401Ks are yet another travel nursing pay benefit that many travel nursing agencies offer. As recruiters we found that many travel nurses addressed 401Ks as important variables in our original conversations and then never utilized them. This is an undesirable approach. You may potentially pass up on good agencies because they don’t have a benefit that you aren’t going to use. You may also select an otherwise poor performing agency because they offer a benefit that you aren’t going to use. Like many other aspects of the pay package, there’s a lot you need to be aware of when determining how important 401Ks are for you.
Before we begin, I must point out that I am not a licensed financial adviser. The details I provide here are for informational purposes only. I am not making any recommendations. You should consult with a certified professional to discuss your specific circumstances. That said, I was formerly a licensed stock broker and principal, and I do have a firm grasp on financial issues.
Travel nursing 401k: tax deferred considerations
A 401k is a type of retirement savings account that lets the individual make “tax deferred” contributions to the 401k account. Tax deferred means that the individual is not required to pay Federal Income taxes on the money contributed to the 401k. For example, if a traveler made $50,000 in a year and contributed $7,000 to a 401k, then their taxable income would be $43,000 assuming they had no additional adjustments or deductions. This is the first potential benefit of the 401k; you’re able to save the money without having to pay income taxes on it. If you have a large income tax burden, then this is a great benefit.
However, if you don’t have a large income tax burden, then this is not much of an advantage at all. This is because there may be better options out there if you don’t pay a lot in income taxes. You see, “tax deferred” means that you don’t have to pay taxes on the money now, but you do have to pay taxes on it later when you withdraw it. The fact that you don’t have to pay taxes now may not really matter if you’re already paying really low (or no) income taxes because you have a low taxable income and/or a lot of deductions.
Many travelers fall in to this category. This is because they typically receive a large percentage of their pay from tax-free stipends. Therefore, they tend to have lower taxable incomes. Furthermore, travel nurses may qualify for other tax deductions that will drive their taxable incomes even lower. As a result, many travelers will have a very low, and sometimes no, federal income tax burden.
If you find yourself in this situation, then you could invest your money in a Roth IRA instead of a 401k. A Roth IRA is another type of retirement savings account that allows you to contribute post tax dollars now, but withdraw them later without paying any taxes. As a result, you may end up paying much less in taxes with the Roth IRA than the 401k in the long run. Keep in mind that the annual contribution limit for a Roth IRA is currently $5500 and it changes periodically. So if you choose to go with a Roth IRA and intend on investing more than $5500, then you’ll want to also have a 401K. This way, you can make your additional retirement contributions to the 401K.
Travel nursing 401k: employer match considerations
There is another potential advantage to 401ks that must be considered. 401ks are a type of retirement account known as “defined contribution plans.” A defined contribution plan is one in which the employer can make specified annual contributions. For 401ks, this is commonly referred to as “matching.” The employer will essentially give the employee some extra money in the form of a retirement contribution. For example, the employer will contribute $.25 for every dollar that the employee contributes. This may not sound like much, but that represents a 25% return on your investment and it’s free of risk to boot! This is a huge advantage in the investment world. Matching is a huge advantage for 401ks. I can’t stress this enough.
Unfortunately, while many agencies advertise that they have matching contribution benefits, you’ll be hard pressed to find one with realistic requirements to qualify. This is typically the result of “vesting periods” that are unrealistic for travel nurses to meet. A “vesting period” is a period of time before the employer contributions are actually owned by the employee.
For example, the agency will say that they have 25% 401k matching, vesting after 1 year. This means that you’d have to work with the agency continuously for a full year before the matching contributions were actually released to you. This is just one example and you’ll see that different companies have different “vesting schedules.” Because travel nurses tend to move from company to company in order to land ideal travel nursing jobs, they rarely meet the vesting requirements. In any case, you’ll want to know everything about the company’s matching and vesting schedule before making any judgments.
Again, I’m not providing advice and I recommend that you seek the advice of a qualified licensed financial professional. That said, my experience tells me that the vast majority of travel nurses will not utilize 401Ks by choice despite the fact that they treat them as important. Furthermore, the single biggest advantage of the 401k, the employer match, is hardly ever realized in the industry. Moreover, travel nurses will most likely not realize much benefit from the 401k tax deferment feature. The reason is that the typical traveler has very low income taxes because they’re getting paid a relatively lower taxable wage and have tax deductions that reduce their taxable income even more.
Therefore, the 401k typically becomes important when you have maximized your Roth IRA contribution. The maximum Roth IRA contribution for 2012 is $5500 for individuals making less than $183,000 per year. As a result, travelers concerned with retirement investing would be wise to determine how much they’re interested in saving each year and splitting that up accordingly between their Roth IRA and 401k.
Managing Your 401K(s) as a Travel Nurse
At this point, you may be wondering what happens to all that money that’s getting contributed to your 401K. Typically, 401Ks are administered by an investment company. This means that the investment company holds and tracks the money for the employer and employee by establishing individual 401k accounts in the employee’s name. The money is put in to the employee’s 401k account where the employee can invest the money in any number of available investment vehicles. Typically, the employer and the investment company have agreed on a set of investments that will be made available to the employee. Typically, these investments will include a very low risk money market fund, and a host of mutual funds with varying investment strategies and levels of risk. The employee then decides where the money will be invested. This may be accomplished over the internet or on the phone with the investment company.
As mentioned previously, travel nurses can expect to switch agencies at a higher rate than permanent employees would switch employers. Therefore, if you decide to make 401K contributions, then you’ll want to have a plan in place for when you switch companies. If you don’t have a plan in place, you could end up with 401k accounts all over the place.
This is fine if you’re okay with keeping track of all these accounts, but there’s another disadvantage aside from the organizational issues. As mentioned previously, 401k accounts typically have a very limited set of investment options and more options is always better than limited options. When you leave a company, you’re able to transfer the 401k to an investment account with unlimited options. Chances are very good that you’ll be charged less in management fees and be able to find investment options with higher returns and lower risk.
To accomplish this, you can set up a 401k rollover account with a brokerage firm of your choice. You can choose a traditional broker, or an online broker like E*Trade. In any case, you’re going to establish the 401k rollover account and complete the required transfer documentation. The broker you choose will help you with all of this. It typically takes 6-8 weeks for your 401k investments and/or funds to be transferred from your old 401k to your 401k rollover account. Once the transfer is complete, you can invest the funds as you see fit and you’ll have one central location to manage your funds.
As always, your comments and feedback are welcome!!