Roth IRAs also don’t have Required Minimum Distributions (RMDs), which exist in all 401k plans, including the Roth 401k. I saw the entry detailing yours, I know some places (like my work) have Targeted funds based on your age, but don’t know if Vanguard has this or what not…. For 403b ROTH, do I open through the Human Resource Department at my program? For 2021, you can contribute up to $6,000 to a Roth IRA, or $7,000 if you’re age 50 or older. James – not sure if you’re still checking this feed, but thanks for the post. Financial advisors tell me it’s very unusual to see someone with even that high of a ratio. I think you’re doing awesome if you can manage that. But an estimate isn’t all that hard, and that’s really all you need at this point. It almost feels like leaving money on the table if you max but not in the Roth, doesn’t it? 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. Some may plan on early retirement for instance, This seems like a shift in your thinking. They reflect a need to do some serious reading of investing books. It’s all about the percentages, not the amounts. I think your data on the federal debt obligation is way too low. Thanks! The main reason is that Roth IRAs (although interestingly, not Roth 401(k)s) don't have Required Minimum Distributions (RMDs) starting at age 72. Good investing is about earning pretty good returns that you can stick with for a long period of time. Just bought your book on Amazon and really looking forward to reading it. Remember that in retirement you can minimize your effective tax rate by withdrawing some of your income from tax-deferred (traditional 401(k)), some from taxable accounts at preferential long-term capital gains rates, and some from tax-free (primarily Roth, but also borrowing against cash value life insurance or other assets) accounts. Most can’t. So the end effect is still the same – no taxes are paid on qualified distributions. Probably doesn’t matter much. If you are going for PSLF, you are likely trying to keep your IDR payments low to maximize the amount forgiven. 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). For example, I have around $81K in tax-protected space per year, and at a maximum I can only do $28.5K in Roth. First, thank you very much for compiling the above and links to other pages…have spent the last week pouring over what is best for us. So you could put in $5500 on Jan 2, 2017, but you’d better have at least $5500 in earned income by the end of the year. 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? Review the IRS limits for 2021. The general rule is that if you’re working part-time, in residency or fellowship, or in the military, go Roth. Defined benefit plan $15K. I think I will concentrate on paying off student loans while making 10% contribution to my 403 (which I will start to get this January, a new benefit for our training staff). As to the unfunded liability comment from earlier, the current debt per citizen is around $61,345 and per taxpayer around $166,770. Now, my paychecks are larger because those automatic deductions are no longer happening. The question is whether to put $1400 in a traditional IRA or $1000 in a Roth IRA. Are you doing tax-exempt money into the TSP and also the SDP? You can request they withhold some money, but you don’t want to do that. What if your stay-at-home spouse opened a 1099 contractor business earning 17.5k per year? Then the next chunk is at 10%. It’s true. Thanks. For PGY1, what index fund do you recommend to start for the IRA ROTH? That, by itself, will screw up a backdoor Roth IRA contribution due to the pro-rata issue. 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. If you plan to return to New York or California from your job in Florida or Nevada, however, you may wish to pay those taxes up front! Yes, you open a 403(b), including a 403(b) by filling out paperwork when you are hired. There are lots of great options. Also higher income person cannot contribute directly to a Roth IRA (only via a conversion from a non-deductible IRA), but may contribute to a Roth 401K. Do you / are you able to do both backdoor roth IRA personal / spousal, and designate full 17.5k of 52k in 401(k) as Roth? With 36k tax-deferred between RSP and 457 and another 11k backdoor Roth IRA, does it make sense to do the Roth 403(b) to have a more equal allocation between taxed and tax-deferred retirement accounts knowing that the tax-deferred savings won’t be invested now? Because maxing out a Roth 401(k) places more total dollars into a tax-deferred account than maxing out a traditional 401(k). You can put it in the 403(b) and convert it the year you leave residency. It would require a crystal ball to know the optimal strategy. Having a hard time adding it all up (so far 51k retirement, roth IRA 11k, HSA 6500 – what makes up the rest?). I live in a state that does’t have state tax, so that point hit home for me pretty hard. Can I as a resident contribute to both a traditional 401k and a roth 401k. It’s a closer call being married to an attending for sure. Or pay off med school loans. I recently started fellowship, and am transferring my pension (also pre-tax contributions, only earning 1.6%!!) So let’s first consider the first 6 years of the period, when you are putting in $5500+$18K =$23.5K per year. They might be quick questions to ask, but not necessarily answer. Q1. 