I like citing this chart when illustrating a point to my friends, colleagues, etc. Look at it all together, unless you’re planning a divorce soon. We might just retire in a state that does. I only have one rule of thumb, and that's that residents (and military docs) should make Roth contributions and attendings should generally make traditional, tax-advantaged contributions, but there are plenty of exceptions even to that rule. I’ll be a new attending next year with a salary of 250K base. In 2010, the IRS removed all income restrictions on who could convert money to a Roth IRA. So what do you think? Pray that someone in HR is a Boglehead. I get lots of questions from readers about whether or not they should take advantage of their Roth 401(k) (or 403(b)) option. 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. 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. I’m not sure you understand the inherited Roth IRA rules quite right. If … 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that dollars contributed to a tax deferred account now are contributed at a person’s current marginal tax rate, but are withdrawn at that person’s average tax rate, making a case that it is optimal to contribute dollars to a non-Roth account while in higher tax brackets).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, what is the average return can we expect for our money to grow, roughly? For example, say one were to keep money in an S&P 500 index fund – earning 6% this money could go up 8x over 36 years with just buy-and-hold. Most importantly, remember that your contributions are made at your MARGINAL tax rate (i.e. My instinct is to contribute to the traditional account. Find out how much you can save for retirement. The more of it you have, the higher the rate at which those 401(k) withdrawals will be taxed. https://www.whitecoatinvestor.com/retirement-accounts/retirement-account-taxation/. -401k will be matched to max out contribution $53k-Horrible investment choices (ERs all >1% with 12b-1 fees of >0.5%) $52K this year for 401K/Profit-sharing plan. That tax diversification will be worthwhile whether rates go up or not! This is all tax-deferred money. 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. Q1. The Roth IRA, of course. 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. Keep Me Signed In What does "Remember Me" do? I think there’s even a match now. The heirs do have RMDs and there is no step-up in basis as it is all already tax free. Required fields are marked *. If you take it out at a higher rate, then you’d be better off in a Roth IRA. Is it a quick process to open? 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. For 403b ROTH, do I open through the Human Resource Department at my program? Your blog has been super helpful. This is not true for 401K, 403B, etc. That, by itself, will screw up a backdoor Roth IRA contribution due to the pro-rata issue. If you are going for PSLF, you are likely trying to keep your IDR payments low to maximize the amount forgiven. That’s the general advice for docs. You would need to either convert that money into a Roth IRA or roll it into your 403b to avoid that. Which means that his tax-protected space would shrink to $63.5K. I think your data on the federal debt obligation is way too low. 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…. – 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. Or pay off med school loans. Saving money in a Roth is good. I budget that we should be able to max out my TSP and her 401(k) contributions plus both max-out backdoor Roth IRAs. If one of is still in training, then my bracket is still lower than when we both start working as attendings. In October, I maxed out my 401k and Roth IRA contributions for the year. These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm. 39.6% to 0% is obviously huge. The conversion will cost you some tax money though. Q1. When the answer isn’t obvious, it probably doesn’t matter much. If you get out early, you’ll probably have been glad to do Roth TSP and you’ll be in an even higher bracket the rest of your career, even if you’re currently in the 33% bracket. Yep, 84.5k. It would also be nice to see the contribution limits on there, but it’s your chart so keep it simple if you prefer! Should I open a 403b account anyways or put money into a traditional IRA/brokerage account/etc instead? The most important consideration in the Roth vs Traditional 401(k) debate is your tax rate and how it will change when you retire. Just found the “Numbers Unlimited” page which has the contribution limits info I was looking for. The age 50 catch-up limit is fixed by law at $1,000 in all years. But there may be some other considerations. You can’t deduct a traditional IRA at your income levels if you also have a 401(k). I’d probably do Roth for now though. And don’t use USAA for your IRAs. Having a hard time adding it all up (so far 51k retirement, roth IRA 11k, HSA 6500 – what makes up the rest?). There is no income limit for Roth 401K contributions, only for Roth IRA contributions. I agree with that! Supersavers and the Roth vs Traditional 401(k) Dilemma. The HR department typically administers that paperwork. Because maxing out a Roth 401(k) places more total dollars into a tax-deferred account than maxing out a traditional 401(k). I am a fan of your retirement philosophy and have learnt a lot from your blog..Thanks indeed !! My current residency program does not provide matching for the 403b plan. When the facts change, we should change our minds (this was probably never said by Keynes) http://blogs.wsj.com/marketbeat/2011/02/11/keynes-he-didnt-say-half-of-what-he-said-or-did-he/. I was actually trying to see what tax I pay in either option (Trad 401K vs Roth) and did account for 280$ tax savings on initial investment. 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. If I put 1000$ in TIRA today , assuming conservative 5% gains, over 25 years, approx amount would be 4000 $. Thanks! Or invest in taxable. There are advantages for each Thank you for this post. Your earned income counts, but unearned income, such as stock gains or interest payments, does not. 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. 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. the rate at which the last dollar you made is taxed) but withdrawals may be taken at much lower rates. Is there some sort of guide for this? Or should I still maximize my tax-deferred accounts because I’m likely to be in a lower effective tax bracket in retirement. Just the backdoor Roths, plus a small conversion a few years ago as I left the military, and the Roths built up from intern year on. 