear now. Than you so much for going through that in detail. Okay. So then let’s go back to the scenario of “I plan to stay in the US long term, or hope to, not sure if it’s gonna work out” versus “I don’t plan to stay in the US long term”. We now know what’s permissible, but then what is advisable? Should a person who hopes to stay in the US long-term, has the ability to invest right now — is there any reason for them to shy away from doing that because they’re not sure about the longterm status? Let’s start with that question.

13:50 Hui-chin: So like I mentioned, I guess, eluded to earlier, because the US is such an attractive market, not in terms of return or performance, but in terms of access, you can invest in a broad index in so many different countries, so many different companies with such little cost, and it’s really hard to beat if you tried to do it in some other country. Usually there’s more brokerage fees more commission, there are more hurdles to jump through as an individual investor. So I would actually recommend the default is think about well if I have the extra money I can invest for the long term, I don’t really need the money — why not? So there has to be a really good reason why you don’t do it upon the US perspective.

14:38 Emily: Got it. And so maybe that person in that situation is thinking, “well, is it a good reason that I might eventually leave?” How would the investments that are in the US for the moment, do they to exit the country with that person? If the person ends up leaving, how does that work and how’s that handled?

14:57 Hui-chin: Yeah. So as I mentioned earlier, even for somebody who’s never been to the US, some custodians will be willing to open account for a foreign customer. So if you’re thinking about, “Oh, I’m just leaving after I finished my grad degree in three years,” if the country you’re likely going to is on whatever list that custodian posts, like it’s European EU country or it’s a relatively developed country or it’s a safe country, it’s not like a terrorist country that may be on the treasury list of “do not do business with”, then you’re probably safe to assume that you can continue to hold the account. But of course do your own research on the specific countries. It’s impossible for me to go into every single country.

15:46 Emily: We’ll link to a reference if you can provide a reference of that treasury list. We’ll put that in the show notes and check to see if your country appears on this list, in that case, okay, we need to tread more carefully. But let’s say, okay the country is not on that list, go ahead.

16:04 Hui-chin: Yeah, so basically what will happen is that for example, if you went the first route when we’re talking about opening an account, you open account with the U S address and everything, and let’s say you actually end up staying over five years or you actually got a job at under H-1B then leave, right? So you actually went from nonresident alien for tax purpose to a US person tax role, and then you’re leaving, so you’re going back to a non resident alien textual. So you do need to report to the custodian that you’re leaving this is my W8-BEN, this my new address. So of course you want to make sure the custodian does business with people at that address. And there is some other complexity in terms of what you can invest in. Some people from the EU countries might know there are some new regulations saying that the custodian is not supposed to sell ETFs that’s not registered in the EU to their residents. So that’s one type of complexity that may come up that whatever you invested in, you may or may not be able to add more to it once you leave. But whatever you have already invested in, there shouldn’t be any issue with keeping it there, as long as the custodian is willing to keep you as a customer.

17:30 Emily: Got it. So let’s say then that the custodian is not willing to keep you as a customer, for whatever reason. What happens in that scenario?

17:39 Hui-chin: It does happen. Over the last 5 to 10 years, even some US citizens are experiencing that, living overseas, it used to be okay that custodians know that they live overseas and now they’re not okay and custodians say please close your account. For normal brokerage account, of course the first step was if you want to keep your investment in the US, you can always find a different custodian to move your investment to. You actually do not need to sell those investments. You can do a transfer. It’s just whoever’s holding those stocks will transfer the certificate electronically to another custodian. It’s not like you’re selling and getting the money back. But if because where you’re going next or because of personal reasons, after investing in the US for five years, you’re willing to take the money and leave, you can go ahead and sell your investments, close the account, taking the money and leave. There’s no problem with that. There’s also some tax considerations there. For people who are considered a nonresident alien, getting capital gains while they stay in the US for over 183 days versus they do not. Because if, for example, if there is a tax year when you have a US based account and you have a lot of capital gains on your Apple stock because it increases in value a lot, but if you already finish your study and you’ve moved back to your country for two years you’re just wondering, well, will I be taxed on the capital gains? The question is, you actually do not get taxed on the capital gains, in the US. There could be also tax treaties that differs between the US and your country, but in general, the rule is the US does not tax and your country may or may not tax that. So that’s actually a good–

19:34 Emily: It sounds like in that situation, where you’re planning on moving the money out of the US, it sounds like that’s the time to consult a tax advisor in the country that you’ve moved to, right? How to execute this, when to execute this and the tax implications. Is that right?

19:51 Hui-chin: Yeah. So you’re definitely thinking about tax strategy, because, as opposed to the situation I talked about, if you sell the day you leave the U S for example, like “I’m just closing everything down, I’m moving back home.” And if you sell the stocks as somebody who has lived in US, even though you’re a nonresident alien but you were in the US as a tax home, when you sell the stocks, the capital gain is actually taxed at 30%, unless their treaty dictates differently as well. Like you said. So definitely talk to your tax advisor in your home country, as well to understand how the tax coordination works.

Taxable vs. Tax-Advantaged Accounts

20:33 Emily: Got it. And now, you mentioned earlier that all of that was for a taxable brokerage account. So let’s also throw in the scenario that the person has been using a tax advantaged retirement account — IRA, 401k, 403B — and they’re not going to leave it in the US, they’re are going to be moving the money out, what are the tax implications of making a withdrawal from whichever account type.

20:56 Hui-chin: Yeah, in that scenario, basically first of all, you should know that there is a penalty that applies if you take money out of and IRA, 401K, 403B. You should have known it before you put money in, but that’s the same rule that applies broadly to everyone, whether you’re a US person or not. Right? Because the reason is that the government gave you a tax benefit and it’s the incentive for you to keep the money there for retirement. They don’t want you to take the money out. So, if you need the money obviously and you think closing the account, paying the penalty and income taxes is still better going back home and doing it in a few years because of the different tax situation, of course that’s something you can consider. But knowing, with a penalty if you are not not going to need the money and it is eventually going to pay for retirement, one thing you also can consider is to leave the account open for a very long time and let it grow. Of course, you cannot keep putting money into it, but whatever is in there can continue to grow and you can consider taking the money when your income is lower and take the penalty, so the income and the penalty together is less of a hit, or you can take it out when you are 59 and a half, which is the current law of when you can take it out and then there won’t be a penalty but there is going to be taxes in the US and withholding as well.

22:42 Emily: It sounds to me, and this may be painting with too broad of a brush, but it sounds to me like you know, if you end up having investments in the US, if you’re eligible to keep them in the US, and you do leave, sounds like it’s a good idea to keep the accounts open. You won’t be contributing anymore, at least to the tax advantage ones, but it doesn’t sound like there’s a big reason to be closing accounts and moving the money out, unless it is that you are not permitted to keep the accounts open based on the custodian and the rules of the country that you’re going to, and how they deal with the US, is that right? It sounds to me like that’s the pattern. Like go ahead and keep the money here and then when you’re of retirement age in the country that you’re residing and then you can work on doing the withdrawals and dealing with taxes at that time. Is that kind of broadly what you recommend?

23:32 Hui-chin: I think that’s generally correct. Like I said, the main reason for that is because the US is such a individual investor friendly country to allow you to invest that way, so like I said, I would ask the question of why not. Of course everybody’s situation is different. If there is a legit reason that you think that you shouldn’t be keeping the investment in US, of course, you just need to understand the tax implications. Otherwise, keeping investing long-term in the US, not just — let me clarify this, not investing in US companies only, but using a US based account and custodian, who charges you basically right now no commission to buy and sell anything and with very low mutual fund costs, very low ETF costs, it’s a really good bargain compared to the other alternatives.