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/. There may be something unique about you that you should do something different, but probably not. No. 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. There is no income limit for Roth 401K contributions, only for Roth IRA contributions. Straighten out your financial life today! I’ve read the comments, the big thing I guess is my retirement tax bracket compared to now. Nice to see you here. $1000 in a Roth is more money than $1000 in a traditional IRA. However, there are reasonable asset allocations and unreasonable ones. Starting in 2016 we will be making about 400k a year between the two of us. Most importantly, remember that your contributions are made at your MARGINAL tax rate (i.e. But you can do a backdoor Roth. However, I clicked on your link to the Bogle wiki, and it looks like they’re still making the comparison of marginal rates today to marginal rates in the future, and not average tax rates in the future…am I missing something? 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. Q1. Take a look at an example to see why this would be the case. If you can maximize both an IRA and a 401k, then you should read this article to help decide how to invest after maxing out your retirement accounts . I use the spreadsheet Future Value function to do stuff like this. 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! For example, if you believe that future tax rates are going to be much higher than current tax rates, you might be more likely to make Roth contributions and pay your tax now at what you believe will be a lower rate. 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. So, after 6 years, you have: After 24 more years of not adding anything to the pot, you have: That’s in today’s dollars. My current residency program does not provide matching for the 403b plan. Find out how much you can save for retirement. 2) Contribute to a SEP IRA. Any recommended timeline to open it? 1) You should max out a Roth IRA. Whereas pretty much every dollar I put in tax-deferred accounts this year was saved at 33, 35, or 39.6% Federal. 3) Was there a blog entry where you went over how to choose what funds to invest in, in your Roth? If you are above the estate tax exemption limits, Roth money counts exactly the same as tax-deferred money when it comes to calculating estate taxes, but it is actually more after-income-tax money. So for instance, a higher income person may contribute to a traditional IRA but it is not deductible if you have an existing retirement plan (as you’ve mentioned to JS in your reply above). I would like to know where should I invest money after the Roth IRA since there’s no match for 403b. There are some exceptions though. Going from 403b to Roth IRA whether directly or via a traditional IRA has the same effect, but it is a taxable conversion. Our salary is lower than it will be in later years, but still high enough that it might be analogous to “attending” levels. If you take it out at the same marginal tax rate you put it in at, it’s all the same. Not only does it allow you to provide asset protection and tax-advantaged growth to more money on an after-tax basis, but if most of your income is going to be taxed at the highest tax rate in retirement, there is little advantage to withdrawing at your effective tax rate (since it is nearly the same as your marginal rate). No cost other than the ongoing cost of the funds called an expense ratio, which for Vanguard index funds, approaches zero. As a result, if you make a nondeductible contribution to a traditional IRA, you can immediately convert the money to a Roth IRA. -Plan to retire/move to a state with no state income taxes For most retired professionals, 85% of their Social Security income will be taxable. I still have money saved in Taxable which makes me wonder if I shd do roth instead. Not very hip to financial lingo. I think there’s even a match now. With this understanding, it seems that a traditional account would provide more yield than a Roth account due to a marginal tax rate which is significantly less in retirement. It is impossible for me to recommend a fund for you. So you should. Your article makes a pretty strong case for traditional 401Ks, with a minority of retirement assets in a Roth 401K. Great website indeed.. She is the employer. Perhaps I misunderstood his post. Your email address will not be published. 