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401Ks for Travel Nurses
Many travel nursing companies offer 401k plans as a benefit for their travel nursing employees. A 401k is a defined contribution, tax-deferred retirement savings account. Wow, that’s a mouth-full! In this blog post, we’ll offer some information about 401k’s from a travel nursing perspective that will help travel nurses determine the value of such offerings.
Before we begin, it’s important to point out that we are not registered financial advisers or tax professionals. We are offering this information for informational purposes only and are not making any recommendations. You must seek the guidance of a licensed financial adviser or tax professional to obtain advice based on your specific needs. That said, we are experts in travel nursing and we have worked extensively with 401ks.
401k Matching Plans and Travel Nursing
Now that we have that out of the way, let’s take a closer look at 401k’s from a travel nursing perspective. First, 401k’s are “defined contribution plans.” This means that both the employee and employer are able to make contributions to the plan. It’s important to note that employers are “able” but not “required” to make contributions to the plan.
To make contributions, employers can simply add money to their employees’ 401k accounts, or they can offer a “match.” A “match” is when the employer’s contribution is based on the employee’s contribution, so the employer will only contribute if the employee contributes. For example, the employer might offer to match 25% of the employee’s contributions, so that whatever the employee contributes, the employer adds 25% more in contributions.
This sounds like an amazing deal, right?! It’s basically free money. However, matches come in many different forms and include many different stipulations. For example, a matching plan could require that the employee stays employed with the employer for a specified number of years before the employer contributions are released to the employee. This is known as a “vesting period.”
This is the type of matching plan most common among travel nursing agencies. For example, an agency will offer a 25% match with a 2 year vesting period. This means that the travel nurse will get nothing unless they maintain their employment with the agency for 2 straight years. This is a very important consideration for travel nurses.
Travel nursing has a high employee turn-over rate. This is because travel nursing contracts are short-term. Travel nurses must always seek out new opportunities. And because different agencies have contracts with different hospitals, travel nurses change employers frequently. This means that it’s highly unlikely that a travel nurse will ever receive any funds from an agency’s 401k matching plan. Therefore, you’ll always want to find out the details of the matching plan in order to set proper expectations.
401k “Tax Deferment” and Travel Nursing
Tax deferment is another benefit of 401k’s. This means that you won’t pay income taxes on the money you contribute to a 401k until you withdraw. You’ll sometimes hear this referred to as “pre-tax dollars.” For example, let’s say your weekly taxable pay is $1500 and you contribute $100 to your 401k. In this scenario, you’d only pay taxes on $1400 because the other $100 would go to your 401k before it was taxed.
The financial advantage of tax deferment depends in large part on your current income tax bracket. As you know, income taxes are progressive. So the more money you make, the higher you get taxed. Therefore, the tax savings you realize from tax deferment will be greater as your taxable income increases.
As a travel nurse, your taxable income may be quite low. This is because a large portion of travel nursing compensation comes in the form of tax-free benefits like lodging and Meals and Incidental Expenditure Stipends. Moreover, travel nurses are often able to take further tax deductions for things like travel expenses and other deductible work related costs that agencies didn’t cover during the year. So it’s possible that travel nurses don’t stand to benefit as much from a tax deferred plan due their lower taxable income levels.
Alternative Retirement Planning Options for Travel Nurses
Roth IRAs are an alternative consideration for travel nurses who are planning for retirement and either choose not to use a 401k or work with a travel nursing agency that doesn’t offer a 401k plan. With Roth IRAs, the contributions you make now are made after taxes have been paid on the income. However, you are not taxed when you withdraw the money in your retirement years. This could be a better option for travel nurses who currently have lower marginal income tax rates than they would during retirement.
However, bear in mind that the maximum annual contribution for a Roth IRA is $5,500. The maximum contribution is increased periodically. In any case, if you want to contribute more toward your retirement than the maximum contribution will allow, then you may want to consider utilizing a 401k if one is available. You can also look into a traditional IRA.
A traditional IRA is similar to a 401k except employers are not able to make matching contributions. So the money you contribute to a traditional IRA is tax deductible on your current year taxes and the distributions will be taxed as income when you take money out during retirement.
Recapping 401ks for Travel Nurses
As you can see, these issues can get quite complex. However, there are some simplified considerations for travel nurses. First, determine if the vesting period on a 401k’s matching plan is realistic. You’ll find that most travel nursing agencies do not maintain realistic vesting requirements given the volatile nature of travel nursing employment. Second, determine whether or not the 401k tax deferment feature is a real advantage for you by considering your marginal tax rate. Finally, look into alternative retirement plans like Roth IRAs and traditional IRAs. And of course, seek the guidance of a licensed financial professional to ensure that you’re making the best decision given your unique situation.
Photo via Wikipedia Commons
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