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Resident to Attending Transition: Retirement Account from Residency

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  • Avatar HILA88 
    Participant
    Status: Resident, Physician
    Posts: 7
    Joined: 02/26/2019

    Hi guys, I am currently a medical resident, and I recently started to read up about finance. I have been reading this forum and found it very helpful, so finally decided to make an account and join the community!

    I will be graduating from residency this upcoming June. I will then start my first job as an attending in August. Here is a brief summary about myself so I can get appropriate feedback: 31yo, married, no kids yet, no student loans (so grateful for my parents), and as mentioned above, will be transitioning from residency to attending this year. I currently have a 401a DCP account from residency that has about $18k in it. When I start my new job, I plan to move all this money to my Roth IRA at Vanguard. My understanding is that whether this makes sense or not depends on whether I am in a higher or lower tax bracket this year vs when I retire. It is a bit hard to predict but I believe I will be in a lower bracket this year, so I plan to proceed (anyone have any more insight on this?).

    The bigger question: I heard I can make voluntary post tax contributions to my current DCP account. Then, I can convert that to a Roth IRA (I can do it all at once when I move everything over when I start my job in August). My understanding is that this will not count towards my max contribution to my roth ira in 2019, basically a loophole. Also, because I am married and in my transition year, I predict I will still be able to contribute to my roth IRA in 2019 (which I plan to max out). However, will making voluntary post-tax contributions to my current 401a account reduce the amount of pre-tax contribution I can make at my new job’s retirement account? (based on the fact that there are IRS max to contributions). If so, is it better for me to put as much post-tax money as I can into my current 401a account (which will later be converted to roth ira)? Or is it better that I just don’t make any contributions for now, and maximize my new job’s retirement account with pre-tax money?

    Thanks for your help in advance!

     

    #194253 Reply
    ACN ACN 
    Moderator
    Status: Physician
    Posts: 494
    Joined: 01/08/2016

    For 2019, your max 401k/401a will be $19k.  Doesn’t matter if it’s in residency or as an attending.  Your max Roth IRA contribution (either straight up or backdoor) is $6k for 2019.

    You can convert your 401a to ROTH anytime you want.  That doesn’t have any bearing on your contributions for 2019.  Since you are in a lower tax bracket (half resident income/half attending); its an OK option.  The other choice would be to transfer to your new job 401k.

    The maximum an employee can contribute to a tax-deferred account is $53k/year.  So, if I’m following correctly; you want to do this:

    • Contribute $19k in residency to 401a
    • Contribute post-tax in residency to 401a (up to $53k)
    • Convert all of your 401a to ROTH IRA
    • Contribute $6k to ROTH IRA

    If so, I think it’s reasonable, but I’m not sure how you are gonna get to $53k with a resident salary in half a year.

    If you're ever having a bad day, just remember in 1976 Ronald Wayne sold his 10% stake in Apple for $2,300.

    #194293 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3033
    Joined: 01/08/2016

    ….

    #194302 Reply
    Avatar HILA88 
    Participant
    Status: Resident, Physician
    Posts: 7
    Joined: 02/26/2019
    Earnest refinancing bonus

    Thank you for your input. As far as the max of 53k/yr of tax deferred account, I will have an attending salary the 2nd half of 2019, so I think it is do-able (but yes, I will not be able to contribute much the first half of the year while I am a resident). My question is if I use post-tax money to contribute to my current 401a DCP, that will decrease the amount of pre-tax money I can contribute right? So is it worth it to spend post tax money (so I can ultimately get more money in my roth ira), and decrease the amount of pretax money I can put in to my retirement account? Or will that depend on what retirement account I will have at my new job…

    #194327 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1515
    Joined: 02/01/2016

    401a pre-tax contributions are mandatory contributions that would have been set up upon hire and can not be changed. Also, because these are mandatory contributions picked up by the employer. They are not employee elective contributions and are not included in the 402g limit (2019 = $19K). The 2019 415c limit is $56K, not $53K and your 401a plan may or may not allow voluntary after-tax contributions.

