Personal Finance: Summer Salary and Other Windfalls

One unique aspect of the life of the academic scientist is summer salary. Although many scientists, especially at research universities, may come to expect at least 11 months of salary each year, many others think of this as "extra money" beyond their base pay for a 9-month academic year.

Like most financial windfalls, such as an income tax refund or an inheritance, summer salary isn't difficult to spend. Some families plan to pay expected large expenses--such as property taxes, for example--from this supplemental income. Instead, you should be setting aside money for these big bills out of every paycheck.

If you are repaying consumer debt or education loans, it can be tempting to put any extra money against that debt. If it will pay off the bill entirely, it's often worth it. But some advisers recommend that a windfall be split so that half is put into savings and half paid against your consumer debt; this can create a feeling of progress on two fronts. It's important to remember that emotions are a big part of financial planning; you're more likely to be successful if you can manage some enthusiasm.

If you have no consumer debt to repay, you might consider contributing to a Roth IRA, in which the money can grow tax-free. It's important to make sure you meet all the eligibility requirements, so check with your tax adviser. Married couples who file income taxes separately cannot typically contribute to a Roth IRA.

Of course, you could contribute at least some of your summer salary into your retirement savings plan. In fact, you can probably manage to deposit all manner of windfalls into your 403(b) or 457 plan. Here's how. Suppose you have an income tax refund of $2000 that you'd like to put into your 403(b) plan. Of course, you can typically make deposits to that plan only through payroll deduction. If you're not yet contributing the maximum to the plan, simply increase your contributions by, say, $250 per month. This will reduce your take-home pay (by something less than $250 because your increased contribution reduces your income tax withholding). You simply make up the difference in take-home pay from the $2000 tax refund. When the tax refund is gone, you reset your 403(b) contributions to the previous level. This gets the amount of the refund into your retirement plan (albeit indirectly), leaves you the same amount to spend every month, and coincidentally reduces your income tax liability.

If you are already contributing the maximum to your 403(b) plan, your institution may allow you to open a 457 plan account and contribute to that as well. Under current tax law, it's permissible to contribute up to $15,000 per year to a 403(b) plan, and an additional $15,000 to a 457 plan, even at the same employer.

Much of financial planning is like this. It's not string theory.

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