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. 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. What you’re trying to avoid doing is deferring money at 28% now, and paying 33% on it when you pull the money out. problem. I guess this might not hold if he ends up a partner making crazy-high income, but otherwise, one in this situation should mostly contribute to the pre-tax traditional 401k, no? 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 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. The only pitfall to this conversion strategy is that you cannot choose what money in your traditional IRA you convert. 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. If you make over 130K, you can’t add to your roth IRA? It sounds like most of the advice for someone in my situation would be to do a traditional TSP / 401(k) + backdoor Roth and invest the tax savings into a taxable account rather than do straight Roth contributions (plus future option to convert to Roth and some tax diversification); however, there seems to be some advantages of maxing out a Roth TSP / 401(k) and letting a bigger pot of after-tax dollars grow over 30 years. 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%. If you’ll take it out at a lower rate, you’d be better off in a traditional IRA (or 401(k) or whatever). A lot of this depends also on your expected income in retirement. 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. Federal+state+estate taxes. I believe there is still a tax basis on Roth accounts. The good news is it isn’t like there’s a bad option here. How’s that for a non answer? She is the employer. The conversion will cost you some tax money though. 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. If you think that’s too low or too high, adjust as you feel appropriate. 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. Your employer may contribute another $34,500 (up to $52K, the 2014 limit). My wife and I have been going back and forth on this issue. 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. If $25k ($19k + $6k catchup). Some plans also offer a brokerage window where you can buy any publicly traded security, but I’d say those are the minority of plans. If you’ll be getting out, stick with Roth Roth Roth until you do. 39.6% to 0% is obviously huge. I was actually trying to see what tax I pay in either option (Trad 401K vs Roth) and did account for 280$ tax savings on initial investment. The question is whether to put $1400 in a traditional IRA or $1000 in a Roth IRA. My understanding is that when converting to a Roth IRA, an investor can have no other IRA accounts. A little math will demonstrate this. 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. It was all we could do to max out Roth IRAs. Ha ha. 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. 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. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool.". How are you able to contribute $28.5K to a Roth? That's $44,000 in tax-free profits you can enjoy later! Or invest in taxable. 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 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. 3 questions: Also, I can't find a straight answer on this – can I contribute to a Roth IRA through USAA, the Roth TSP, and a traditional IRA through USAA (or another firm)? 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. Thoughts would be greatly appreciated. When can I find out more? For IRAs, the maximum allowable annual contribution for all IRA plans combined is $5,000. Extremely hard to read! That’s the general advice for docs. It’s all about the percentages, not the amounts. My goal is to get my pre tax pension into a Roth. Keep contributing to roth IRA until I hit the 130K salary cap? It doesn’t sound like you have one yet, so that should be relatively easy for you to avoid getting one. Here I'll try to outline the considerations high-income professionals like doctors ought to consider in the Roth or Traditional 401(k) decision. Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. And don’t use USAA for your IRAs. If so, what is the maximum? In his case, the fact that he has minimal if any Roth space may make it worth it to him to possibly end up paying more taxes overall. We’re in a similar situation and confused about what I should do. That tax diversification will be worthwhile whether rates go up or not! As a result, if you make a nondeductible contribution to a traditional IRA, you can immediately convert the money to a Roth IRA. For example, if you max out your 401(k) plan, including employer contributions, you can still contribute the full amount to a Roth IRA without having to worry about excess contribution penalties. Or should I still maximize my tax-deferred accounts because I’m likely to be in a lower effective tax bracket in retirement. The more of it you have, the higher the rate at which those 401(k) withdrawals will be taxed. 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. I think everyone with any significant degree of wealth/income should not just be worried about this – they should expect this and plan accordingly. I will be maxing out my Roth IRA for this year. 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. If so, is this loss worth still going with Traditional? 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). It’s aimed at docs, but it applies to most high income professionals and many low income folks as well. I think there’s even a match now. What do you think? Perhaps I misunderstood his post. Assume you are in a 25% tax bracket, all in. Thank you for this post. His Roth IRA: $5,500 I use the spreadsheet Future Value function to do stuff like this. You missed something important. Thanks. 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. My other question, is how does one maintain both traditional and backdoor Roth accounts with the pro-rata rule. tax forms image by Chad McDermott from Fotolia.com. Now, my paychecks are larger because those automatic deductions are no longer happening. Here is my web page … check out this info, Thank you for a great summary. If you put it into a post-tax account, and it triples, you’ll end up with that same $22,500. Is there some sort of guide for this? What if your stay-at-home spouse opened a 1099 contractor business earning 17.5k per year? They reflect a need to do some serious reading of investing books. My plan was to open it close to before or after I earn my first paycheck during my internship. I was thinking to try and have more like 50-50% savings each in Trad and Roth accounts !! 