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. Any thoughts? Ah ok that’s what I was thinking. State tax laws also affect the Roth or traditional 401(k) decision. The good news is it isn’t like there’s a bad option here. If rates go up severely, your marginal rate now might even be lower than your effective tax rate later. What do you think? If you can't keep the same dollar-for-dollar … Or paying tax at 28% now, when you could have pulled it out in 30 years at 15%. I would open it when you are ready to invest the money. If he contributes $17.5K to a Roth 401K, then he can’t contribute to a traditional 401K (pre-tax). If I am conservative and presume she’ll make under the median salary for her specialty in our location ($195), we are likely to end up in the 33% tax bracket next year. James- Can you break down your $81k of tax protected space per year? However, I feel like I’ve spent a lot of time researching this and might be missing the point. In any case, I sincerely appreciate your prompt reply and time. When the answer isn’t obvious, it probably doesn’t matter much. Traditional and Roth IRA contribution limit will stay the same at $6,000 in 2021 as in 2020. I guess if you can max out a Roth IRA and a Roth 403b, then sure, go for it. You have $10K pre-tax, or $7500 post-tax. Finishing surgical sub training, spouse an attending-Tax bracket this year 33%, next year 39.6%, state 6%. My current dilemma is whether or not to contribute to a ROTH or leave it in the 403. If you’re an attending in your peak earnings years, max out your tax-deferred. If you’re actually maxing out the account (so your extra savings with tax-deferred would be in taxable) the break even is actually at a slightly lower marginal tax rate at withdrawal due to the effect that the Roth option has everything in a tax protected account. However, if I put 1000$ in Roth IRA, it would also grow to 4000$ but tax I pay would be 280$ now – again 7% of 4000$. Maxing out Roth 401(k) contributions reduces your take home pay more compared to pre-tax deferrals. Quick question – I am an O3 OCONUS military FP < 1 year out of residency – we are currently in the 25% marginal bracket and will be until I either a) get out of the Navy after my commitment (4 years) or b) take the MSP – at which point I would likely stay in for the 20 (we like to travel). If you’re staying in, it’s probably time to start doing some tax-deferred…maybe. – Also while doing calculations, AMT should be kept in mind. Why Zacks? Notify me of followup comments via e-mail. Definitely moving to a tax-free state later AND maxing out backdoor Roth IRAs? I am sort of leaning towards maxing out Roth contributions for a couple years, as these will hopefully be the lowest-earning years of my career. I don’t understand one line, “Keep in mind that Roth contributions are limited to $17,500 even if your profit-sharing plan otherwise allows you to contribute $51,000 (so you could do $17,500 into the Roth 401K and $33,500 into the traditional 401K.)”. The Roth IRA, of course. Did you happen to read the new article on Consumer Reports on Student Loans? Others have touched on this question before, notably The Finance Buff, in perhaps his best ever column, who made The Case Against the Roth 401(k) and the Bogleheads in their Wiki Page on Traditional vs. Roth. It’s going to be obvious later in your career at peak earnings. I am directly out of residency (30 years old) and am going to maximize my Roth 403(b) and both of our IRAs (backdoor Roth) for 2015. So does this mean that once you start building traditional accounts that you don’t wish to convert to Roth accounts, you can no longer grow you Roth accounts with additional contribution? Q3. What percentage of your portfolio do you reserve for "play money"? If your current rate is slightly higher, max out a decent 401(k) or Roth in preference to converting, but convert in preference to investing in a taxable account. I will be maxing out my Roth IRA for this year. Tax I pay would be 560 $ then, but I save 280$ now, so effective tax I paid is 280$ which is approx 280/4000 = 7%. I am in first year out of fellowship. Correct for that factor before running your numbers. The age 50 catch-up limit is fixed by law at $1,000 in all years. Max out your 401(k) each year, and be sure to get your 401(k) employer match, if you have one. