Those things bode less well for the traditional 401K. It would require a crystal ball to know the optimal strategy. I’ll look at the code and see if I can fix it. I believe there is still a tax basis on Roth accounts. 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. Those who save a lot of money may also want to preferentially use Roth accounts. Can I contribute 17.5k to both? 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. Calc doesn’t appear to take into account maxing out contribution plus the catchup for 50yo+. Does the above plan seem reasonable? Your email address will not be published. I don’t have math that supports that ratio, but it feels right to me. The conversion will cost you some tax money though. -Plan to retire/move to a state with no state income taxes I think there’s even a match now. If things work out as projected, my salary should be around 700K within 3-4 years. 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? One popular strategy is to contribute enough to the 403b to get the full company match, then work on maxing out your Roth IRA. Yes, you open a 403(b), including a 403(b) by filling out paperwork when you are hired. I’d like to think after residency I’ll be making over 130K. Probably doesn’t matter much. 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. Copyright © 2021 Zacks Investment Research. There is no easy way. 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. That’s a good question. My understanding is that when converting to a Roth IRA, an investor can have no other IRA accounts. How is rolling over from a 403b different from rolling over from a traditional IRA? At any rate, no big deal to leave them at the old employer for a while. Just became eligible for 401k with employer, spouse maxes 403b with my employer…we have this question before us, do we want a Roth401k or Traditional401k? A really easy one is the Life Strategy Moderate Growth Fund. This is a mathematical guarantee. Correct for that factor before running your numbers. 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? I’m aiming for about 33% Traditional / 66% Roth. No. 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). I plan on maxing my 401(k) starting in 2014. That’s the general advice for docs. For 403b ROTH, do I open through the Human Resource Department at my program? tax forms image by Chad McDermott from Fotolia.com. I just got married, and although I am still training, my husband is working as an attending hospitalist. 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. These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm. Contribution Limits. If I am correct, that way, when I want to roll-over, I don’t have to worry about “pro-rata” stuff, and at the same time, I can work on compounding with my pension money in a Roth IRA. Click to learn more! 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! I’d lean very heavily toward traditional contributions if I were you. If in early retirement (prior to SS) your only taxable income from a tax deferred account, your first $20K or so will be totally tax free. Finishing surgical sub training, spouse an attending-Tax bracket this year 33%, next year 39.6%, state 6%. 2) You or your accountant. Why Zacks? Extremely hard to read! Ignore my snark. You should remedy that soon. If you're worried about this, you may prefer to get your tax break as soon as possible with a tax-deferred contribution. She is the employer. Thank you for this post. Is there some sort of guide for this? But if you’re really worried about it, pay your taxes now and go with more Roth money. For example, if after your nondeductible contribution your traditional IRA has 50 percent nondeductible contributions, half of your conversion is tax-free and half is taxable income. If you are already maxing out your available retirement accounts, you may lean a little more toward making Roth contributions so you can get more money (on an after-tax basis) into retirement accounts where it will enjoy preferential tax and asset protection treatment. Know this- that you’re choosing between better and best, and nobody can tell you which is which in your situation. There is also an episode on Reveal on this: https://www.revealnews.org/episodes/whos-getting-rich-off-your-student-debt/. Do these three things after maxing out your 401k and Roth IRA. The most common type of income is Social Security. It’s a closer call being married to an attending for sure. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool.". 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. You can also subscribe without commenting. Also available on Audible! If I can choose, what do you recommend, again? No one knows exactly what percentage of a portfolio a retiree will ideally have in Roth accounts on the eve of their retirement, but most experts agree that you ideally want some of both. Visit performance for information about the performance numbers displayed above. 1) I’m not quite clear on what your plan is. Defined benefit plan $15K. Individual retirement account: ... extra to a traditional IRA or a Roth IRA, which have different rules about when they are taxed. Do you use a Roth 401(k)/403(b)? Your article makes a pretty strong case for traditional 401Ks, with a minority of retirement assets in a Roth 401K. That’s when compounding runs wild, © 2021 - The White Coat Investor – Investing & Personal Finance for Doctors. If you are going for PSLF, you are likely trying to keep your IDR payments low to maximize the amount forgiven. Check with the new employer. It sounds like you’re going to put some pension money (pre-tax) into a traditional IRA. Mostly, yes. 