    #194371 Reply
    Liked by jfoxcpacfp, Peds
    Avatar HILA88 
    Participant
    Status: Resident, Physician
    Posts: 7
    Joined: 02/26/2019

    To clarify, when I talk about maxing out my pre-tax contributions, I am talking about contributing to my retirement account at my new job (but again, it seems like I will have to look up what retirement account they will offer me to get the best answer here). Right now, my 401a account allow voluntary after-tax contributions. So I am trying to figure out if I should put in as much voluntary after-tax money while I can (up until June), vs If I should NOT put any in and wait until I go to my new job and put more pre-tax money into my new job’s retirement account. Basically I am wondering if putting voluntary post-tax money into my current 401a account (which will be converted to roth ira), will decrease the allowable max pre-tax contribution I can make to my future job’s retirement account. And if it does, is it worth it or not?

    I apologize if my wording is difficult to follow or not making sense, still new to all this stuff. Thanks!

    #194379 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1515
    Joined: 02/01/2016

    There is a separate 415c annual addition limit at each unaffiliated employer. So in 2019 given sufficient resources, you should be able to contribute:

    • Mandatory pre-tax 401a contributions at current employer.
    • Voluntary after-tax contributions of $56K – the above and any employer contributions at current employer.
    • As long as the new employer is not affiliated with the current employer and allows immediate participation. You could make $19K in elective employee deferrals, receive any employer contributions and even make employee after-tax contributions up to $56K.
    • Make $6K direct or Backdoor Roth contribution depending on Roth MAGI.
    #194390 Reply
    Liked by Peds
    Avatar HILA88 
    Participant
    Status: Resident, Physician
    Posts: 7
    Joined: 02/26/2019

    To clarify, you are saying that as long as my new employer is not affiliated to my current residency, contributing to my current 401a retirement account does not count towards the max allowable contribution to my future job’s retirement account?

    Realistically, I will likely not be able to make the max contribution of $56k during the next few months of residency. At most, probably put $1000/mo of voluntary pot-tax money (so from now to graduation, probably only about a pathetic $4000 total). In summary, does this sound like the best way to go about my finances?

    – While I am a resident: contribute as much post-tax money to my current 401a between now and graduation (~4k). Then, convert all this to my personal roth ira later, as below (no tax on this)

    – After starting my new job as an attending, move/convert all my 401a fund from residency (~18k right now) to my personal roth IRA (pay tax on this)

    – Once I start my new job as an attending, maximize my pre-tax retirement account (max of 19K)

    – Max out my roth ira contribution of $6k for 2019

    Thank you!

    #194396 Reply
    Avatar HILA88 
    Participant
    Status: Resident, Physician
    Posts: 7
    Joined: 02/26/2019

    Bumping to see if anyone can confirm/clarify the above. specifically wondering if I should start putting away as much post tax money as I can in to my 401a right now so I can convert it to roth ira when I switch employment. Thank you

    #195890 Reply
    Avatar CFEonline 
    Participant
    Status: Physician
    Posts: 70
    Joined: 09/05/2018

    I think you are part of the UC system based on your DCP 401a?

    If yes, you have these accounts
    401a
    403b
    457b (governmental)
    If not the below might not apply to you

    You have mandatory pre-tax contributions each month into the 401a a few hundred $$.

    You will not have any contributions to the 403b nor the 457b unless you choose to.

    So, by account:
    401a – your mandatory contributions have been pretax. You can roll this to a Roth IRA or a 401k. If roll to a Roth you will have to add this to your income for tax purposes in the year you roll, if roll to 401k you won’t. You can also make after-tax non-roth contributions. These can be rolled into Roth IRA. These do NOT count against your employee deferral for 401k in the same year. These do NOT count against your IRA/Roth IRA contribution limits for the year. There is not an option for voluntary pre tax contributions.

    403b – basically think of this as a 401k. You can make up to $19k employee elective deferrals into this account. They are pre tax. You can roll this into a 401k later. This $19k limit DOES count against your 401k employee deferrals in same year. You must contribute to this monthly by deferring a set amount from your paycheck. You can’t lump sum contribute after the fact.

    457b – if you are at UC system this should be governmental, the good kind. You can contribute $19k per year. These contributions are pre tax. This does NOT count against your 401k/403b contributions. You can roll this into a 401k later. You must contribute to this monthly by deferring a set amount from your paycheck. You can’t lump sum contribute after the fact.

