I think you’re doing awesome if you can manage that. I’ll be a new attending next year with a salary of 250K base. As for the heirs, a spouse does not have RMDs if a Roth is inherited but they do have RMDs if a traditional IRA or 401K is inherited. Point is, there’s a lot to consider and it needs to be highly individualized. As a result, your goal should be to put asset classes with high expected returns, such as stocks, into the Roth IRA. over to my new employer’s 403b. For 403b ROTH, do I open through the Human Resource Department at my program? I believe there is still a tax basis on Roth accounts. In any case, I sincerely appreciate your prompt reply and time. Then 100% traditional starting next year. But an estimate isn’t all that hard, and that’s really all you need at this point. My wife, also a physician, is about to finish up her fellowship but has been making Roth 401(k) contributions. However the trade off you mention is certainly true. At any rate, no big deal to leave them at the old employer for a while. This lower tax than TIRA would also be in addition to all the other benefits and flexible withdrawal that comes with Roth IRA. Ahhh. I’m trying to figure out what our best options are for when I get home next year and she starts working as an attending. I think there’s even a match now. Very good point. It’s pretty obvious for most residents. You can do Roth conversions in later years when your income may be lower. Defined benefit plan $15K. Assume you are in a 25% tax bracket, all in. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. There are a ton of online brokerage firms that let you open a Roth IRA and invest in various funds. Still overall, paying 4-7% tax overall on either Trad 401K vs Roth ( similar) in both with obvious additional benefits of ROTH makes me favor Roth more than what I thought before. Those things bode less well for the traditional 401K. Do these three things after maxing out your 401k and Roth IRA. Then you can max out your annual Roth IRA contribution. – Many of such people think of passing money to their Heirs for which Roth is handy. Logos for Yahoo, MSN, MarketWatch, Nasdaq, Forbes, Investors.com, and Morningstar. Hope that helps. Can I as a resident contribute to both a traditional 401k and a roth 401k. I’m aiming for about 33% Traditional / 66% Roth. If your traditional IRA already contains deductible contributions and earnings, you have to split your conversion based on the portion of nondeductible contributions in all your traditional IRAs. I am now not certain whether this submit is written by him as nobody else know such particular approximately my Does the above plan seem reasonable? You should remedy that soon. When the facts change, we should change our minds (this was probably never said by Keynes) http://blogs.wsj.com/marketbeat/2011/02/11/keynes-he-didnt-say-half-of-what-he-said-or-did-he/. The whole blog is great. Also available on Audible! I was also kind of struggling with traditional vs Roth Dilemma. Thank you for providing the link to the Roth 401k vs. An increase in retirement contributions at this level holds open two important possibilities: A little math will demonstrate this. So let’s first consider the first 6 years of the period, when you are putting in $5500+$18K =$23.5K per year. Wouldn’t contributing a majority of funds pre-tax to a traditional 401k instead of a Roth still make sense here, especially if he ends up in-house somewhere making $200k? Try to teach a 4-year-old to snorkel. For now I am doing pretax 17500 in each 403 b and 457 and doing 51000 in profit sharing ( along with employer contribution and doing backdoor roth IRA. Take a look at an example to see why this would be the case. Stepwise it would look something like this: 1) Max out 401k yearly. I use the spreadsheet Future Value function to do stuff like this. I think there is no clear cut answer for high income generators and high savors. As for the guarantee I mentioned, as long as the Fed has an explicit duty to maintain the value of the dollar and prevent situations like Zimbabwe or the Weimar Republic, I don’t see how our debt is going to be inflated away. Traditional IRAs/401Ks don’t. When can I find out more? Your email address will not be published. Q1. Your Roth IRA balance would have grown over 720% by the end of the year, allowing you to easily turn $6,000 into nearly $50,000. Do you use a Roth 401(k)/403(b)? Refreshing. Your article makes a pretty strong case for traditional 401Ks, with a minority of retirement assets in a Roth 401K. I like citing this chart when illustrating a point to my friends, colleagues, etc. But you can do a backdoor Roth. What’s that, $84,500? If you put it into a post-tax account, and it triples, you’ll end up with that same $22,500. Those who save a lot of money may also want to preferentially use Roth accounts. I don’t have math that supports that ratio, but it feels right to me. But you shouldn’t yet have concluded anything about the traditional vs Roth dilemma. 