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%. It's much better to do a Roth conversion at 10-22% than to make Roth contributions paying tax at 28% or more. Whereas pretty much every dollar I put in tax-deferred accounts this year was saved at 33, 35, or 39.6% Federal. In reality, probably Roth IRA would compound even more than 25 years ( I am 32) and hopefully more than 5%, in which case my effective tax rate may be more like 4-5%. 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? But you can do a backdoor Roth. If you’re married, doing two is a 22% savings rate. For example, you can only shelter $5500 per year from taxes by maxing out an IRA so if you choose a Roth, you pay the government $1000 (or whatever) and you have $5500 sheltered from taxes in a Roth or you can shelter $5500 sheltered in a Traditional and you can use that $1000 you would have paid in tax to invest in your taxable account. My instinct is to contribute to the traditional account. I suspect 50/50 Roth will mean you’ve overpaid taxes during your peak earnings years. 2) You don’t maintain both. Got it. You have $10K pre-tax, or $7500 post-tax. 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. However, given that the federal debt obligation plus unfunded liabilities translates to about $20,000 per year for each taxpayer in America (that’s a 40% tax rate vs. median income), income tax increases are inevitable and each investor who has access to a Roth, should maximize at least until age 60 and probably until they retire. – Also while doing calculations, AMT should be kept in mind. Ie: Very high income professionals wont necessarily need more $$ in retirement. I kind of agree but wanted to clarify my own calculation !! This text is worth everyone’s attention. It won’t affect you if you do that conversion. I guess if you can max out a Roth IRA and a Roth 403b, then sure, go for it. 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? Is it a quick process to open? Ha ha. The Roth IRA, of course. I don’t think my salary is going to go up too much over the years but it could. 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). Q3. So the end effect is still the same – no taxes are paid on qualified distributions. $52K this year for 401K/Profit-sharing plan. We both contribute max to our 403b/401k and have been doing backdoor ROTHs for several years. If you’ve discovered you overcontributed to your employer-sponsored 401(k) plan — first of all, congrats on maxing out tax-free contributions to your retirement savings. 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. The HR department typically administers that paperwork. Also, at this point any money saved now by going with the tax-deferred route won’t be invested but will likely be sent to pay off student loans (at 6.875%). 3) An asset allocation tends to be very personal. Do you see any big advantages or one strategy over the other? Traditional and Roth IRA contribution limit will stay the same at $6,000 in 2021 as in 2020. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. If I estimate it myself, do I just estimate my joint tax bracket, and use that to withhold that amount? Your employer may contribute another $34,500 (up to $52K, the 2014 limit). It is impossible for me to recommend a fund for you. But thanks to the fact that not only are you likely to have a lower marginal rate in retirement but also the fact that you contribute at your marginal rate and withdraw at your effective tax rate, most doctors in their peak earning years are going to be better off deferring taxes whenever possible. Thanks in advance. Remember, it's your HSA, just like an IRA or 401k would be your money too. Whether or not that is actually in the 403(b) is up to HR. I am aware that the answer to my question varies depending on the market and what index fund you use. Learn to Be a Better Investor. Max out your 401(k) each year, and be sure to get your 401(k) employer match, if you have one. Once the IRA or Roth IRA is inherited (Stretch IRA), RMDs start based on the age of the heir, but if the heir is very young, the account is likely to continue to grow if only the RMDs are withdrawn. If I put 1000$ in TIRA today , assuming conservative 5% gains, over 25 years, approx amount would be 4000 $. If you’ll be getting out, stick with Roth Roth Roth until you do. Your earned income counts, but unearned income, such as stock gains or interest payments, does not. Lots of good choices. The whole blog is great. 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. The basis of a distribution, however, is the fair market value (FMV) of the distribution at time of sale: https://www.irs.gov/publications/p590b/ch02.html#en_US_2016_publink1000231061. You’d have to run the numbers with reasonable assumptions to know for sure. And then once I’m over 130K, do a traditional IRA? You’ll need to do some reading and develop an investing plan in order to figure out what investment to put into the Roth IRA. I wanted your opinion on my approach / calculation.. Is there any flaw or point I am missing in my calculations. They may just inflate it all away instead of raising taxes. 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