A New Hire asks:
As part of my start-up package, I get a lump sum of ~$60k cash. The default option is for this to be paid monthly over 5 years, but you can choose other schemes, including all at once. However, if you leave before 5 years is up, you have to pay it back (I’m assuming pro-rated). I’m not sure how taxes would be handled. We assume we’d have to pay back money you already paid taxes on, but maybe it could be written off as a loss.
- Our (combined income) – (tax sheltered retirement contributions) will be $186 – $228k the first year (bonus is a large component of my spouse’s compensation package). The expected value (with an “average” bonus) is $206k
- We only will move away if there are extenuating circumstances
- We hope to buy a house in approximately 2 years, maybe slightly sooner. We can probably accomplish this without the lump sum help, but obviously we’d borrow more
- We expect the home to cost in the neighborhood of $700k, perhaps more
- If taken as a lump sum, we’ll likely put into a CD until we use it for a home downpayment.
- We have access to a special loan program requiring 10% down with no PMI, and no real considerations of “jumbo” vs regular mortgage. The drawback is that while rates are quite attractive (3% today with no points), it is variable and pegged to short term investment returns with a floor at 3%
What is the most optimal way for us to take this money?
I’m advocating for lump sum ASAP or splitting between two years. I think the 2 years split would be optimal. Spouse is not sure what to do, but thinks the 5 year monthly trickle makes sense. I assume that if we choose a 2 year period, it may have to be monthly – but I can check if we can get 2 lump sum payments if determined that is most optimal.
(A separate analysis would ask if the mortgage program is a good deal, given that we could lock in low rates in the private market. But we aren’t ready to buy yet, so we can’t compare that yet.)
1. Find out how taxes are going to be handled! If there’s any chance that you can get that 60K to count for taxes on a lower income year (moving from piddly grad student salary to full year salary) and pay lower marginal tax rates on the full amount, that would be ideal. Similarly, if you’re moving from a low tax state to a high tax state, it would be nice to have half the year count for the low tax state.
Similarly, if you think your raises or bonuses will be going up over time or that tax rates will be going up over the next 5 years, that argues for front-loading. If you think Obama is going to be replaced with a tea party member and tea party houses… then you probably make enough money as a family that they’d want to lower your tax rates and you might want to put that off.
The tax bracket you’re estimating is:
28% on taxable income over $148,850 to $226,850, plus… so you’d be paying 33% on anything you earn over 226,850. So ~2000*.05 = $100 extra for the amount that gets into the 33% bracket instead the 28% bracket, if I did my math correctly. I would probably not do anything fancy to save ~$100 at that income.
2. Does your department have a history of kicking people out at the 3rd year review or only at tenure? How likely are you to stick out a bad situation if there are “extenuating circumstances” (does the spouse’s job keep you in this area? would you be willing to move to say, Kansas, if this job doesn’t work out?). More importantly, if “extenuating circumstances” happen, are you easily going to be able to pay back the money from your spouse’s salary or from savings? Does the university really make people pay it back in practice? Does the university allow payment plans to be set up if they do? Of course, if you keep it in a CD you should be able to pay it back with only minimal penalty if you have to break the CD.
3. Is it really 50K all at once vs. 1/5 of that a year for 5 years? Even with small inflationary expectations, there’s no good reason except for #1 and #2 that I can think of to let them earn interest on the money rather than you. Even at a piddly 1% interest rate.
So I guess in general my recommendation is to take the lump sum and keep it somewhere safe. Unless you feel more confident about #2 or are planning on doing a lot of additional saving so you can easily pay back 20 or 30K at the drop of a hat. (Something you may want to be able to do before you buy a house, just in case!)
Re: the mortgage issue, ask us again when you’re closer to that decision and know what the rates are! It does sound a bit sketchy and there may be additional strings depending on the school you’re at. (The UCs, for example, use their mortgage program as a way to lock professors in, I have heard.)
Standard disclaimer: we are not professional financial planners or accountants. Always talk with a real professional before making these kinds of important decisions.
What have we missed, Grumpy Nation?