Thank you for sharing this article. I took a look at revised guidance for Publication 970 and I am feeling more confident that my daughter’s stipend will able to be used in a Roth IRA, but she will definitely confirm with her Grad program.
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If the funds are contributed into a Roth IRA (since the grad student presumably pays minimal if any income tax currently there is limited or no benefit to deductibility), the money set aside will be free of any taxes on withdrawal, including capital gains which can be significant as the investment returns are compounded tax free over a significant period of time. Triple tax free bonds/bond funds yields are typically low because they factor in the tax benefit in their pricing, and there is some level of credit risk dependent on the issuer and the collateral, if any, and will not match equity returns over the long run. Most US obligations are taxable at the federal level with interest taxed currently and capital gains/(losses) assessed on sales prior to maturity.
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I advised my children to fund their Roths instead of a traditional IRA or 401K while they were in college so the accounts could enjoy 50 years of tax-free compound growth.
Now that they are out of college and working in fairly high tax cities, I suggest the Roth 401K, and a Roth IRA for as long as they remain below the income threshold and can manage the contributions.
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Parent of a current, fully funded (generously, by most standards $45K stipend + tuition, med, travel, conferences, fees, etc.) STEM PhD student in a high cost area (Cambridge MA). Kiddo will be very, very happy to break even while completing degree.
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Exactly. If the money is going to go into a Roth IRA, then at least an equal amount of money, and maybe slightly more money, will need to transfer from parent to student.
However, given at least 40 and probably closer to 50 years for the money to be invested tax free, I think that this is still a very good idea if (and only if) the parent can afford to help out.
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I definitely understand where your STEM PhD student is coming from… I think my student remembers our humble beginnings during her early childhood and has always been extremely frugal. Her only fixed expense is rent (utilities and cable tv are included). She has zero debt, no real transportation costs (new e-bike , and student fees pay for bus and trolley transit use in her new city), and she has more money budgeted for food, entertainment, and miscellaneous expenses than she has ever had and she previously lived in a pretty expensive city (Washington DC).
We are helping some (she will not have out of pocket medical expenses or a cell phone bill). She has even calculated the taxes and says that she has enough left over to full fund her Roth IRA and still save a little money. We will see how much she actually saves, but I agree that her goal is an ambitious undertaking. But I have seen her only spend $150 of her own money over an entire semester (meal plan and books paid for by her scholarship) in undergrad, so I’ve learned to trust her.
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Perhaps “trust but be ready with the check book” might be a good motto for parents with kids in their 20’s.
It is both fun and tough seeing our 20-something kids go out in the world on their own, but it is the way that it is supposed to be.
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I definitely encouraged my D to contribute as much as possible to ROTH while working on PhD since stipend funding doesn’t take out SS. Thankfully now students can include stipend to come up with income to figure Roth contribution. Before that D still contributed because 1) she did additional fellowship that was paid as salary with W2 and 2)when had TA funding she was treated same as teachers with withholding and W2.
When she started program I told to only do it if she would consider it like any other low paying job and figure out how to save some. She is in a humanities field so employment options from PhD will be less. She enjoys her program and thankfully very well funded.
Stipends are tricky though. Her school issues nothing to account for money. They are told to get figure off last paystub year to date info and of course they also don’t withhold so have to pay estimates. But then when TAing, part of stipend is replaced with salary and that does withhold. Tax time is fun!
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Absolutely!
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This is going to be the hardest part of dealing with grad school finances. My daughter is still deciding whether to send her tax withholding in quarterly or have a big tax bill at year end.
Well we worked our way into quarterly. First year was fine, did owe tax but since school year not equal to tax year, only fall semester was with stipend. With that as guide we actually found that with some guess work the IRS withholding estimator worked pretty well. Not that penalties are huge but wanted to avoid… one year she paid first two estimates and then we refigured once we saw what fall was looking like.
Even if you decide against paying estimates it’s good to figure because you have to have some way to know how much to set aside each month to pay taxes when time comes.
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Also don’t forget if school pays health insurance the value of that is taxable.
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Healthcare insurance is almost always subsidized, whether in full or in part, by most employers. I don’t think those subsidies are taxable.
I think that how you receive health insurance matters. If my daughter was paying for the school’s subsidized health insurance out of her stipend, she would not have to pay taxes on it, but if the school is just giving the health insurance as another benefit (the school is paying all the health insurance costs), I believe she would have to pay taxes on the value of the subsidized health insurance. My kid already has that question ready for her 1st grad school Q&A meeting scheduled in 4 weeks.
Your daughter’s actual real world experience to work her way towards quarterly tax distributions sounds like a great idea that my daughter could use. Thank you for sharing.
Yes, Ds health insurance is paid by a “healthcare scholarship” - not deducted from any other pay. Value of it is taxable. The value is full cost of health insurance that any undergrad has option to buy but covered for doctoral students. The amount is included in the 1098. Dental and vision has to purchased by student and therefore not taxable.
Her school has a chart on tax page for grad students that says for each type of compensation what kind of tax forms are received (if any) and if it’s taxable.
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I just wanted to give an update on my STEM Graduate student’s funding of her retirement. Despite living in a very high cost of living area (top 10 HCOLA nationally), she has been able to be pretty frugal and fully max out a Roth IRA every month and also save beyond that. She currently has 3 months of expenses in her checking account and is up to 7 month expenses in her savings account and has recently received a substantial raise (from 30K to 36.4K a year or about ~$500 a month after taxes) with another substantial raise (15%) coming in fall 2023. She has decided to keep her expenses static (about $1500 per month) which means that she is now saving even more money. The best news from my perspective is that her institution started taking out federal and state taxes after her 1st paycheck so there is no need to send a quarterly tax withholding so far, but she will start as a Graduate RA next quarter so she is not sure if they will continue to withhold taxes or not. She is really enjoying Grad school so far and loves the school and many low/no cost activities available in her new city.
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