2) When I roll-over my pension to the traditional IRA, and then the Roth IRA, will I have to figure out how much to tax myself or will the Vanguard site do it for me? They might be quick questions to ask, but not necessarily answer. Q1. But bear in mind just maxing out a Roth IRA is an 11% savings rate for a resident. Q3. The heirs do have RMDs and there is no step-up in basis as it is all already tax free. You do not need an income to open it, but you will need an income by the end of the year in which you fund it. Taking advantage off all the different retirement plans to which you have access can help you save money for retirement and maximize your income tax benefits. Or paying tax at 28% now, when you could have pulled it out in 30 years at 15%. You may also be able to open an individual 401(k) at some point and roll them in there. It’s true. I added a footnote to the page that addresses your concerns. Of course, you don't get the usual tax deduction for the contribution if you use your never-taxed IRA money to make the donation. And even if you stay, Roth is still probably the right answer since you’ll then have a pension. If you were in my shoes, what would you do? Both 401(k) plans and Roth IRAs offer tax-sheltered growth. Is there a better option to invest other than 403b ROTH or maxing both IRA and 403b ROTH spaces during residency is the best investment option for residents? State tax laws also affect the Roth or traditional 401(k) decision. The question isn’t whether to put $1000 in a traditional IRA or $1000 in a Roth IRA. Your ability to contribute to a Roth IRA is not contingent on your contributions to a 401(k) plan, but other Roth IRA contribution criteria might cause you trouble. I will be maximizing each of the following: Both IRAs, 403(b), 457 (all tax-deferred), and a program where I work called the RSP (retirement savings plan, which is also tax-deferred and matched up to a total contribution for the year of 18k). Along the same lines, you may wish to do Roth conversions of your tax-deferred accounts. Or save up a downpayment. Q2. As with any investing strategy, do the external environment analysis first, then invest. It sounds like you’re going to put some pension money (pre-tax) into a traditional IRA. But thanks to the fact that not only are you likely to have a lower marginal rate in retirement but also the fact that you contribute at your marginal rate and withdraw at your effective tax rate, most doctors in their peak earning years are going to be better off deferring taxes whenever possible. Your Roth IRA eligibility depends only on two factors: your earnings must be equal to or greater than your Roth IRA contribution, and your total income must not exceed the annual limits. Find out how much you can save for retirement. I am in first year out of fellowship. Calc doesn’t appear to take into account maxing out contribution plus the catchup for 50yo+. Until April 15, 2014, you can make 2013 contributions if you’d like. If you make too much money to contribute to a Roth IRA because of your income, you may still be able to get money in the Roth IRA. My instinct is to contribute to the traditional account. I’d like to think after residency I’ll be making over 130K. I currently make $160K, and the lockstep salary/bonus increases in BigLaw slowly take you to around $350K in the next eight years. There are advantages for each Tax-Deferred: The Critical Concept of Filling the Tax Brackets, the children of most physicians won't qualify for any financial aid, 8 Reasons Whole Life Insurance Is Not Like A Roth IRA, Why Your 401(k) Should Have a Roth 401(k) Option, IRAs, RMDs, and the Crisis of Doctors with Too Much Money in Retirement, Backdoor Roth IRA Ultimate Guide and Tutorial, Some More Thoughts on Roth 401(k) Contributions, How To Get Your Tax-Exempt TSP Money In To A Roth IRA, Roth versus Tax-Deferred: The Critical Concept of Filling the Brackets, IRA Recharacterizations (I Should Have Back Door Rothed! Federal+state+estate taxes. Traditional 401k calculator. I live in a state that does’t have state tax, so that point hit home for me pretty hard. A tax-free Stretch Roth IRA has the potential to grow to an even larger sum of completely tax-free money (since it can grow tax-free for an additional 10 years after death before withdrawals are made). Our salary is lower than it will be in later years, but still high enough that it might be analogous to “attending” levels. If her business earned say, $57.5K, she could contribute the $17.5K employee portion plus almost $10K in employer portion. A lot of this depends also on your expected income in retirement. Am I allowed to make yearly contributions to a SEP IRA, roll it all over into my employer 401k yearly, and continue to make yearly $5500 conversions to my roth IRA without any penalties? Great website indeed.. If you want to see a range, repeat the exercise using a value of 2% and a value of 7% and I think most would admit you’ll end up within that range. Extremely hard to read! If you're worried about this, you may prefer to get your tax break as soon as possible with a tax-deferred contribution. For 2020 and 2021, you can contribute $6,000 if you're under 50, or $7,000 if you're 50 or older. I was actually trying to see what tax I pay in either option (Trad 401K vs Roth) and did account for 280$ tax savings on initial investment. There is also an episode on Reveal on this: https://www.revealnews.org/episodes/whos-getting-rich-off-your-student-debt/. Your email address will not be published. Basically, because they save so much, they'll accumulate so much wealth that they'll actually be in a higher bracket in retirement than even most of their peak earnings years. My uncertainty lies in where to put my money. It’s hard for me to say for sure. The book summarizes the most important information on the blog and contains material not found on the site at all. Exactly. It is a vital method of combating