401K Plans are a type of retirement savings account offered by many travel nursing agencies. There are 4 key factors the travel nurse must consider when determining if a 401K plan is beneficial for them.
First, the travel nurse must consider the “defined contribution” being offered by the travel nursing agency. 401K Plans allow both the employer and employee to make contributions for the benefit of the employee. The employer’s contribution is called a “defined contribution” or a “match.” For example, the agency may advertise that they have a 25% match. This means that for every dollar the travel nurse contributes to the 401K, the agency contributes $.25. This would be great for the travel nurse because they would be automatically realizing a 25% return on their investment.
However, there is a catch with employer contributions which brings us to our second consideration, the “vesting period.” A vesting period is a period of time that must transpire before the agency’s contribution is owned by the travel nurse. For example, the agency may state that their contributions vest after 1 year of continuous service. You’ll want to ask for the agency’s vesting schedule to see their rules. Ultimately, you’ll have to consider if it’s realistic for you to stay with the agency long enough to meet the vesting requirements and benefit from their match.
The third 401K Plan consideration for travel nurses is the “tax deferred” benefit. “Tax deferred” means that you don’t pay income taxes on the money now, but you do pay income taxes on the money when you withdraw it. For example, if you have $70,000 of total income for the year and you make $7,000 dollars of 401K contributions for the year, then you’re taxable income would be only $63,000. This is a big advantage if you have a large income tax burden. However, it’s much more likely for travel nurses to have lower income tax burdens because they receive a large percentage of their compensation in the form if tax free stipends and they may also qualify for other tax write-offs that further reduce their tax burdens. As a result, you may be better served by a Roth IRA which is a type of retirement account that allows you to make after tax contributions now, but avoid the taxes when you withdraw the money in retirement.
This brings us to the fourth 401K Plan consideration for travel nurses, maximizing your retirement plan contributions. If you opt to go with a Roth IRA, then you may still want access to a 401K if you plan to make large contributions for your retirement. This is because the maximum annual Roth IRA contribution is $5,000 for individuals making less than $173,000 per year. Therefore, if you plan on contributing more than $5,000, then having access to a 401k would be advantageous.
Again, the “defined contribution” and “tax deferred” benefits of the 401K may not be of great benefit to the average travel nurse. As a result, travel nurses may be better served by a Roth IRA, and utilize the 401K if they plan to maximize their Roth IRA contribution. Everybody’s circumstances are unique. You’ll want to consult a financial advisor, or tax advisor to determine your best course of action.