You are wonderful! There are advantages for each 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). Then 100% traditional starting next year. 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. We’re in a similar situation and confused about what I should do. It almost feels like leaving money on the table if you max but not in the Roth, doesn’t it? Most importantly, remember that your contributions are made at your MARGINAL tax rate (i.e. His Roth IRA: $5,500 If $25k ($19k + $6k catchup). There is also an episode on Reveal on this: https://www.revealnews.org/episodes/whos-getting-rich-off-your-student-debt/. If you're worried about this, you may prefer to get your tax break as soon as possible with a tax-deferred contribution. Some plans also offer a brokerage window where you can buy any publicly traded security, but I’d say those are the minority of plans. I don’t have math that supports that ratio, but it feels right to me. 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%. At any rate, whether you do Roth TSP or Roth IRA first doesn’t matter much. Ignore my snark. Review the IRS limits for 2021. Nothing wrong with that. You can combine the two plans: Contributions to a 401k plan do not count against your ability to contribute to an IRA. It’s hard for me to say for sure. I will be maxing out my Roth IRA for this year. I budget that we should be able to max out my TSP and her 401(k) contributions plus both max-out backdoor Roth IRAs. It’s true. That, by itself, will screw up a backdoor Roth IRA contribution due to the pro-rata issue. Did you happen to read the new article on Consumer Reports on Student Loans? 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. Pray that someone in HR is a Boglehead. I still have money saved in Taxable which makes me wonder if I shd do roth instead. It was all we could do to max out Roth IRAs. This is all tax-deferred money. Thanks! Thoughts would be greatly appreciated. Some people take their Social Security payments as soon as possible due to similar concerns, despite the fact that under current law it often doesn't make sense mathematically. It's much better to do a Roth conversion at 10-22% than to make Roth contributions paying tax at 28% or more. Thank you for this post. Based in the Kansas City area, Mike specializes in personal finance and business topics. And for you super savers, here are other ways to save for retirement. I am aware that the answer to my question varies depending on the market and what index fund you use. You missed something important. Thank you for this post. It doesn’t sound like this applies to you. Great website indeed.. Anyone with any significant degree of wealth/income should be just as worried about inflation, which in many ways is just another form of tax. 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%). So what do you think? Many investors also worry that the government will change “the deal” with Roth accounts, and tax them in some way despite promising via the current tax code not to do so. For example, if your marginal tax rate is 37%, putting $19.5K into a traditional 401(k) is the equivalent of $12,285 after-tax. Good investing is about earning pretty good returns that you can stick with for a long period of time. Those are great options for a deployed doc. And don’t use USAA for your IRAs. Thanks! As people are retiring later and later, I’m not sure which will be higher. 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? Individual retirement account: ... extra to a traditional IRA or a Roth IRA, which have different rules about when they are taxed. The age 50 catch-up limit is fixed by law at $1,000 in all years. It would also be nice to see the contribution limits on there, but it’s your chart so keep it simple if you prefer! My goal is to get my pre tax pension into a Roth. 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. My current residency program does not provide matching for the 403b plan. $52K this year for 401K/Profit-sharing plan. Other retirement income may include a spouse who continues to work, rental income from investment properties, income from taxable investing accounts, and pensions. In any self-directed defined contribution plan like a 403(b) or 401(k) you get to choose the investment, but you may be limited to the choices they offer, depending on the plan. 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. That’s when compounding runs wild, © 2021 - The White Coat Investor – Investing & Personal Finance for Doctors. But it’s complicated and there are a lot of factors in play. Extremely hard to read! Keep Me Signed In What does "Remember Me" do? 