24:34 Emily: Yeah. So it sounds like whether an individual in the US, not on a green card yet, not sure if they’re gonna be able to stay long-term or planning to not stay long-term, if they have the ability to invest at the time that they’re living in the US, as you said, why not? Why not go ahead and open the taxable brokerage account or the IRA or the 401k or whatever it is and use it, because it’s sort of, as we know — we don’t have to go into about the power of compound interest — starting to invest earlier is fantastic. So basically don’t a waste or fritter away the time that you may be in the US, it might be longer than you expect. Go ahead and start investing and then deal with either moving the money out or keeping here or whatever later, once you know where exactly are you going to be living. I like that approach of why not. So whether the intention is to stay in the US long-term or to not, go ahead and use the time while you’re here. Use your access. Go ahead and open the accounts, again if you’re able to be able to invest.

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Commercial

25:37 Emily: Emily here for a brief interlude. As a listener of this podcast, every week you hear strategies that another PhD has used to improve their financial picture. But listening and learning does not automatically translate into action in your own financial life. If you are ready to change how you think about and handle your money, but need some help getting started, I can be of service. There are two main ways you can work with me to create and implement a financial plan tailored for you. First, I offer one-on-one financial coaching, either as a single session or a series, as you make changes over the long term. You can find out more at PFforPhDs.com/coaching. Second, I offer a group program called The Wealthy PhD that is part coaching, part course, and part community. You can find out more and join the wait list for the next time I open the program at PFforPhDs.com/wealthyPhD. I believe it’s possible to succeed with your finances at every stage of PhD training and throughout your career. Let’s figure out together how to make that happen for you. Now, back to the interview.

Investing Under Different Visas

26:52 Emily: Okay. That was the first scenario to talk about. And then the second one was about visa types. So F-1, J-1 and H-1B. You’ve already said broadly it is permissible, but is it advisable? Are there any differences among people holding each one of those different visas that they should be thinking about? Or is it like, “no, the general consensus of it’s permissible, why not?” still applies no matter what visa type?

27:17 Hui-chin: I think that it’s not really only based on visa type, but the idea of combination of visa type, how long are you staying in the US — as, you know, F1 can turn from NRA to US person, J-1 as well, with different time frames. I would think about it as just, it’s very similar to what we were talking about before, like longterm or short term. Eventually, the main difference is tax treatment of if you’re staying, if you’re becoming a us person long-term, or even becoming a US citizen and we’re just going to pay US taxes forever versus at some point, in the future, it’s possible you will sever tax ties with the US, other than whatever investment you kept in the US. So overall investing in both scenarios are great. You just need to know the tax implication and the tax strategies, because if you’re switching from one to the other, there may be some opportunities for you to reduce taxes. And if you don’t think about it clearly or get the correct advice, you might find out, well I could have been taxed zero but now I’m getting taxed 30%.

28:28 Emily: Got it. So it’s not so much about the particular visa type, but rather at what point it flips to you being a resident alien for tax purposes, which is different on the different visa types. Okay, great! Quick one there.

Investing for Different Income Types

28:41 Emily: Third point that I wanted to talk about was the income type. So having W2 type income, or even self-employment type income, if that’s permissible, versus having this weird fellowship, training grant, non W2 type of income. This is very common for graduate students and also for postdocs. And so the general rule that certainly applies for US citizens and residents is if you have the W2 type of income that is taxable compensation for the purposes of contributing to an IRA. So let’s say in the scenario where the person does not have access to a workplace-based retirement account, they’re looking at can I open an IRA or not? Taxable compensation would be the W2 type of income. They can open an IRA and use that income towards it. If you go an entire calendar year and don’t have the W2 type of income, not taxable compensation, it’s all fellowship or training grant, and of course for international students, scholars, they’re not permitted to side hustle, they can’t have the second jobs and so forth, so there would be no possibility of having taxable compensation type of income. I guess the question is, whether they had access to an IRA or not, does it change the, we know it’s permissible, but does it change the advisable recommendation on whether to be investing at this time or not, knowing that in the one case with fellowship and training grant type income they wouldn’t be able to use an IRA but could be using a taxable brokerage account as we discussed earlier.

30:09 Hui-chin: I think that’s actually something we can just combine with the fourth one, so the tax-advantaged one. Like you said, eventually the main question is whether I have taxable compensation or I do not have taxable compensation.

30:23 Emily: Now, I want to jump in just to note that we’re recording this in November 2019 so the SECURE Act has not passed the Senate, yet. I am certainly hopeful that it will because what it does is it changes the definition of taxable compensation to include fellowship and training grant type of income, non-W2 income for graduate students and postdocs. So maybe when you’re listening to this, that law would have changed, and so certainly keep that in mind that we’re discussing this as what is the definition of taxable compensation. Basically, right now it does not include fellowship and training grant and come perhaps in the future it will, but right now it doesn’t. Okay, go ahead.

31:02 Hui-chin: I think at the very beginning you mentioned the whole connection to your personal service, right? So the idea of you can contribute to areas that you need to have taxable compensation and that’s related to the idea of it’s not just that it’s taxable, but it is a compensation for performing a service. If we’re just really thinking about why we’re using IRA, it is for the tax advantages. So even before you think about that, it’s like what would be the tax consequences or how much you save by using that kind of account and is that really helpful in your situation? I know, one question, you posed before is well, everybody wants a Roth IRA because they’re like, well, I’ll never get taxed in the future. I want to be able to contribute to that.” But a Roth IRA and traditional IRA have the same rule: the compensation needs to be taxable. So if it’s already not taxable, the government wouldn’t allow you to put money into something that’s never been taxed before. The Roth IRA is for the government to tax you up front, so it doesn’t tax you it in the future when you take it out.

32:26 Emily: Okay, let me, I just want to clarify this. This is a little bit new information to me. So when we have the two words, taxable and compensation, you have to have taxable compensation to contribute to an IRA. The compensation part of it is this, is it non-W2, fellowship and training grant type income? Okay, that’s not compensation. But now we’re also talking about the “taxable”, the first word there in taxable compensation. Your income has to be taxable in the US in the first place to be eligible to be contributed to an IRA. So maybe under certain tax treaties, your income for a time is not taxable in the US, that income would not be eligible to be contributed to an IRA. Correct?

33:05 Hui-chin: Yes.

33:06 Emily: Okay, great. Go ahead.

33:07 Hui-chin: Yeah, and the second one, we use compensation, but on the US-person side it’s called earned income. So if you look at IRS publications it’s always referred to earned income for US person related publications on contributing to IRA. Those two are equally important. It has to be earned income, so your compensation from service, and it’s taxable. The idea is that you will know whether you have that kind of income or not and if you have that income, meaning you’re getting tax in current year, so you’re thinking about, “Oh, if I contribute to an IRA or 401K, or 403B, I get taxed less. Or you contribute to it and now we get taxed, but in the future it won’t get taxed, which is the Roth side. In the first one, just the pretax contribution, it makes sense if you’re really high income. I think for the students, because if you’re on a 1040-NR, depending on the level of your compensation, because you may not have standard deduction, you may only have itemized deduction, some people can be at the zero percent, some people can be twelve percent or above, so you have to look at your tax situation of which bracket you’re going to be in to give you an idea of, well, maybe I want to do pretax instead. And the second one is, okay, so if I’m at a really low bracket, how about I just do Roths, but then the idea is you want the tax benefit in the future, right? But if you are going to move away from the US, how much more is that tax benefit versus simply using a taxable brokerage account, if you don’t get current year tax benefits. So those are the analysis that you need to go through, in terms of whether or not to use a tax advantage account, if you have the income type to do so.