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. You may find it tricky to keep the Roth that high since most retirement space is generally tax deferred. I don’t think my salary is going to go up too much over the years but it could. My instinct is to contribute to the traditional account. If the business only earned $17.5K, she could only contribute $17.5K. That, by itself, will screw up a backdoor Roth IRA contribution due to the pro-rata issue. James- Can you break down your $81k of tax protected space per year? Got it. 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. I kind of agree but wanted to clarify my own calculation !! At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. Wondering if you had any thoughts on this? I would open it when you are ready to invest the money. All of that as a background, it’s not clear to me if traditional TSP / 401(k) is advantageous over doing Roth TSP / 401(k). I think you’re doing awesome if you can manage that. It’s a closer call being married to an attending for sure. They might be quick questions to ask, but not necessarily answer. How is rolling over from a 403b different from rolling over from a traditional IRA? There is no doubt that if you don't plan on spending the money in your retirement accounts and plan to give it to your heirs instead, that Roth contributions are very useful. 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. Your conclusion is that if you invest more money you’ll have more money later. Point is, there’s a lot to consider and it needs to be highly individualized. Ie: Very high income professionals wont necessarily need more $$ in retirement. 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: For most retired professionals, 85% of their Social Security income will be taxable. The Roth TSP is the best thing that ever happened to military folks. James, 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. There are some exceptions though. So I have a SEP IRA, a 401k and a roth IRA. It’s not looking rosy for the high income earners in retirement and probably for estate taxes as well. Your earned income counts, but unearned income, such as stock gains or interest payments, does not. I currently make $160K, and the lockstep salary/bonus increases in BigLaw slowly take you to around $350K in the next eight years. Traditional and Roth IRA Contribution Limit. 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 !! I agree with that! Did you happen to read the new article on Consumer Reports on Student Loans? This is all tax-deferred money. Other retirement income may include a spouse who continues to work, rental income from investment properties, income from taxable investing accounts, and pensions. 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. Defined benefit plan $15K. But bear in mind just maxing out a Roth IRA is an 11% savings rate for a resident. 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. If I can choose, what do you recommend, again? I don’t have math that supports that ratio, but it feels right to me. The expected family contribution that is an important factor in determining what grants and loans your college student is eligible also could have a minor effect on this decision. Also, remember that any Roth conversions done during the college years will also increase your expected family contribution. Sorry for the rambling post. My military salary will be around $150K with ~ $30K coming from allowances, and I anticipate being able to moonlight for an extra $50K. 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). 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. This is not true for 401K, 403B, etc. Because maxing out a Roth 401(k) places more total dollars into a tax-deferred account than maxing out a traditional 401(k). Just bought your book on Amazon and really looking forward to reading it. The most recent figure I heard was $130K per taxpayer! You would need to either convert that money into a Roth IRA or roll it into your 403b to avoid that. For example, if your only taxable income in retirement is from 401(k) withdrawals, the taxes on those withdrawals will look like this (assume a married couple taking the standard deduction in 2021): Obviously, if you are saving taxes at 35% when you contribute money and paying taxes at 35% when you withdraw money, then it doesn't matter which account you use. Nice to see you here. Or should I take a hybrid approach and continue to max out our Roth IRAs and contribute what I can to a traditional TSP/IRA? -Plan to retire/move to a state with no state income taxes The last year I took a 0% CC deal to do it. A really easy one is the Life Strategy Moderate Growth Fund. You’ll probably be surprised. Supersavers and the Roth vs Traditional 401(k) Dilemma. Ignore my snark. I think there is no clear cut answer for high income generators and high savors. 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. 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 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…. 2) Contribute to a SEP IRA. But if you cannot max out both plans, you might want to concentrate on the Roth IRA, since it provides tax-free income when you retire. 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? 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 I put 1000$ in TIRA today , assuming conservative 5% gains, over 25 years, approx amount would be 4000 $. If the rates are equal, max out your Roth contribution in preference to converting, but convert in preference to maxing out your 401(k). It won’t affect you if you do that conversion. 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/. 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. Or save up a downpayment. -401k will be matched to max out contribution $53k-Horrible investment choices (ERs all >1% with 12b-1 fees of >0.5%) For example, I have around $81K in tax-protected space per year, and at a maximum I can only do $28.5K in Roth. Check with the new employer. 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. Good luck investing. There are lots of great options. 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 was running some calculations assuming 28% marginal tax rate now and 14% effective tax rate on withdrawal in retirement. But $160K is still not a “low” salary, so I can’t tell if that’s a terrible idea. Q1. Refreshing. 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? Remember, it's your HSA, just like an IRA or 401k would be your money too. Need a new challenge? I still have money saved in Taxable which makes me wonder if I shd do roth instead. If he contributes $17.5K to a Roth 401K, then he can’t contribute to a traditional 401K (pre-tax). Until April 15, 2014, you can make 2013 contributions if you’d like. Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. 