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  • tax efficiency during residency.

    Hey all! - first off thank you all for your valuable feedback regarding all my questions so far - you all have been a tremendous resource from buying cars to making sure that my finances are on track.
    I was hoping to get some clarification on this and see if this is something I could swing:
    Briefly, I'm a PGY2 Internal medicine, In Texas (no state income tax), no loans, current salary is 62K/year, maxing out roth IRA, and on track to potentially max out roth 403b, living comfortably on 30% of each paycheck every month, the rest getting dumped into HYSA.
    Now my question is regarding tax efficiency - from what I understand, I am getting taxed at 22% marginal federal income tax rate since my contributions to my retirement accounts are going towards roth IRA and roth 403b. At my institution, we also have a 457b available to us as well - would it make sense to try to contribute $4000 towards a non roth 457b account to lower my federal income tax rate to 12% instead of 22%? Is it even worth the effort or am I thinking about this all wrong?

  • #2
    Where is that $4,000 going now?

    Also, I’m sure you know this, but you’re only paying 22% on whatever you earn above ~$80,000 (assuming you’re MFJ since you said “to us”). So worst case is you’re paying an extra $880 in taxes. If you don’t need the money for anything else I would put it in the 457.

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    • #3
      does you 457b plan have a roth option? is this governmental or non-governmental? those are important considerations. Like MaxPower says, being in the 22% bracket really isn't terrible and assuming you are a resident who is young, I'd keep putting more in roth (why I asked about roth 457b because that could be an option) because the increase in tax from a dollar standpoint really isn't a lot. Assuming you are single you're only paying 22% on the dollars above ~40k. Plus from the 62 subtract $12,400 so it's 22% of ~$9600. If there's not Roth 457b option, I'd put that $4k in the pre-tax 457b if you can afford it. I'd say live a little too but there aren't many options during these covid times!

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      • #4
        22% starts at 40K. Not something I'd worry about.
        need to learn about 457.
        When do you spend any of it....

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        • #5
          Maxing out your Roth IRA and Roth 403b on a $62k salary is quite the savings rate/I'd say you shouldn't feel guilty spending some of the money along the way too

          When deciding if you should do Roth v. Pre-Tax, just compare your tax rate today to where you think it will be in the future. You don't have to guess what tax rates will be in the future, but just looking at your income, do you think there will ever be a point in your life where you'll make less than $62k? Unlikely. And tax rates are still historically low right now.

          During residency, with no loans, I'd try to get as much as I could in Roth money because you're essentially guaranteed to be in a higher tax bracket in the future. I'd gladly pay taxes in residency at a marginal tax rate of 22% to get more into Roth accounts right now/have all those years of tax-free growth. Like Peds mentions though, you want to make sure you understand how your 457b plan works/potential risks. If you're comfortable with it, then the next "optimal" place to save is the Roth 457b option (if offered). Since we don't know your HYSA balance, it's also worth noting that I'd build up an emergency fund to cover any unexpected expenses that may come up.
          Andrew Musbach, CFP® | Co-Founder & Financial Advisor at MD Wealth Management, LLC
          Financial Planning for Physicians | [email protected]

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          • #6
            great advice! thank you all

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