35:20 Emily: Okay. Yeah. Let me see if I can summarize that. If you don’t have taxable compensation, can’t use a tax advantage account anyway, so go through the brokerage firm and go for the taxable brokerage account, if you’re able to use it, if you can set up that kind of cap. Okay. On the other side, we have eligibility for the 401K, the 403B, the IRA. If you want the tax deduction today for contributing to a traditional version of each of those accounts, great. Go ahead and take it and get a tax deduction today. Awesome. The money grows tax deferred, you’ll deal with the taxes in retirement or whenever you move the money out or whatever. For the Roth option, because of any of those kinds of accounts, because you don’t have the immediate tax advantage today, you really have to be asking yourself, does it make sense to put my money into a Roth IRA, no immediate tax advantage, but it will grow income tax free and then I can withdraw it income tax free in retirement versus can I just use a taxable brokerage firm, which is more flexible. And I think maybe the answer to that question, of course it will depend on the math in any individual’s scenario, but might come down to, again, what we talked about earlier, the expectation of staying in the US long-term or the hope, because really over the long, long term it is very advantageous to be using an IRA of any kind, Roth or traditional. But maybe if the time that you see yourself being in the US is on the shorter side, not to retirement or only five years or the length of your degree, then maybe it’s like, well why bother with the whole Roth IRA scenario? Let’s just go for the taxable brokerage account because if you are expecting to move the money out, for example, it’s kind of more of a pain to do so with a Roth IRA, because while you can withdraw your contributions, whatever gains have been in the account, if you try to withdraw those, then then the penalty comes into play. Is that correct?

37:12 Hui-chin: Yeah. And one big difference for people who eventually just move away from US and no ties in the US, I think I mentioned that before, you could qualify for 0% capital gains tax rate if you sell it, so it’s almost like the same, but the only difference is the dividend. So dividends are taxed at a flat 30% if your a NRA living outside of the US, but over the long term, if you’re investing in, for example tech companies, they don’t pay dividends anyway, and your main goal is for that capital gain growth for the next 30 years, then investing in Roth and investing in a taxable brokerage as an NRA living somewhere else is the same.

37:53 Emily: Gotcha.

37:53 Hui-chin: Why give yourself more ties to a Roth type account you can’t access and there’s more complexity.

38:01 Emily: I see. So really your investing strategy might change based on the tax treatment, if you’re no longer living in the US, of capital gains versus dividends. I actually do want to also add in for people who, I think this is still the case under post-tax custom jobs act, people who are the 12% marginal tax bracket or less, they have 0% federal tax on long-term capital gains and qualified dividends. So if you have a very tax efficient strategy, if you’re buying and holding, generally, as long as you stay in those lower tax brackets, you’re really going to see much or any income tax anyway. So why bother with the IRA, when you could be using a taxable account and not really having that much in the way of actual tax burden. Is that correct?

38:47 Hui-chin: Yeah. And just going back to definitely understand the tax treaty if you already know where you’re going to. Of course, most of the time you might think, well I’m just moving back to my home country, but then you get a job somewhere else and then you know, your life is not really as predictable, but at least understand the tax treaty between us and your home country, if you think it’s very likely you might end up there at retirement age when there would be IRA, 401k distribution consequences and compare that to, if I simply use a taxable brokerage, how does that change my dual country tax liability.

39:31 Emily: Got it. I think what I’m hearing mostly from this interview and the point that you just made about life being sort of unpredictable is, okay, here’s what you know. You know you’re in the U S right now. You have to be in the US for a few years, several years, maybe longer. Deal with what you know about right now, make the best decision you can for right now, and then if the situation changes later, you have to pivot. It’s possible to pivot. You’re not going to be losing your investments just because you’re leaving the country or whatever. It’s something that you can move with you, so you can adapt and change depending on, you know, the next step that you take. And hey, if you end up, if you do end up living in the US long-term, like until retirement age, it will be awesome if you started investing earlier and had started using an IRA or a 403B or a 401K earlier, as soon as you have access. Is that fair?

40:22 Hui-chin: Yeah. And I think those more specific questions and people questioning whether they should have account here. I think in my experience, I really mostly hear it from people from EU countries, Australia, Canada, because they feel like they have the same access when they move back. They don’t want the complexity of dealing with cross border things. And I totally understand that. And if you have good access to invest when you go back home, of course. But I think, what I know is being from a developing country myself is that most of the people who come to US see it as an opportunity and if you can have an investment in the US and don’t have to deal with turmoil that may be happening in your home country, most people jump on the opportunity. I don’t know that many people would say it’s a bad idea to open an account in the US.

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Where to Find More Information

41:26 Emily: Got it. I think we’ll leave it there. This has been fantastic. Thank you so much for joining me. Tell us again where people, can find you — your website, your business name and so forth.

41:35 Hui-chin: Yeah, sure. If you want to read more about what I just talked about, and this also how Emily found me, is on moneymattersforglobetrotters.com. It’s just a blog for reading. And if you’re interested in working with me, you can go directly to pavlovfp.com. That’s Pavlov Financial Planning.

41:54 Emily: Thank you so much for joining me today Hui-chin.

41:57 Hui-chin: You’re welcome.

41:58 Emily: Listeners, thank you for joining me for this episode. PFforPphDs.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, here are four ways you can help it grow. One, subscribe to the podcast and rate and review it on Apple podcast, Stitcher, or whatever platform you use. Two, share an episode you found particularly valuable on social media or with your PhD peers. Three, recommend me as a speaker to your university or association. My seminars covered the personal finance topics PhDs are most interested in, like investing, debt repayment, and taxes. Four, subscribe to my mailing list at PFforPhDs.com/subscribe. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs. 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 Poddington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing and show notes creation by Lourdes Bobbio.

The Graduate Student Savings Act Fixes a Major Flaw in Tax-Advantaged Retirement Accounts

October 14, 2019 by Meryem Ok

In this episode, Emily interviews Abigail Dove, a PhD student at Johns Hopkins. Abby spent last summer as a science policy fellow at the Federation of American Societies for Experimental Biology (FASEB). Her major policy accomplishment during her internship was to secure FASEB’s endorsement of the Graduate Student Savings Act of 2019 (GSSA), a bill that has been proposed in both chambers of Congress. Graduate students and postdocs are not currently permitted to contribute their non-W-2 income, which typically comes from fellowships and training grants, to Individual Retirement Arrangements (IRAs). The GSSA would allow this type of income to be contributed and have a very beneficial effect on the PhD trainee workforce. Abby explains her role in shepherding the GSSA endorsement through FASEB, what the GSSA would do for graduate students and postdocs, and how the GSSA relates to the SECURE Act, another bill that has passed the House and is before the Senate.

Links Mentioned in the Episode

Teaser

00:00 Abigail: But it was a little tricky for FASEB to first navigate the waters. They’ve never supported a tax legislation before. You think that experimental biology doesn’t have that much to do with legislation on tax. But here was a perfect one for them to start.

Introduction

00:22 Emily: Welcome to the Personal Finance for PhDs podcast, a higher education in personal finance. I’m your host, Dr. Emily Roberts. This is season four, episode nine and today my guest is Abigail Dove, a PhD student at Johns Hopkins and recent science policy fellow at FASEB, the Federation of American Societies for Experimental Biology. Abby’s major policy accomplishment during her summer at FASEB was to secure FASEB’s endorsement of the Graduate Student Savings Act of 2019, or GSSA, a bill that has been proposed in both chambers of Congress. Graduate students and postdocs are not currently permitted to contribute their non-W2 income, which typically comes from fellowships and training grants to individual retirement arrangements or IRAs. The GSSA would fix that problem and have a very beneficial effect on the PhD trainee workforce. Abby explains her role in shepherding the GSSA endorsement through FASEB, what the GSSA would do for graduate students and post docs, and how the GSSA relates to the Secure Act, another bill that as of this recording has passed the House and is before the Senate. Without further ado, here’s my interview with Abigail Dove.

Will You Please Introduce Yourself Further?