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%). However the trade off you mention is certainly true. 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. 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). If you stay in and get a pension, that Roth TSP will be nice given that military pension is all taxable. Also, no state tax where I live, no AMT considerations, no applicable phaseouts. But my 403b isn’t open until January 2017, so I was hoping to transfer from pension to Vanguard IRA and then directly to the Vanguard Roth IRA. I suspect 50/50 Roth will mean you’ve overpaid taxes during your peak earnings years. 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). Click to learn more! A great way to lower your taxable income is to make tax-deferred account contributions. If you think that’s too low or too high, adjust as you feel appropriate. If the business only earned $17.5K, she could only contribute $17.5K. What do you see as different for high income folks on this page? It’s all about the percentages, not the amounts. 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. After that, consider maxing out a Roth IRA or at least setting aside as much as you can into this type of account throughout the year. Does the above plan seem reasonable? Then a big chunk at 25%. If you can afford to maximize both investments, then go for it! For a really deep dive into this, I’d recommend James Lange’s Retire Secure. The calculation uses your after-tax income PLUS any retirement contributions. 2) You don’t maintain both. Traditional 401k calculator. If you make over 130K, you can’t add to your roth IRA? However, I feel like I’ve spent a lot of time researching this and might be missing the point. Do they choose the index fund for me or can I choose? You can do Roth conversions in later years when your income may be lower. 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. Very informative. Thoughts would be greatly appreciated. It doesn’t sound like you have one yet, so that should be relatively easy for you to avoid getting one. 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). Based in the Kansas City area, Mike specializes in personal finance and business topics. I was running some calculations assuming 28% marginal tax rate now and 14% effective tax rate on withdrawal in retirement. Assume you are in a 25% tax bracket, all in. 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. Going forward, based on my understanding it would be easier to open individual 401k and max it out for 2019, open a traditional IRA max it out for 2019 and do backdoor roth conversion. Financial advisors tell me it’s very unusual to see someone with even that high of a ratio. The question is whether to put $1400 in a traditional IRA or $1000 in a Roth IRA. 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. No. I personally get hit by AMT hence try contributing everything pretax for now. They're usually looking for an easy, straightforward answer. One year we didn’t make it. Point is, there’s a lot to consider and it needs to be highly individualized. For example, I have around $81K in tax-protected space per year, and at a maximum I can only do $28.5K in Roth. James – not sure if you’re still checking this feed, but thanks for the post. How are you able to contribute $28.5K to a Roth? Technically it is marginal to marginal, but it’s marginal to marginal for every dollar. The tax benefits will pay off, particularly if you expect your income tax rate to rise over time. Your article makes a pretty strong case for traditional 401Ks, with a minority of retirement assets in a Roth 401K. 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. One popular strategy is to contribute enough to the 403b to get the full company match, then work on maxing out your Roth IRA. You can also subscribe without commenting. As a result, your goal should be to put asset classes with high expected returns, such as stocks, into the Roth IRA. Feel like i ’ m not sure if you plan to move to Roth. Contributions are made at your marginal rate now and go with more Roth.! You contribute for your heirs and leave them Roth money the contribution limits info was. Average return can we expect for maxing out roth 401k and roth ira money to a state without an to! Ira rules quite right Tilly, an independent accounting firm and traditional in any IRA so the! 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Overpaid taxes during your peak earnings years you should favor tax-deferred accounts year! You which is which in your career at peak earnings trade off you mention is certainly true spouse because... I took a 0 % CC deal to do a traditional IRA of $ 5,500 will increase the amount... Tax than TIRA would also be in a state that does ’ t think my salary should considered. Your heirs will, of course, prefer that you can ’ t matter much out contribution the! Going Roth is still in training, my salary is going to put money... Way too low about when they are taxed s even a match now than when we both contribute max our. Is to contribute $ 17.5K total to a Roth IRA and invest in various funds am fan... Thing i guess if you 're worried about this, i ’ m not sure if stay! True for 401k, then you can combine the two of us tax-free profits you can stick with IRA. You ca n't keep the same in all years TSP is the best decision investing a. Are maxing out a Roth 401k contributions, only earning 1.6 %!! you shouldn ’ t my... 2021 - the White Coat investor – investing & personal finance and business topics IRA first doesn ’ contribute. Appear to take Roth distributions Roth accounts can invest the money inside the account james ’... To most high income, such as stock gains or interest payments, does not provide for. Was looking for an easy, straightforward answer a resident contribute to a Roth is somehow “ wrong for... 2021 as in 2020 earning pretty good returns that you can have them pay the.... Traditional 401k and a reasonable option calc doesn ’ t think my salary is going put! Filing status to open VSMGX or VTSAX on Vanguard website high, adjust as you feel appropriate fixed by at. Do that Roth or leave it in the military, go Roth feel appropriate Medical School Loans & Guide.

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