A bipartisan bill introduced in the U.S. Senate would allow graduate students to save their fellowship and stipend compensation in an individual retirement account.
Introduced by Sen. Elizabeth Warren, D-Mass., and Sen. Mike Lee, R-Utah, the Graduate Student Savings Act of 2016 would change current law to allow fellowships and stipends to qualify as compensation so they can be saved in a retirement account. Currently these types of compensation are taxed as income by federal and state governments but they don’t qualify as compensation when it comes to savings in an IRA.
“We should be encouraging young adults to start saving early for retirement, but that’s a lot tougher than it should be for graduate students who can’t tuck away some of their income into tax-deferred accounts,” Warren said. “This bipartisan bill will open an important opportunity for graduate students and postdoctoral fellows who want to start building their retirement savings.”
Lee added that, “the complexity of our tax code and the incentives to save for retirement have unfortunately left many post-graduate researchers in a position where they are unable to take advantage of tax-deferred retirement savings programs like IRAs. This bill makes a very simple change to the code to fix this inequity.”
The majority of doctoral students receive at least part of their financial support during grad school from grants and fellowships. Most doctoral students take at least seven years to graduate, which means that for nearly a decade they can’t save portions of their income in a tax-advantaged account. There are about 100,000 postdoctoral fellows working in the U.S. today, according to the National Postdoctoral Association.
If a graduate student begins saving for retirement early, putting away about $1,500 a year for five years of graduate school, she or he would have an additional $57,654 at retirement, assuming 7.5% interest and a retirement age of 65, adjusted for 2% inflation. A postdoctoral fellow who put away $3,000 for three years on top of that would have an additional $113,253 at retirement.
“Graduate and professional students work long hours, juggling their coursework and studies, oftentimes with teaching or research,” said Kristofferson Culmer, president and CEO of the National Association of Graduate-Professional Students. “The stipends they receive for teaching undergraduate classes or working alongside research partners is analogous to a salary and should not be restricted to prevent these individuals – many of whom must obtain graduate or professional degrees to fill crucial and much-need occupation gaps in our communities – from saving for retirement and investing in their future.”
Financial services companies, including Fidelity, Betterment and TIAA, are supportive of the bill.
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