01:33 Emily: I have joining me on the podcast today, Abigail Dove, and she is a PhD student who completed an internship at FASEB last summer. And she has a lot to tell us about the Graduate Student Savings Act. So if you have been wondering about your IRA and why you can or cannot contribute to it, that’s what we’re going to be discussing in today’s episode. Abby, thank you so much for joining me today and will you please introduce yourself a little bit further?

01:59 Abigail: Sure. Thanks for having me. My name is Abigail Dove. Currently, I’m a PhD student at Johns Hopkins and I just started my sixth year. I work in fruit flies and study the gonad development. A little bit of my background: I first started as an undergraduate at Bard college, a small liberal arts school in upstate New York. And then I did a postbac for two years at the NIH NIDDK (National Institute of Diabetes and Digestive and Kidney Diseases) before starting at Hopkins. What we’re talking about is kind of the work that I did at my internship at FASEB, which is the Federation of American Societies for Experimental Biology, which I guess to be a little more descriptive it’s a society that represents 29 member societies, which has about 150,000 scientists that they represent.

Tell Us More About Your FASEB Internship

02:57 Emily: Excellent. You and I have common that we both did a postbac at the NIH. In fact, I’ve interviewed several other people on the podcast who have that on their resumes as well. So very popular program. Anyone still in college considering going for a PhD in biomedical sciences or related areas should definitely consider the NIH postbac program. It’s amazing. Okay. So you had this internship at FASEB last summer. What exactly were you doing in that role? Because it’s a little bit unusual for a graduate student to have an internship. And I think especially a graduate student in the biological sciences because, I don’t know about you, but I sort of observe the culture as like, “ah, you need to stay at the bench 120% of your time and never do anything away from the bench.” So please tell us a little bit more about what you were doing in that internship.

03:40 Abigail: Yeah, so I was really fortunate. I have a PI that–we both know that I’m interested in a career that is outside of the academic track. So, I did a lot of science outreach and I knew that I like communicating science to the public. So I wanted to pursue this career of science policy as a way to talk to the public about science and its importance. So what I did at FASEB, I had a lot of responsibilities. I was particularly interested in training and workforce policy. So, policy that relates to students, postdocs, and even faculty as it’s something that everyone can relate to. So that was one of the reasons that I was most interested in it. And I did a wide range of things. I hosted a webinar on work-life balance and the lab culture and we can include a link to that if anyone wants to watch it later. I represented FASEB on Capitol Hill and at the NIH for different events and I generated comments on sexual harassment that will soon be sent to the NIH. I also helped organize an online symposium series for the FASEB Science Policy Committee on challenges facing women throughout their career lifetime. And then I compiled minutes for the meetings, I drafted talking points for committee members, and then the big thing that I did was I spearheaded FASEB’s endorsement of the Graduate Student Savings Act.

How to Land a Science Policy Internship

05:13 Emily: Excellent. And we’ll get a lot more into that in a moment. But that sounds like a really exciting internship. It’s absolutely fabulous that your PI was supportive in you completing that. I actually did a science policy internship as well. The Mirzayan Policy Fellowship out of the national academies. That was actually after I finished graduate school. But it’s available to current graduate students as well. So, if what Abby was describing sounds amazing to you, that’s another potential avenue for you to get that kind of experience in science policy. Okay. So how did you actually land this internship if other people are interested in doing something similar?

05:46 Abigail: Yeah, so I first started–we have an office at Hopkins, it’s called the Biomedical Careers Initiative Office. And it’s really great for people that are looking for careers outside of the academic track. They were offering a course on science policy and advocacy that was actually being taught by the Director of Public Affairs at FASEB, Jennifer Zeitzer, and the Director of Science Policy, Dr. Yvette Seger. So the class gave us a background on legislation and how bills get enacted into law. And we did some case studies on different issues in science policy. They also taught us how to be a science advocate. But finally, we had to write a policy memo on an opportunity or challenge in research activities supported by federal funding, and we had to give an elevator pitch on that to the class as well. And I did mine on saving for retirement as a graduate student and a postdoc.

06:48 Emily: Yeah. Excellent. And so was it through that paper and that pitch that you gave that you found the Graduate Student Savings Act?

06:56 Abigail: Yes, that’s how I found it. Oh, I guess we didn’t cover how I got the position too. So this office that hosted the class actually also hosts internships for students. And so FASEB was also accepting applications for science policy fellows through the Biomedical Careers Initiative Office. So I applied for that directly. But they also have internships for a wide range of different careers outside of the academic track, including industry and consulting and patent law as well as policy.

What is the Graduate Student Savings Act?

07:33 Emily: It sounds like a great deal of support actually, that Hopkins is providing and helping you sort of step a little bit outside of academia into another role that can really presumably help your post-PhD career, should you decide to pursue one in science policy. So let’s kind of back up a second and explain more about what the Graduate Student Savings Act is because it’s probably not one that most people have ever heard of. Right? Like probably a lot of people in my audience, they know about IRAs. Maybe they don’t have one, but they sort of know they’re supposed to or maybe they know they might not be able to have one. So what is the Graduate Student Savings Act?

08:06 Abigail: Yeah, so the Graduate Student Savings Act. There’s a bill in both the House and the Senate and they’re essentially the exact same bill, so they’re called companion bills. And they would allow graduate students and postdocs who receive their income through either a fellowship or stipend to contribute to an IRA or an individual retirement account. The current issue right now is that on the current tax law, trainees who are receiving their income through a fellowship or a stipend are actually prohibited from contributing to an IRA because it’s not considered compensation or earned income.

08:44 Emily: Exactly. And I like to further kind of clarify this for people by saying within academia we might use the word fellowship in different ways. We might use the word stipend in different ways. Nobody’s ever heard the word compensation. But what it really boils down to is, is your graduate student or postdoc income reported on a W2 or not reported on a W2? It could be reported somewhere else, it could be reported not at all. W2 income is the kind of income, taxable compensation, or earned income that can be contributed to an IRA under the current law. And anything else in terms of graduate student, postdoc income non-W2 does not fall into that category, unfortunately. So that’s how things currently stand. The Graduate Student Savings Act includes this type of non-W2 or fellowship income in taxable compensation for the purposes of contributing to an IRA. Is that correct?

09:39 Abigail: Yes. And unfortunately, it doesn’t change its designation universally. It doesn’t make it earned income or compensation, but it just allows it to be saved for retirement purposes in an IRA.

09:51 Emily: Yeah. This is one of those confusing things about the tax code in general is that they use these terms like “taxable compensation” and “earned income” under different contexts. And so sometimes they have different definitions under different contexts. So earned income has other implications in the tax code, like around the earned income tax credit. Whereas, taxable compensation has a different meaning. It’s under the section for IRA contributions and so forth. So it’s sort of defined there as “taxable compensation for the purposes of contributing to an IRA is these things,” and currently, it says explicitly, “does not include fellowship income, not reported on a W2.” So that’s the current status. But then there’s this Graduate Student Savings Act bill as you said, it’s sort of on the floor in both the House and the Senate.

How Abby Got FASEB to Endorse the GSSA

10:37 Emily: I was looking at the history of this and I think the first time it was introduced was 2016 and it’s introduced every year I think in more or less the same form until now, 2019. We should actually say we’re recording this interview on September 25th, 2019. It will be released within a couple of weeks of that date. So things might have changed. But as of September 25th, 2019, the Graduate Student Savings Act has not been passed but it is, I guess, available to be passed. So, what was the process like for getting FASEB to ultimately endorse the Graduate Student Savings Act, and what work did you do to make that happen?