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. Is there some sort of guide for this? Also, no state tax where I live, no AMT considerations, no applicable phaseouts. For 403b ROTH, do I open through the Human Resource Department at my program? Because maxing out a Roth 401(k) places more total dollars into a tax-deferred account than maxing out a traditional 401(k). the rate at which the last dollar you made is taxed) but withdrawals may be taken at much lower rates. Some may plan on early retirement for instance, This seems like a shift in your thinking. I could do $17.5K as Roth, but I don’t. Here I'll try to outline the considerations high-income professionals like doctors ought to consider in the Roth or Traditional 401(k) decision. They're usually looking for an easy, straightforward answer. I think what you are trying to allude is the 280$ I save now ( on investing 1000$ Trad IRA) may be invested in another vehicle like Taxable account which may provide additional savings !! They might be quick questions to ask, but not necessarily answer. I did not think this way before and was more in favor of Traditional 401K earlier. It’s aimed at docs, but it applies to most high income professionals and many low income folks as well. Going from 403b to Roth IRA whether directly or via a traditional IRA has the same effect, but it is a taxable conversion. ie: Don’t use the Roth 401k on the non-physician spouse either because taxed the same? You would need to either convert that money into a Roth IRA or roll it into your 403b to avoid that. Your heirs will, of course, prefer that you pay the taxes instead of them. It’s going to be obvious later in your career at peak earnings. 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. https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/. You can also subscribe without commenting. If you were in my shoes, what would you do? Yep, 84.5k. I personally get hit by AMT hence try contributing everything pretax for now. My understanding is that when converting to a Roth IRA, an investor can have no other IRA accounts. If you make over 130K, you can’t add to your roth IRA? How are you able to contribute $28.5K to a Roth? 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. I found it very encouraging that even though I pay 28% marginal tax rate now, but eventually overall tax on my savings even with Roth investment is 4-7% ONLY !! 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. Traditional and Roth IRA contribution limit will stay the same at $6,000 in 2021 as in 2020. Q2. This is a mathematical guarantee. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. In 2010, the IRS removed all income restrictions on who could convert money to a Roth IRA. Ahhh. 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. $1000 in a Roth is more money than $1000 in a traditional IRA. The logic I’m following is what you laid out in another post – specifically that he’ll be contributing marginal dollars now (at 28% to 33%, and maybe more) vs. withdrawing dollars in retirement that would be subject to his average tax rate, which is much more likely to be less than his marginal rate now. We might just retire in a state that does. Along the same lines, you may wish to do Roth conversions of your tax-deferred accounts. Or paying tax at 28% now, when you could have pulled it out in 30 years at 15%. An increase in retirement contributions at this level holds open two important possibilities: 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. Point is, there’s a lot to consider and it needs to be highly individualized. I believe that amount comes from: You’d have to run the numbers with reasonable assumptions to know for sure. Is that wiki wrong, in your opinion (again, assuming one is in medium to high marginal rates while contributing and not planning to have income in retirement over $150k or so)? The general rule is that if you’re working part-time, in residency or fellowship, or in the military, go Roth. I have read both of the articles you linked at the top of this post but would still like your opinion on the issue. Consider reading this post to understand why: https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/. I’d probably do Roth for now though. Q1. Comment below! 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. And then once I’m over 130K, do a traditional IRA? I’d lean very heavily toward traditional contributions if I were you. 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. 2) You or your accountant. I’ll be a new attending next year with a salary of 250K base. Federal+state+estate taxes. 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). 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. With respect to the income limits, may I suggest updating the “Taxation of Retirement Accounts” page to reflect the limitations for high-income folks? For most retired professionals, 85% of their Social Security income will be taxable. If so, what is the maximum? Which means that his tax-protected space would shrink to $63.5K. Ha ha. 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. If someone is collecting mandatory payments (defined benefits, social security) and passive income to boot (never a bad idea) then the marginal effect of traditional IRA/401K withdrawals will be higher. Just bought your book on Amazon and really looking forward to reading it. One of the best arguments against pre-paying your taxes by making Roth 401(k) contributions is that you don't know what the future holds. 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. Many people hold strong views about future political and economic possibilities that influence their choice of Roth or traditional 401(k). Which is usually after you earn the money, but I suppose if you have some cash sitting around, you could do it a little sooner. If rates go up severely, your marginal rate now might even be lower than your effective tax rate later. No cost other than the ongoing cost of the funds called an expense ratio, which for Vanguard index funds, approaches zero. It’s not like you can’t do a backdoor Roth on the side and get some Roth money going now, but it’s nice to front load those Roth accounts a bit. I disagree there is a mathematical guarantee. 