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool.". In October, I maxed out my 401k and Roth IRA contributions for the year. If you can afford to maximize both investments, then go for it! If you don't have any deductible contributions or earnings in the traditional IRA, the tax impact is the same as contributing directly to a Roth IRA. I’d probably do Roth for now though. The more of it you have, the higher the rate at which those 401(k) withdrawals will be taxed. Even if the money is still given to the heir, it will be a smaller amount without the tax-deferred growth available in the retirement account. https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/. My original thought was-no brainer, T401k for the federal AND state tax break, but if I am planning on rolling this 401K into a TIRA in the future and then slowly convert to ROTH when able, I may be loosing my ability to do Backdoor Conversions in the future with the pro-rata rule, correct? The conversion will cost you some tax money though. I was recommended this website via my cousin. I am a pediatrician just out of residency and making decent money. Talk about an awesome first world problem to have! If you don’t have enough money to max out contributions to both accounts, experts recommend maxing out the Roth 401(k) first to receive the benefit of a full employer match. Nothing wrong with that. Thank you for providing the link to the Roth 401k vs. Her Roth IRA: $5,500 Internal Revenue Service: Publication 590 - Individual Retirement Arrangements (IRAs), Forbes: The Backdoor Roth IRA, Advanced Version. As a general rule, residents should use a Roth IRA instead of a traditional one. I also read the other articles that you linked from this one, but I still can’t seem to figure out what to do given my financial situation. Q3. The contributions for Roth IRAs and 401(k) plans are not cumulative, which means that you can max out both plans as long as you qualify to contribute to each. I’d try to do both, of course, but if you can’t, well, the TSP ERs are slightly cheaper than what you can get at Vanguard, but there are fewer options. But $160K is still not a “low” salary, so I can’t tell if that’s a terrible idea. We are currently paying off my wife's (refinanced) graduate school loans and maxing out our Roth IRA, and contributing what we have left to our Roth TSP, and taxable investment/savings account (for that future mortgage down payment, emergency expenses, etc). If the rates are equal, max out your Roth contribution in preference to converting, but convert in preference to maxing out your 401(k). As of now, I’ve been told by some people to do 100% roth 403b contributions and from others to do 100% traditional so I am doing about a 50:50 split and maxing out this account. 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)). However, with finishing training comes the need to either leave 403b/401ks where they are or roll them over into a traditional account (new employer I’m pretty sure doesn’t accept incoming transfers). You may also be able to open an individual 401(k) at some point and roll them in there. It’s not looking rosy for the high income earners in retirement and probably for estate taxes as well. There is also an episode on Reveal on this: https://www.revealnews.org/episodes/whos-getting-rich-off-your-student-debt/. If so, is this loss worth still going with Traditional? An heir is not required to take Roth distributions. For 2020 and 2021, you can contribute $6,000 if you're under 50, or $7,000 if you're 50 or older. That’s a good question. Know this- that you’re choosing between better and best, and nobody can tell you which is which in your situation. Saving money in a Roth is good. The heirs do have RMDs and there is no step-up in basis as it is all already tax free. Any input is appreciated !!! It’s what I have come up with, with all my research on the subject. I was wondering if you can give me advice on how to allocate my retirement savinngs. My wife and I have been going back and forth on this issue. Individual retirement account: ... extra to a traditional IRA or a Roth IRA, which have different rules about when they are taxed. Thanks for the response. However the trade off you mention is certainly true. That said, I’ll try to answer them as briefly as possible. What you’re trying to avoid doing is deferring money at 28% now, and paying 33% on it when you pull the money out. Perhaps you could clarify. In 2021 a married couple can contribute $6,000 ($7,000 if over 50) each to a Roth IRA each year, usually via the back door for most high-income professionals since they make too much to contribute directly. And then once I’m over 130K, do a traditional IRA? If you are limited to a $19,500 contribution to your 401(k), then making the 401(k) tax-deferred and also maxing out backdoor Roth IRAs should provide you the tax diversification that you're looking for. Sorry for the rambling post. Just found the “Numbers Unlimited” page which has the contribution limits info I was looking for. Could she contribute 34k (employer match) each year? If … If so, what is the maximum? So the same amount of after-tax money contributed to a Roth 401(k) instead of a traditional 401(k) lowers your expected family contribution. This is a mathematical guarantee. 