11:15 Abigail: Yeah, so originally before I even did the class, FASEB was not aware of the Graduate Student Savings Act at all. It wasn’t on their radar. It wasn’t until I wrote my policy memo on the issues of graduate students saving for retirement, and I actually did the research and I was just Googling it and I came across it on my own, that we both kind of became aware of it. And so I kind of took this on as a task that I wanted to complete in my fellowship and I thought it was an important task and FASEB was great. If there was an issue that I really wanted to take on and it was something that was good for FASEB to endorse, they would have no problem with me taking the lead. So this was my big accomplishment of the fellowship.

12:04 Abigail: And since FASEB is a nonprofit organization any bill that they support needs to have bipartisan support for endorsement. And that thankfully both the House and Senate bill had bipartisan support on both pieces of legislation. I think some of the previous iterations of the Graduate Student Savings Act didn’t have bipartisan support. So this was really important for FASEB to get on board. But it was a little tricky for FASEB to first navigate the waters. They’ve never supported a tax legislation before. You think that experimental biology doesn’t have that much to do with legislation on tax. But here was a perfect one for them to start.

Personal Impact of Flawed Tax Legislation

12:49 Emily: Yeah. As you were saying earlier, it’s a clear workforce issue. Right? So that’s the definite connection or conduit between what they do generally and this weird little tax quirk that happens to deeply affect their own workforce.

13:03 Abigail: Well, yes. So this actually personally affected me. From when I was in college and doing other side jobs, I was always contributing to an IRA, if possible. My dad is very financially responsible and he just told me when I was young, “you need to have an IRA.” He always recommended a Roth IRA. He always thought it would be better to get tax first and any profit you make later you don’t get taxed on. So there’s two different IRAs, a Roth and the standard IRA. So maybe some clarity on that. But this personally affected me when I was a post-bac for those two years I was receiving stipend income and wasn’t reported on a W2 so I couldn’t contribute to an IRA for those two years.

13:51 Abigail: Then my first year in graduate school I was on a training grant, so also not receiving a W2 so I couldn’t contribute. My second year I was actually a teaching assistant, so I was being employed by the university somewhat and getting my income reported on the W2. So I was for that year able to contribute, which was really great. And then I got awarded the National Science Foundation, Graduate Research Fellowship award.

14:20 Emily: Congratulations, but also, dun, dun, dun.

14:23 Abigail: Yeah. So it was really great. But then I also couldn’t contribute to my IRA because it wasn’t reported on a W2. So that affected me for my third and fourth year of graduate school. My fifth year I got married. So that changed things a little. I was still on my NSF fellowship. But because I was married to someone who had a real job and was receiving income that was deemed compensation, I was able to contribute to my Roth IRA just because I was married to my husband. so that was my last year of my fellowship. Now I’m back at Hopkins and I’m TA’ing for this year. So I will again be able to contribute even if my husband wasn’t receiving earned income himself.

15:14 Emily: Yeah, I have a little bit of a similar story of flip-flopping between RAs and fellowship income. And at some point I got married and so my husband, having a similar situation of flip-flopping between RAs and fellowship income, it helped in certain years one of us would have a taxable compensation, maybe the other one wouldn’t. So one of the things that helps people in this situation–under the current status of fellowship income, non-W2 income is not eligible to be contributed to an IRA–one thing that helps is that the academic year and the calendar year do not line up. So, if you have different sources of funding in two different academic years, maybe you can be covered for one calendar year in terms of being able to contribute. It helps if you’re married of course, to someone with taxable compensation. And the other workaround is actually having a side hustle that is self employment income. So self-employment income is taxable compensation that can be contributed to an IRA. So that’s something I sometimes float with people who are frustrated by their multi-year wonderful fellowship packages that don’t allow them to contribute to an IRA. If it’s possible to side hustle, that’s another way to kind of sneak in that eligibility. So, your stipend wouldn’t be eligible, but that side hustle income would be eligible. All these are workaround solutions, the real main solution is just changing the tax code because this is ridiculous that this is happening, right?

Commercial

16:35 Emily: Emily here for a brief interlude. Through my business, I provide seminars and webinars on personal finance for graduate students, postdocs, and other early-career PhDs for universities, institutes, conferences, associations, etc. I offer seminars that cover a wide range of personal finance topics and others that take a deep dive into the financial topics that matter most to PhDs, like taxes, investing, career transitions, and frugality. If you are interested in having me speak to your group or recommending me to a potential host, you can find more information and ways to contact me at pfforphds.com/speaking. That’s p f f o r p h d s.com/speaking. Now back to the interview.

Anything Else About Your Role in FASEB?

17:25 Emily: Okay. So, anything else to add about your role with getting FASEB to endorse the GSSA?

17:31 Abigail: Yeah. So, because it was a tax bill and FASEB had never endorsed a tax bill before, they want it to go through full process of endorsement. They wanted to get everyone’s feedback on it. So the first step was going through their Training and Career Opportunities Subcommittee. So, they have a monthly meeting, I prepared talking points for the chair of that committee, and we discussed it and they couldn’t see anything wrong with it. So, we got a full endorsement from that subcommittee. Then we had to go up one level to the Science Policy Committee and did the same thing, had to talk to the entire committee, got overwhelming support of it. So, it got pushed up to the next FASEB tier, which was the executive committee. They gave the final approval. Actually, for the Training and Career Opportunities Subcommittee and the Science Policy Committee, I made a one-page summary of the current situation and how the Graduate Student Savings Act would change that. So, a one-page review for them. And then when we went for approval for the Executive Committee, we had the full letter drafted for them to approve, and we can also give you a link to the FASEB’s endorsement letter too, as well.

18:56 Abigail: Normally, it would go to the FASEB board for approval, but the board was jam-packed with what they had to do for that month. So, because we got unanimous support from the two committees before that, they thought that the Executive Committee approval would be sufficient. But I started my internship in June and it wasn’t approved until the first week of September. So, it does take a long time for this approval to go through because you have to wait every month for the next committee to happen. And if there are changes and edits to it, then it can also take a lot of time. You want to do it as quick as possible so the endorsement actually has an effect if the bill is getting voted on soon.

19:47 Emily: Yeah, exactly. This is fascinating to hear kind of how the sausage is made, and not even to make the policy, but just to get something like this: an endorsement from group whose endorsement matters in this kind of thing. What I’m just thinking is how good it is that FASEB has connections to the current trainee workforce like through you and other interns they accept because they had you to tell them, “Hey, this is an issue that’s going on. And by the way, there’s a solution to it and it’s in front of Congress right now.” So it’s just, I guess it’s really good for them to offer these kinds of internships programs to get those fresh ideas and those connections to people who are still in training.

20:30 Abigail: Yeah, I think they really appreciate the fellowship program for that same perspective. The younger generation. People serving on these committees and the boards are faculty members that have been serving for a while and they’re very removed from this training portion. I think there might be–and correct me if I’m wrong–but I think there could be a few postdocs who are serving on boards, but I think that’s very unlikely. Most of it’s always faculty. There’s never a postbac representative in these meetings. So, having a fellow there, they really value so they can get that younger perspective on what’s happening currently.

What is the SECURE Act?

21:10 Emily: Yeah. That’s excellent. Okay. So that was your role with FASEB and then with respect to the GSSA, the Graduate Student Savings Act. There is a different bill before Congress that has sucked up a lot more attention in terms of changing the tax code than the GSSA has, and that is the SECURE Act. Can you tell us what the SECURE Act is? Not in a lot of detail, but basically just how it relates to the Graduate Students Savings Act?

21:35 Abigail: The SECURE Act is Setting Every Community Up for Retirement Enhancement Act of 2019, and it’s just a massive retirement savings bill. For some perspective, the Graduate Student Savings Act is a two-page bill, whereas the Secure Act is 124 pages. So it’s just way too large for FASEB to endorse something so big. But fortunately, it has almost the exact same wording as the Graduate Student Savings Act in one of its sections. So it would get across the same thing as the Graduate Student Savings Act. It would allow graduate students receiving unearned income to contribute to an IRA account. It just was too big of a bill for FASEB to endorse because we can’t vet everything and it’s a little bit out of FASEB’s wheelhouse.