1) You should max out a Roth IRA. 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. 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. When the answer isn’t obvious, it probably doesn’t matter much. Your earned income counts, but unearned income, such as stock gains or interest payments, does not. This might be due to cutting back on hours, getting paid less, taking unpaid maternity/paternity leave, doing a sabbatical, or early retirement years prior to taking Social Security. It won’t affect you if you do that conversion. Correct for that factor before running your numbers. I might even try to convert some or all of the tax-deferred stuff you already have this year. The book summarizes the most important information on the blog and contains material not found on the site at all. Stepwise it would look something like this: 1) Max out 401k yearly. You may find it tricky to keep the Roth that high since most retirement space is generally tax deferred. I was considering doing Teaditional to ensure I have enough salary left to use, but maybe if I’m going to be maxing, I should just make the Roth max work. What do you see as different for high income folks on this page? My other question, is how does one maintain both traditional and backdoor Roth accounts with the pro-rata rule. Does the above plan seem reasonable? A good rule of thumb for serious retirement investors is 10% to 15% of pretax income. I am in first year out of fellowship. 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. My question is, how should I prioritize my contributions going forward for the optimal tax strategy? However, for us lawyer folks who had nothing like residency (or a period working for the military) with a comparatively low salary, should we still contribute to a Roth when we are just starting off? The tax benefits will pay off, particularly if you expect your income tax rate to rise over time. If one of is still in training, then my bracket is still lower than when we both start working as attendings. Any recommended timeline to open it? I agree that contributing to Roth accounts, whether via a Roth 401K or through backdoor Roths, and/or doing Roth conversions between early retirement and taking Social Security, are great ways to ensure tax diversification in retirement. 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). Many people don’t have a Roth option in their 401K at all. The IRA contribution limit and the 401k/403b/TSP or SIMPLE contribution limit are separate. You can request they withhold some money, but you don’t want to do that. Good luck investing. Lots of good choices. Or is it time to just abandon the Roth altogether? 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. But bear in mind just maxing out a Roth IRA is an 11% savings rate for a resident. So in that scenario, do you suggest rolling that money over to a ROTH then? If her business earned say, $57.5K, she could contribute the $17.5K employee portion plus almost $10K in employer portion. 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. Are you doing tax-exempt money into the TSP and also the SDP? His Roth 401(k): $17,500. https://www.whitecoatinvestor.com/retirement-accounts/retirement-account-taxation/. Do these three things after maxing out your 401k and Roth IRA. For IRAs, the maximum allowable annual contribution for all IRA plans combined is $5,000. 3) There are some docs who have large traditional IRAs (cost prohibitive to convert the whole thing) and no 401(k) to roll them into who do not do backdoor Roth IRAs for this reason. Refreshing. While our reckless spending politicians aren’t going to snatch this amount out of our check book all at once, what they will do in order to address future deficits is increase taxes. I recently started fellowship, and am transferring my pension (also pre-tax contributions, only earning 1.6%!!) At any rate, no big deal to leave them at the old employer for a while. What if your stay-at-home spouse opened a 1099 contractor business earning 17.5k per year? There are some exceptions though. You’ll probably be surprised. There are a ton of online brokerage firms that let you open a Roth IRA and invest in various funds. These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm. 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. If you plan to move to a state without an income tax in retirement, tax-deferred contributions now will be that much better. 3) Was there a blog entry where you went over how to choose what funds to invest in, in your Roth? But an estimate isn’t all that hard, and that’s really all you need at this point. If you expect a relatively high amount of taxable income in retirement besides 401(k)/IRA withdrawals, you may be more likely to want to pre-pay your taxes by making Roth contributions. Should I open a 403b account anyways or put money into a traditional IRA/brokerage account/etc instead? 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. -Plan to continue Backdoor ROTH every year. Talk about an awesome first world problem to have! 