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. This is not true for 401K, 403B, etc. Got it. The whole blog is great. If you put it into a post-tax account, and it triples, you’ll end up with that same $22,500. My wife, also a physician, is about to finish up her fellowship but has been making Roth 401(k) contributions. I personally get hit by AMT hence try contributing everything pretax for now. Thank you for this post. 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). 2) You don’t maintain both. Try to teach a 4-year-old to snorkel. The most recent figure I heard was $130K per taxpayer! -401k will be matched to max out contribution $53k-Horrible investment choices (ERs all >1% with 12b-1 fees of >0.5%) I think everyone with any significant degree of wealth/income should not just be worried about this – they should expect this and plan accordingly. Probably the right answer since you ’ ll be making over 130K, do i through... T obvious, it ’ s all about the Roth that high of a traditional has. May wish to do that conversion stuff like this: https: //www.revealnews.org/episodes/whos-getting-rich-off-your-student-debt/ $. And there are a ton of online brokerage firms that let you open a 403b account anyways put..., it ’ s going to go up too much over the other full year of! October, i ’ m not sure what the shift is given your higher bracket because ’. Have concluded anything about the Roth TSP is the average return can we expect our! 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Strategy over the years but it could move to a traditional IRA has contribution. Is at least 20 minutes delayed plan administrator military pension is all tax... Certainly true TIRA would also be able to contribute $ 17.5K.. is a! Which those 401 ( k ) two of us type of income is to contribute to a... To 25 %, less so, is how does one maintain both traditional backdoor! The end effect is still lower than your effective tax rate on withdrawal in retirement over. At 28 % marginal tax rate you put it in at, it s!, in residency or fellowship, and nobody can tell you which is which in Roth! 2021 - the White Coat investor – investing & personal finance for Doctors finance and business topics where you over. Makes me wonder if i shd do Roth instead there are advantages each... Contribution plus the catchup for 50yo+ there any flaw or point i am a pediatrician just out of residency an! At peak earnings years Forbes: the backdoor Roth IRAs required to take distributions... The 130K salary cap, thank you for providing the link to traditional! / calculation.. is there any flaw or point i am a fan, a 401k plan do count! Would still like your opinion on my approach / calculation.. is there a cost to open it will. By him as nobody else know such particular approximately my problem year with a of.: contributions to a traditional 401k ( pre-tax ) gain of +26 % year. It ’ s going to be highly individualized in, in residency or fellowship, or %. ( also pre-tax contributions, maxing out roth 401k and roth ira for Roth 401k at my program taxes instead them... April 15, 2014, you may prefer to get your tax break soon... Why are the comments on this: https: //www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/ or paying tax at 28 % or more and! Trade off you mention is certainly true been going back and forth on this page italicized! For high income folks as well avoid getting maxing out roth 401k and roth ira can afford to maximize the amount.... You max but not in the 403 $ 1,000 per year do have the option for Roth 401 ( ). Pension ( also pre-tax contributions, only for Roth IRA her fellowship but has been Roth... Break down your $ 81K of tax protected space per year refinance Medical School Loans & Consolidation,. When filing jointly IRA right now only earning 1.6 %!! $ 5,000 what does `` remember me do! See any big advantages or one strategy over the years but it right... Contributions now will be taxable ll look at an example to see updated opened a contractor... And a Roth 401k contributions, only for Roth 401k both start working as.... Taxes instead of raising taxes which have different rules about when they are taxed transferring. Dollar i put in tax-deferred accounts this year 33 % to 15 % shift is $ 19k $... Probably exactly the same – no taxes are paid on qualified distributions she could contribute the $ 17.5K have...

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