22:22 Emily: Yeah. So, basically what sounds like has happened is that the Secure Act has absorbed the Graduate Student Savings Act pretty much verbatim. And it’s making a lot of other changes as you said to retirement accounts. I’ll link to a couple articles on the Secure Act from the show notes, but some other things that caught my eye that it’s trying to address are like having part time workers have more access to 401k’s. It’s changing a little bit of the distribution rules, like once you’re actually in retirement and about inherited IRAs and there’s just a lot of changes there. Abby and I were glancing over it and we saw something that, “Oh maybe this addresses the kiddie tax.” We’re not even sure about that, which would be amazing if it does. So there’s a lot of different things that it touches.

23:02 Emily: And as you were saying earlier, like for FASEB being able to endorse the GSSA, the GSSA had to have bipartisan support. In fact the Secure Act does have bipartisan support. It passed the House and is currently hung up in the Senate as of, again, September 25th. Because the Secure Act passed the House with such strong bipartisan support, everyone kind of thought that it would pass the Senate really quickly. But it’s been hung up, so its future is uncertain but hopefully it will get through. And the wording that was adopted from the GSSA, hopefully that would actually be maintained. And in the final version we would actually see this benefit be extended to graduate students and postdocs where it wasn’t before. But that’s kind of where things stand as of today as of this recording. Hey, maybe by the time this is published something will have changed on that front. That would be awesome.

23:56 Abigail: I think something also important to note is that the wording of the bill, I don’t think that it would also apply to postbacs. It seems very specifically to graduate students and postdocs. So I think, unfortunately, postbacs would be still excluded from the Graduate Student Savings Act.

How Will the Internship Help Your Future?

24:12 Emily: Hmm. Interesting. Yeah. I’ll have to take a look at that because I didn’t realize there were distinctions being made among different levels of training. We’ll see how that actually shakes out. It’s always sort of uncertain until kind of the next tax cycle rolls around how these things are actually going to be implemented and everything. Thank you for pointing that out. For postbacs out there, this might not be the news you’re looking for. Maybe you still need the side hustle or maybe you still need to get married to have one of these workarounds. Just kidding, people don’t do that. Okay. So Abby, how do you think that this internship experience with FASEB is going to benefit your future career?

24:52 Abigail: Oh, I think it benefited me already tremendously. Besides from just getting a sense of what science policy really is and getting to immerse myself in it and what I would expect in a job. I got great networking. I already met a bunch of people because FASEB represents so many other societies. You know, I really got to get my name around and people know my work now. I also just got a ton of experience. I generated a bunch of writing samples, which is really crucial in the science policy job search, and I think I’ll get great references also for future jobs. So, it’s benefited me tremendously.

25:30 Emily: Do you have specific plans yet for after you finish? Like what positions you might apply for?

25:35 Abigail: Yes, I’m probably looking for science policy analyst positions. When I graduate. I don’t see really any benefit of doing a postdoc afterwards. There are people that continue to do more science policy fellowships. I’m kind of in the boat where I would just like to be out of fellowships and schooling and just want a real job. And I think with this internship I generated enough experience that I would be able to get an entry-level position and be a sought-after candidate.

Final Advice for Early-Career Grad Students

26:08 Emily: Yeah, I have a great deal of sympathy with that position of, “okay, I don’t need any more training. I’m trained. Let me have a job. Finally.” Definitely. So Abby, last question here, which is one I ask all of my guests. What is your best financial advice for another early-career PhD? And that could be related to something we’ve talked about today or it could be something entirely different.

26:29 Abigail: Yeah. So I think of course I would recommend that everyone should open and save in a Roth IRA account and start saving what they can, even if they can’t hit the max. But I think more importantly, we know that graduate school is a really stressful time, and I think it’s really important to invest in your personal wellbeing. And so if that means, paying for workout classes or traveling or if it’s even retail therapy. I think whatever it is, if it’s important to you and if it makes grad school a little bit saner for you it’s important to put some money aside and make time for yourself.

27:08 Emily: Yeah, it’s, it’s actually a little bit weird that sometimes we have to give graduate students permission to spend money on themselves. But if you think about it like more broadly, other people when they receive the financial advice to cut back on those discretionary expenses, cut back on those Wants and so forth, it’s usually because they’re spending at such a level that’s actually endangering their other financial security.

27:35 Emily: Graduate students I would say in general are not spending a sufficient percentage of their income on discretionary things for themselves. Actually, sort of to tie this back to the GSSA, one of the co-sponsors of the GSSA is Senator Elizabeth Warren. She’s sponsored every year in the past, whatever, four years that it’s been up. Many years ago, back when she was a consumer advocate, basically, she wrote this book called All Your Worth*. She co-authored it with her daughter. And that book promotes the balanced money formula, which is to spend, of your after-tax income, no more than 50% of your after-tax income on Needs, 30% on Wants and 20% to Savings. And I was looking at that the other day and I’m thinking that graduate students, I would be surprised if they spent 30% of their income on their Wants.

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

28:28 Emily: Usually, it’s that Needs category that gets up to 60, 70, 80% or more because of rents and high costs of living areas and low stipends and all of those kinds of problems. So yeah, in fact, sometimes we do need to hear the advice that it is okay to spend a little bit of money on yourself to help bolster your mental health and help you get through graduate school in great shape. Of course, it’s ideal if you can do that alongside saving for your future and doing all these other great things, but we want you to get through graduate school in one piece. So yeah, thank you for that advice, Abby, and for giving this interview today.

29:02 Abigail: Well, thank you for having me.

Outtro

29:05 Emily: Listeners, thank you so much 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, a form to volunteer to be interviewed, and a way to join the mailing list. I’d love for you to check it out and get more involved. If you want to support the show and my business, please go to pfforphds.com/helpout. There are plenty of ways to do so without laying out any of your own money. See you in the next episode! And remember, you don’t have to have a PhD to succeed with personal finance, but it doesn’t hurt. The music is Stages of Awakening by Podington Bear from the free music archive and is shared under CC by NC.

What to Do With Your 401(k) or 403(b) When You Start Grad School

April 29, 2019 by Emily

One of the common perks that companies and organizations give to their employees is access to a workplace-based retirement account such as a 401(k) or 403(b). They may even match your contributions to a degree! Unfortunately the great majority of universities do not give their graduate students access to their 403(b)s. (This does happen rarely, so it’s worth inquiring about.) If you had a 401(k) or 403(b) in a prior job, what do you do with that account when you leave your job for grad school?

Further reading: Financial Reasons to Work Before Starting Your PhD

Your Three Options for Your Workplace-Based Retirement Account

In general when you leave a job, you have three options for what to do with your 401(k) or 403(b).

Leave It Where It Is

Most of the time, your former employer will permit you to leave your 401(k) or 403(b) where it is and continue to manage the account for you while you are in grad school. Employers usually have a minimum balance requirement to maintain these accounts, so your account has to meet that bar.

The upside to this approach is that you don’t have to do anything, and if you liked the investment options and account fees, you can keep using it.

The downside to this approach is that you have to stay in some degree of contact with your former employer and go through them if you want to make any changes to the account.

Roll to Your New Workplace-Based Retirement Account

If you have the option to open a 403(b) with your university, you may be able to roll your previous 401(k) or 403(b) into that account. Again, this opportunity is rarely extended to grad students.