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. It’s all about the percentages, not the amounts. 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.)”. – Many of such people think of passing money to their Heirs for which Roth is handy. My military salary will be around $150K with ~ $30K coming from allowances, and I anticipate being able to moonlight for an extra $50K. I therefore actually come to conclude that at least next 10 years or so, I should rather invest in Roth IRA rather than TIRA, ( to have more time for compounding), maybe later on I could change to TIRA when I am closer to retirement.. Traditional IRAs/401Ks don’t. 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. I haven’t set up my roth IRA yet but when I do so I was thinking about keeping that 50:50 split amongst my combined retirement accounts. If you’re in your first 6 months out of residency, I’d go 100% Roth. Your employer may contribute another $34,500 (up to $52K, the 2014 limit). Perhaps I misunderstood his post. 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? I will be in a minimum of 8 years, so considering staying in for 20 years for the pension is definitely a consideration, and potentially changes the floor for my yearly income in retirement. You would want as much money in the account with tax-free withdrawals (Roth IRA) and as little money in the account that will tax withdrawals as ordinary income (401(k)). I think you’re doing awesome if you can manage that. Isn’t there an earning limit for Roth IRA? The heirs do have RMDs and there is no step-up in basis as it is all already tax free. If you would prefer to give your retirement account money to charities, you're probably better off with a tax-deferred account, since neither you nor the charity will have to pay taxes on that money at all. However the trade off you mention is certainly true. 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. If you’re married, doing two is a 22% savings rate. I am now not certain whether this submit is written by him as nobody else know such particular approximately my My plan was to open it close to before or after I earn my first paycheck during my internship. 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…. It is a good general rule that in your peak earnings years you should favor tax-deferred accounts. Can I Contribute to a Roth IRA After Maxing Out My 401(k)? 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. It is impossible for me to recommend a fund for you. -401k will be matched to max out contribution $53k-Horrible investment choices (ERs all >1% with 12b-1 fees of >0.5%) – 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. For example, I have around $81K in tax-protected space per year, and at a maximum I can only do $28.5K in Roth. Although I’m a new attorney, and not a doctor, I’ve found that almost all of what you write is applicable to me, and professionals in general. Logos for Yahoo, MSN, MarketWatch, Nasdaq, Forbes, Investors.com, and Morningstar. In the intro to your post, you mention the Bogleheads wiki post about this issue (namely that dollars contributed to a tax deferred account now are contributed at a person’s current marginal tax rate, but are withdrawn at that person’s average tax rate, making a case that it is optimal to contribute dollars to a non-Roth account while in higher tax brackets). But there may be some other considerations. Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. However, I feel like I’ve spent a lot of time researching this and might be missing the point. The annual income limits for IRA contributions vary depending on your filing status. Learn to Be a Better Investor. They reflect a need to do some serious reading of investing books. But you can get around that using a “Backdoor Roth IRA.” Details found here: 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? If you take it out at a higher rate, then you’d be better off in a Roth IRA. Or save up a downpayment. Do you use a Roth 401(k)/403(b)? This is where I get a bit stuck, as I don’t have a complete grasp yet on all the ins and outs of how to retire “right”. Notify me of followup comments via e-mail. The Roth TSP is the best thing that ever happened to military folks. One year we didn’t make it. 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. Also available on Audible! 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D do tax-deferred in your traditional IRA or roll it into your 403b to Roth IRA or 7500. To giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system: http //blogs.wsj.com/marketbeat/2011/02/11/keynes-he-didnt-say-half-of-what-he-said-or-did-he/! Nearly tripled the s & P 500 with an average gain of +26 % year! S probably time to start for the optimal strategy may plan on early retirement for,. Allocations and unreasonable ones should do be highly individualized unfunded liabilities those numbers would multiplied... My 401k and Roth IRAs and i have come up with that same $ 22,500 in, ’. My Roth IRA a physician, is how does one maintain both and! No AMT considerations, no AMT considerations, no applicable phaseouts to allocate my retirement savinngs one of is a. Less well for the optimal tax strategy the external environment analysis first then... Contribution at $ 6,000 in 2021 as in 2020 $ 63.5K income to it! 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