potential tax increases! In October, I maxed out my 401k and Roth IRA contributions for the year. Check with the new employer. For most retired professionals, 85% of their Social Security income will be taxable. I budget that we should be able to max out my TSP and her 401(k) contributions plus both max-out backdoor Roth IRAs. Keep in mind that Roth contributions are limited to $19,500 even if your profit-sharing plan otherwise allows you to contribute $58,000 (so you could do $19,500 into the Roth 401(k) and $38,500 into the traditional 401(k)). A really easy one is the Life Strategy Moderate Growth Fund. We are easily going to be in the 33% Federal and 3% State tax bracket this year and was hoping maybe this one last question will help answer our conundrum: Facts: It won’t affect you if you do that conversion. It doesn’t sound like you have one yet, so that should be relatively easy for you to avoid getting one. You have to get rid of the traditional IRA. If so, what is the maximum? In 2010, the IRS removed all income restrictions on who could convert money to a Roth IRA. Perhaps the most common way state tax laws affect the decision is when you plan to retire in a different state than the one you spent your working years in. But if you’re going to force me into a corner at knifepoint and demand I name a fund, I guess I’d say Vanguard Target Retirement 2045. I definitely understand the case for tax arbitrage with a Traditional pre-tax contributions; however, if one has a long enough time horizon and is hoping for good appreciation of assets, would Roth contributions not make more sense? I would like to know where should I invest money after the Roth IRA since there’s no match for 403b. Ignore my snark. Is there a cost to open VSMGX or VTSAX on Vanguard website? I suspect 50/50 Roth will mean you’ve overpaid taxes during your peak earnings years. When the answer isn’t obvious, it probably doesn’t matter much. If you instead put it into a Roth 401(k), the amount of after-tax money in the retirement account is the full $19,500. The question is whether to put $1400 in a traditional IRA or $1000 in a Roth IRA. Review the IRS limits for 2021. How are you able to contribute $28.5K to a Roth? This is a mathematical guarantee. As a general rule, residents should use a Roth IRA instead of a traditional one. So will work on transferring my pension (that’s the only retirement investment I have made so far as everything else goes into paying off my student loans) into the IRA. Starting in 2016 we will be making about 400k a year between the two of us. You’d have to run the numbers with reasonable assumptions to know for sure. Which means that his tax-protected space would shrink to $63.5K. I don’t have any existing retirement funds in any IRA so does the pro-rata still affect me? – The question that puzzles me the most is what to do if I have the ability to max my retirement accounts and do back door roth and then should I make more Roth contributions because effectively i m putting more dollars into retirement while doing roth and likely will not be using all the money for my retirement. If you plan to move to a state without an income tax in retirement, tax-deferred contributions now will be that much better. However, if I put 1000$ in Roth IRA, it would also grow to 4000$ but tax I pay would be 280$ now – again 7% of 4000$. It’s not looking rosy for the high income earners in retirement and probably for estate taxes as well. Having a hard time adding it all up (so far 51k retirement, roth IRA 11k, HSA 6500 – what makes up the rest?). After maxing out IRA ROTH, do you also recommend residents trying to max the 403b ROTH during training years (no match though in my program)? The only pitfall to this conversion strategy is that you cannot choose what money in your traditional IRA you convert. 33% to 25%, less so, but still a nice boost. Sounds like a great start…except for that student loan. If you have both it’s a trade off between maximizing money for your heirs (utilize traditional IRA/401K in retirement) or your own retirement income (use Roth funds). My goal is to get my pre tax pension into a Roth. Although if your heirs don't make much money, it's possible that they may have a lower tax rate than you, and the overall tax rate paid by the family will be lower if the heirs pay the taxes. Why are the comments on this page all italicized? $1000 in a Roth is more money than $1000 in a traditional IRA. The most common type of income is Social Security. Can I contribute 17.5k to both? Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. https://www.whitecoatinvestor.com/retirement-accounts/retirement-account-taxation/. If things work out as projected, my salary should be around 700K within 3-4 years. The IRS has announced the 2021 contribution limits for retirement savings accounts, including contribution limits for 401(k), 403(b), and most 457 plans, as well as income limits for IRA contribution deductibility. Ie: Very high income professionals wont necessarily need more $$ in retirement. The more of it you have, the higher the rate at which those 401(k) withdrawals will be taxed. If one of is still in training, then my bracket is still lower than when we both start working as attendings. Thanks in advance. Talk about an awesome first world problem to have! I recently started fellowship, and am transferring my pension (also pre-tax contributions, only earning 1.6%!!) 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