Roll to an IRA

You always have the option when you leave a job to roll your 401(k) or 403(b) into an Individual Retirement Arrangement (IRA). An IRA’s tax advantages are similar to those of a workplace-based retirement account, but you manage the account yourself instead of your employer managing it. Be sure that you have instructed your firms to execute a “rollover” directly to your IRA and not to cash out your account and send you a check, which would be a hassle to correct. You can use an existing IRA account or open an IRA account specifically to receive this transfer.

Which Option Should You Choose?

The general personal finance advice is to always roll your 401(k) or 403(b) when you leave an employer to avoid eventually having accounts scattered across many employers and potentially losing track of one. Whether you should roll into your new employer’s 401(k) or 403(b) or your IRA is debated. If you are trying to optimize the investments inside your retirement account, IRAs have an advantage because the entire world of investment options is open to you, whereas the options inside a 401(k) or 403(b) are only what your employer decides to make available. Sometimes, 401(k) or 403(b) plans are more expensive than what you can get inside an IRA, and since cost minimization is a key tenant of successful investing, again IRAs are preferred.

However, this general advice is not necessarily fully applicable to grad students.

First, your options are mostly likely to be either to leave your 401(k) or 403(b) where it is or to roll it into an IRA.

Second, you may not want to manage your own investments. While managing your IRA can be easy and hands-off, it may still be intimidating, and some students might prefer to simply choose among the options offered by the former employer to opening and managing an IRA.

Third, the investments available to an individual investor inside an IRA may not be as attractive as the institutional-level investments available inside a 401(k) or 403(b) in terms of their fees. To paint with an overly broad brush, 401(k) and 403(b) options at smaller companies and organizations may be more expensive than what you can buy inside an IRA, whereas 401(k) and 403(b) options at larger companies and organizations may be less expensive than what you can buy inside an IRA. So if you were employed by a university or a large company before starting grad school, compare the cost (expense ratios) of your current investment options with those at the brokerage firm you’re considering for your IRA. It may turn out that your existing options are more favorable.

Further reading:

My advice to entering grad students is to roll your 401(k) or 403(b) into an IRA unless you have high-quality, inexpensive investment options inside the workplace-based retirement account and do not want to manage your own account.

Other Advice Related to Retirement Saving

You’re on a great path already by starting to invest for retirement through your job. If at all possible, continue to make excellent choices related to retirement investing during grad school.

Contribute Money to Your 401(k) or 403(b) While You Still Can

It’s a great idea to kick your retirement savings rate into an even higher gear in the months you have left at your job. You’re likely to not have access to a 401(k) or 403(b) again for quite a while, so any additional money you can get into that tax-advantaged account will be a huge boon to your post-PhD self. (Plus, you’re forcing yourself to deflate your lifestyle, which you’ll have to do in a few months anyway!)

However, don’t become so zealous about retirement saving that you compromise your cash position. It’s going to take a good amount of cash to transition into grad school between moving costs, start-up expenses, and university fees. You don’t want to put a lot of money inside your 401(k) or 403(b) only to turn to credit cards to make it until your first grad school paycheck.

Keep Investing for Retirement!

Yes, it is sometimes possible to invest for retirement during grad school, but it heavily depends on your stipend, the local cost of living, and the rest of your financial situation. If you have no pressing debt, enough cash savings for emergencies and short-term expenses, and some excess cash flow, please continue to invest for retirement!

Further reading:

If you have W-2 income as a grad student (typically from an assistantship) in a given calendar year, you can contribute to an IRA. If you don’t have IRA eligibility due to receiving only non-W-2 (typically fellowship) income in a given calendar year, don’t let that stop you from investing for retirement! You can still use a taxable brokerage account. Between tax-efficient investments and your low tax bracket, you are likely to still enjoy tax benefits of investing even outside of an IRA.

Further reading:

Consider Traditional to Roth Conversion During Grad School

During your time in grad school, you may be in a lower tax bracket than you were while at your previous job. Grad students, unless married to someone with a much higher income, are usually in the 12% marginal tax bracket at the highest.

If you have any money in a traditional 401(k), 403(b), or IRA (which you certainly would if you ever received a retirement contribution match from your employer), consider converting it from traditional to Roth during your lower-earning grad school years. It’s pretty unlikely that you’ll ever be in the 12% (or lower) tax bracket again after you finish grad school due to both your personal earning potential and today’s rock-bottom income tax rates, so it makes sense to do the conversion at that low tax rate to gain the benefits of a Roth IRA. (People are flocking to do this type of conversion even in much higher tax brackets!)

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

When you do the conversion, you’ll have to pay income tax on the full balance of your traditional retirement account. Before you start the conversion process, be sure that you 1) have enough cash to pay the tax and 2) are not bumping yourself into a higher tax bracket with that income infusion.

You don’t have to rush to do this in your first full calendar year as a grad student if you’re not ready, but you should do it as early as you can, and keep an eye on that year in which you expect to finish and get a higher-paying job.

This conversion can be slightly complicated if you only want to convert part of your traditional money in any given year, so be sure to discuss your plans with the brokerage firm that houses your IRA.

Conclusion

Great job on contributing to a 401(k) or 403(b) prior to starting grad school! The positive financial habits you’ve already cultivated will serve you well during and after grad school. If you want to take any steps at all with your existing workplace-based retirement account, they are quite straightforward and easily accomplished.

Why You Should Contribute to Last Year’s Roth IRA

April 9, 2019 by Emily

Good news for you investors: The calendar may say 2021, but you can contribute to your 2020 Roth IRA up until Tax Day (May 17, 2021)! Why is this good news? Because you can continue to contribute to your Roth IRA (if you have contribution room) without taking up contribution room in 2021. In this way, you can roll forward some of your contribution room, even over multiple years. This is particularly useful for those of you expecting income increases in 2022 or so.

The IRS’s Retirement Account Contribution Window Extends until Tax Day

Every calendar year from January 1 to December 31, you can contribute to your retirement account for the current year. This applies to IRAs (Roth and traditional), 401(k)s, 403(b)s, etc. You can also contribute to last year’s retirement account in the subsequent calendar year up through Tax Day. You can even open and fund an IRA for the previous year!

Right now, between January 1, 2021 and May 17, 2021 (Tax Day), you have the choice of contributing to your 2020 IRA or your 2021 IRA assuming you are eligible and have contribution room in both years. In fact, you should contribute as much as you can to your prior year IRA before switching over to the current year IRA.

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Eligibility and Contribution Limits

I’m going to clear up the caveats I’ve been making right here.

Eligibility: You need “taxable compensation” in a calendar year to contribute to that year’s IRA. Employee (W-2) and self-employment income are both taxable compensation. Fellowship income, if not reported on a W-2, was not considered taxable compensation in 2019. However, the definition of taxable compensation was changed for 2020 and following to include taxable fellowship and scholarship income for graduate students and postdocs.

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

Contribution limit: The contribution limits on IRAs are pretty low, at least in comparison with workplace-based retirement accounts like 403(b)s and 401(k)s. For 2020, you can only contribute a maximum of $6,000 ($7,000 for those over age 50) or the amount of taxable compensation you had in the calendar year, whichever is lower. You do not have to contribute the entire $6,000 in a year; it’s fine to contribute $1,000 or $3,000 or whatever you can. When I say contribution room throughout this post, I mean the difference between your contribution limit, e.g., $6,000, and the amount you’ve already contributed.

Why Is Contributing to an IRA So Important?

You may be asking yourself why I’m writing about Roth IRA contributions in particular. After all, once you’re out of graduate school and actually able to save more money, don’t you have a reasonable expectation of receiving a 401(k) or similar employee benefit?

1) Yes, you probably will work somewhere that provides you with a 403(b) or 401(k) or other type of workplace-based retirement account (or you’ll be self-employed and have self-employment retirement accounts available to you). Exception: Some postdoc positions (and adjunct!) might not offer a 403(b). But you don’t know the future, so I think it’s better to be cautious and roll forward as much contribution room as you can.