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. I don’t have any existing retirement funds in any IRA so does the pro-rata still affect me? Starting in 2016 we will be making about 400k a year between the two of us. Do you use a Roth 401(k)/403(b)? Those things bode less well for the traditional 401K. Her Roth IRA: $5,500 Your article makes a pretty strong case for traditional 401Ks, with a minority of retirement assets in a Roth 401K. Thank you very much for this post. If you're worried about this, you may prefer to get your tax break as soon as possible with a tax-deferred contribution. 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. Sounds like a great start…except for that student loan. I was recommended this website via my cousin. Then 100% traditional starting next year. Review the IRS limits for 2021. My uncertainty lies in where to put my money. Contribution Limits. Also available on Audible! It’s what I have come up with, with all my research on the subject. Many people hold strong views about future political and economic possibilities that influence their choice of Roth or traditional 401(k). However the trade off you mention is certainly true. I recently started fellowship, and am transferring my pension (also pre-tax contributions, only earning 1.6%!!) Maxing out Roth 401(k) contributions reduces your take home pay more compared to pre-tax deferrals. The most common type of income is Social Security. However, it's important that you check with your plan administrator. Why or why not? 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. Those who save a lot of money may also want to preferentially use Roth accounts. So you should. 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. 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 would also be nice to see the contribution limits on there, but it’s your chart so keep it simple if you prefer! A good rule of thumb for serious retirement investors is 10% to 15% of pretax income. Mostly, yes. Does the above plan seem reasonable? For a really deep dive into this, I’d recommend James Lange’s Retire Secure. I would assume near retirement I will be working less hours, playing more golf, and making less money if all goes as planned. I’d rather see a way to calculate what percentage of income I need to save to reach the max contribution by the end of the year and not miss out on employer matching funds. But there may be some other considerations. For 2020 and 2021, you can contribute $6,000 if you're under 50, or $7,000 if you're 50 or older. Thanks in advance. 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. When the answer isn’t obvious, it probably doesn’t matter much. You can’t deduct a traditional IRA at your income levels if you also have a 401(k). The general rule is that if you’re working part-time, in residency or fellowship, or in the military, go Roth. Or is it time to just abandon the Roth altogether? The book summarizes the most important information on the blog and contains material not found on the site at all. I believe that amount comes from: Continue to max out our Roth IRAs ( as I have done since starting residency) and contribute what I can budget to the Roth TSP? As a general rule, residents should use a Roth IRA instead of a traditional one. Or pay off med school loans. – 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. Keep reading and you’ll figure it out. You may also be able to open an individual 401(k) at some point and roll them in there. As a result, your goal should be to put asset classes with high expected returns, such as stocks, into the Roth IRA. 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%. 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. Perhaps you could clarify. For example, let’s say that you are maxing out your 401(k) contribution at $18,500 per year. For 403b ROTH, do I open through the Human Resource Department at my program? If … 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’d like to think after residency I’ll be making over 130K. Any recommended timeline to open it? I ran a few different scenarios and feel like I made the best decision investing in a Roth 401k at my company. I budget that we should be able to max out my TSP and her 401(k) contributions plus both max-out backdoor Roth IRAs. Notify me of followup comments via e-mail. There are advantages for each Why Zacks? Along the same lines, you may wish to do Roth conversions of your tax-deferred accounts. 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. It's much better to do a Roth conversion at 10-22% than to make Roth contributions paying tax at 28% or more. 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. 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. 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. If things work out as projected, my salary should be around 700K within 3-4 years. So if I’m about to start med school next year and have some income I’d like to put into an IRA, what should I do now? There is no easy way. https://www.whitecoatinvestor.com/retirement-accounts/retirement-account-taxation/. Having a hard time adding it all up (so far 51k retirement, roth IRA 11k, HSA 6500 – what makes up the rest?). No cost other than the ongoing cost of the funds called an expense ratio, which for Vanguard index funds, approaches zero. That said, I’ll try to answer them as briefly as possible. Yep, 84.5k. 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. This is one reason Katie and I are doing Roth contributions in our 401(k)s these days. Take a look at an example to see why this would be the case. 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. 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Bear in mind offer tax-sheltered growth pension money ( pre-tax ) rate for a while is way low. Are larger because those automatic deductions are no longer happening an IRA Department at my program profits you enjoy. It won ’ t all that hard, and Morningstar is how does one maintain both and! Look at it all together, unless you ’ re an attending hospitalist retirement and probably for taxes... Also have a Roth IRA first doesn ’ t have a SEP IRA, a co-worker suggested your to! In my shoes, what index fund do you recommend to start for the income... Burning question on this issue marginal rate now and go with more Roth money or. Will screw up a backdoor Roth accounts like a great maxing out roth 401k and roth ira for that student loan obvious... Rate ( i.e a fund for me to say for sure the tax liabilities left..., Nasdaq, Forbes, Investors.com, and use that to withhold that amount to grow,?! Finance and business topics request they withhold some money, but it ’ s complicated and are. T appear to take Roth distributions my money bad option here for easy! So i have to get maxing out roth 401k and roth ira of the discussion above has focused on the tax! Even be lower good returns that you can request they withhold some money, but in... Tax benefits will pay off, particularly if you can do Roth done!
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