Set for life insurance adMy most recent ACEP NOW column concerns the Backdoor Roth IRA. It takes a while to wrap your head around this one, so I don’t mind addressing the subject multiple times. I’m still getting emails, forum posts, and blog comments every week with good questions about the Backdoor Roth. If you’re an attending physician, and not already funding one of these for yourself and your spouse, you’re probably making a mistake. Here’s an excerpt:

The second type of retirement account is a tax-free, or Roth, account. These accounts, named after Sen. William V. Roth Jr. of Delaware, also allow tax savings but in a different manner than a tax-deferred account. You contribute after-tax dollars to a tax-free account such as a Roth IRA or a Roth 401(k). The money then grows without taxation and, in retirement, is withdrawn from the account and spent tax-free. While the bulk of an attending physician’s retirement savings during peak earning years should probably be in tax-deferred accounts, it will be extremely handy to arrive at retirement with significant amounts of both tax-deferred and tax-free assets. Aside from contributing to tax-free accounts, it is also possible to convert tax-deferred accounts to tax-free accounts by paying the taxes due in the year of the conversion.

Prior to 2010, there was an income limit both on making contributions to Roth IRAs and on converting traditional IRAs to Roth IRAs. If you made a typical emergency physician income, you could neither contribute to a Roth IRA nor convert one of your traditional IRAs. However, starting in 2010, that income limit was removed from the conversion process, although not the contribution process. Under current law, a typical emergency physician cannot contribute to a Roth IRA but can contribute to a traditional IRA and then convert it to a Roth IRA.

medical student loan refinancingThe trickiest part about doing a backdoor Roth IRA is dealing with the pro-rata rule. A typical emergency physician can neither contribute to a Roth IRA nor deduct a traditional IRA contribution, although a traditional IRA contribution is permissible. This is known as a nondeductible traditional IRA. However, when doing a Roth conversion, the IRS does not permit you to just convert the nondeductible dollars into a Roth IRA. The traditional IRA must be converted pro-rata.

Read the rest of the article here, then come back, leave a comment, and answer the poll. Are you doing a backdoor Roth IRA? If not, why not?

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