2) Even if you have a workplace-based retirement account available to you, the rule of thumb for retirement contribution priority is: workplace up to the match, IRA, then workplace again. This is because you can buy just about any fund you want through any brokerage firm in your IRA, whereas your options in your workplace based account will be severely limited. It is assumed that you can find better quality (read: cheaper) investment options through your IRA, so that should be prioritized. However, you should definitely check out your options through your workplace account before assuming this is true for you; some universities offer good, low-cost institutional investment options that might be even better than what you can buy as an individual.

3) Your workplace might only offer a traditional retirement account, so an IRA will give you the option of using a Roth, which you could take if you think it’s the better choice for you in a given year.

Why Am I Specifying a Roth IRA?

As far as your taxes go, if you’re contributing to a Roth IRA in both calendar years, it doesn’t matter which one you choose during the overlapping period. If you were contributing to a traditional IRA instead, it would matter: Your contributions to last year’s IRA would count for a tax deduction on last year’s tax return (hence being able to contribute up until Tax Day). But with a Roth IRA, you aren’t taking a tax deduction, so you’ll pay your full tax on the contribution no matter in which year you make it.

Always Contribute to Last Year’s IRA First

Now we come to my suggestion to contribute as much as you can to last year’s IRA before switching to this year’s (aka roll forward contribution room), either because you have reached your contribution limit or because Tax Day has passed.

The advantage is most clearly seen in the year that you experience an increased ability to contribute to your IRA (as long as you haven’t been maxing out your contribution room). This could happen because:

You decrease your expenses so that you can save more
You start earning a side income
You finish your PhD and take a higher-paying position (postdoc or Real Job)
You finish your postdoc and get a Real Job

In these cases, you may be able and want to contribute more than $6,000 to your IRA in one calendar year, and you are only able to do that if you split the contribution between your prior year IRA and your current year IRA.

But you should practice this every year, not just in a year when you expect an increased ability to contribute because:

You don’t know what will happen throughout the whole next calendar year, and your ability to contribute to an IRA could increase unexpectedly (e.g., you receive a windfall, a side income presents itself, you decide to leave grad school/your postdoc early for a better-paying job, you combine finances with a higher-earning person).
You can roll forward your contribution room into future years. For instance, if you can contribute $5,000 each calendar year to an IRA, you can carry forward some or all of your $1,000 excess contribution room, so that in the year that you are able to contribute more, for example, you can contribute $6,000 to your current year IRA and perhaps $1,000 to your prior year IRA.

An Illustration (with Numbers!)

The advantage of this strategy is more easily understood with an example.

Let’s say you’re a graduate student in 2020 and 2021, earning $30,000 per year. You are a superstar saver, so you contribute 12% of your gross income to your Roth IRA every month. In 2020, your total contribution to your 2020 Roth IRA was $3,600.

In the first five months of 2021, you continue to contribute to your 2020 Roth IRA, which brings your 2020 Roth IRA contributions up to $5,100. In the seven remaining calendar months of 2021, you contribute $2,100 to your 2021 Roth IRA. Your remaining contribution room for 2021 is $3,900.

January 2022 hits and you start a Real Job! Your new yearly salary is $72,000, and you increase your savings rate to 20%. This means that you can put $1,200 each month into your retirement account(s).

In the first four months of 2022, you max out your 2021 Roth IRA with $3,900 and also put $900 into your 2022 Roth IRA or other retirement account options. You can use the rest of 2022 to max out your 2022 Roth IRA and contribute to your other retirement account options.

In this example, you ended up contributing $17,100 to your Roth IRA over three years ($5,100 in 2020, $6,000 in 2021, and $6,000 in 2022). Had you not rolled forward your contribution room, you would have contributed only $13,200 to your Roth IRA ($3,600 in each of 2020 and 2021 and $6,000 in 2022). (The rest of the money would go into your other retirement account options in 2021, presumably.)

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The Psychology of a Ceiling

The previous illustration assumed that you would save at the same rate no matter what contribution room you had available or what account you used. However, if you are a competitive person, you might benefit even more from rolling forward your contribution room by contributing to your prior year Roth IRA first.

I’ve noticed that many people strive to max our their Roth IRAs each year, irrespective of the actual amount or percentage they might otherwise want to save. They use the contribution limit as their goal. This is not a good thing if you would otherwise contribute more than the limit, but I think many grad students and postdocs might have the opposite issue: without the limit serving as an implicit goal, they might contribute less than the limit.

By rolling forward your contribution room, you can create ever-higher savings rate goals for your Roth IRA, which might modify your behavior and help you save even more overall.

I fell victim (in a good way!) to this psychology in a similar scenario. When I started contributing to my Roth IRA, my goal was 10% ($2,400) per year. But once I found out that my now-husband maxed his Roth IRA out every year, I made keeping up with him and maxing out my goal, too. I found creative ways to gradually increase my savings rate. I didn’t quite make it to $5,500/year (the contribution limit at the time) by the end of graduate school, but I sure got a lot closer than $2,400/year.

I think the contribution limit can create the same kind of competitiveness, and rolling forward your contribution room makes the challenge even greater.

My Personal Experience with Contributing to Prior Year Roth IRAs

A couple years before we finished our PhDs, my husband and I started following this suggestion of contributing to our prior year Roth IRAs as much as possible before switching to our current year Roth IRAs. It seemed not to matter much for a couple years until we experienced an income increase, and then having the extra contribution room was really helpful.

My husband’s Real Job offered a 401(k), but it was through a notoriously expensive full-service brokerage firm, which we did not want to use. Instead, we contributed our target amount of savings to our Roth IRAs (still maxing out the prior year first) and a self-employment retirement account (available through my business). The extra Roth IRA contribution room we created through rolling forward was particularly helpful in the transition year because 1) it took some time to figure out our 401(k) and self-employment retirement account options and 2) my contribution room in my self-employment retirement account wasn’t very high after working on the business for only a few months.

Further reading: Avoiding an Expensive 401(k) Plan through Self-Employment

Investing

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Climate Change and Personal Finance

The Impact of Individual’s Choices

Being Mindful with Where You Keep Your Money

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Socially Responsible Investing

Collective Action

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Intro

1 The Prior Definition of Taxable Compensation

2 The Legislation That Changed the Definition

3 What to Do Now

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Investing in the US as an International Student

Is it permissible? Yes!

Opening a Brokerage Account

Investing during Short-term vs. Long-term Stays in the US

Taxable vs. Tax-Advantaged Accounts

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Investing Under Different Visas

Investing for Different Income Types

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Tell Us More About Your FASEB Internship

How to Land a Science Policy Internship

What is the Graduate Student Savings Act?

How Abby Got FASEB to Endorse the GSSA

Personal Impact of Flawed Tax Legislation

Commercial

Anything Else About Your Role in FASEB?

What is the SECURE Act?

How Will the Internship Help Your Future?

Final Advice for Early-Career Grad Students

Outtro

Your Three Options for Your Workplace-Based Retirement Account

Leave It Where It Is

Roll to Your New Workplace-Based Retirement Account

Roll to an IRA

Which Option Should You Choose?

Other Advice Related to Retirement Saving

Contribute Money to Your 401(k) or 403(b) While You Still Can

Keep Investing for Retirement!

Consider Traditional to Roth Conversion During Grad School

Conclusion

The IRS’s Retirement Account Contribution Window Extends until Tax Day

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Eligibility and Contribution Limits

Why Is Contributing to an IRA So Important?

Why Am I Specifying a Roth IRA?

Always Contribute to Last Year’s IRA First

An Illustration (with Numbers!)

Free Email Course: Investing for Early-Career PhDs

The Psychology of a Ceiling

My Personal Experience with Contributing to Prior Year Roth IRAs

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