    So if you have all your expenses covered AND you can pay taxes on your resident salary with your extra cash flow, by all means after-tax non-roth contribute to 401a and roll to Roth. These dollars will be worth the most in the future, but are the hardest to save now.

    If you want to reduce your taxable income you can put money into the 457b and 403b. The 457b will not affect your ability to contribute to 401k for rest of year after you graduate (but would reduce contributions to 457b later in year, but most jobs won’t have a governmental 457b unless you stay in academia). Contributions to 403b reduce your employee deferrals to 401k later in year. You can still profit share into 401k but that will be limited to ~20% of income if your plan allows it, which would be tough to get to $56k limit in half year after graduation, so that 401k employee deferral is worth something.

    Without knowing your personal situation, I think generally what would make sense is to contribute $19k to the 457b. Then whatever extra you can afford to save put into the 401a and convert to Roth. Save your employee deferral to 403b for your 401k after graduation, especially if your post graduation job would have any match.

    #195901 Reply
    Avatar HILA88 
    Participant
    Status: Resident, Physician
    Posts: 7
    Joined: 02/26/2019

    Thank you for your details response. I am graduating from a UC residency so that was quite helpful!

    Hmm why would contributing more pretax money to 457b better off than contributing to the 401a for a roth conversion? Although my transitional year will place me at a higher bracket than my previous residency years, I still predict I will be at a lower tax bracket than when I retire (I also will be taking 1.5months off so will not have income during that time as well).

    #196873 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6929
    Joined: 01/09/2016

    Bumping to see if anyone can confirm/clarify the above. specifically wondering if I should start putting away as much post tax money as I can in to my 401a right now so I can convert it to roth ira when I switch employment. Thank you

    Click to expand…

    Your situation is quite unusual. Perhaps not unique, but rare. I’ve read through this thread 3 times, hoping to understand this issues (that’s right, I’m not as fast as @spiritrider). Here’s what I’ve come up with:

    1. You should contribute as much as you can afford in voluntary post-tax contributions to your 401a.
    2. Make your employee contribution of $19k through your new employer. This assumes you will get some kind of match.
      • If not, go with either plan.
      • And this assumes your new plan accepts r/o from prior plans.
      • That is, unless you are fine with an orphan 401a and your prior employer has a decent fund offering.
    3. To answer your other question, if I understand correctly (and it baffles me why you d/n disclose your additional choices before @cfeonline brought up the issue) you can do both: contribute pre- and/or post-tax $$ to both the 401a and the 457b.

    BUT, as @spiritrider already articulated, you are locked in to your 401a choices. So this seems to be an exercise in futility.

    And, to answer a couple of other questions you had:

    • No, making NRAT (Non-Roth After Tax) contributions to your 401a will not reduce available contributions to your new plan. @spiritrider has already answered this.
    • No, these contributions have nothing to do with your ability to contribute to personal IRA accounts.

    @spiritrider, please shoot me down asap if I’m wrong.

    There is an awful lot we don’t know and the interaction of your income and the variety of options you have available makes this a difficult response. Of course, we also are wondering how you have the funds to make these contributions, but that is not a question you asked and none of my business.

    Hope this helps clarify.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #196912 Reply
    Avatar HILA88 
    Participant
    Status: Resident, Physician
    Posts: 7
    Joined: 02/26/2019

    Thanks for your response! Hmmm why is my situation unusual?

    I apologize for leaving out some details. Again, I am only recently learning about financial planning and didnt really understand the 403b/457b, and since I don’t have any money in there at this point didn’t really think to utilize it with the last few months of residency I have. The other information I would like to add (and found out) is that my new employer will:

    – NOT have any 401k match (but comes with a pension)

    – have a Roth 401k options.

    Furthermore, I will add on that I do NOT have the funds to max out my current 457 account. I probably am saving like $1000/month or so that I can put towards something. Initially, I was thinking I should aggressively put post tax money in to my 401a now, as this may be my last chance to put money into my roth ira while still in the lower “transitional year” tax bracket. However, knowing that I will have a Roth 401k option, I am wondering if I don’t need to rush putting money away right now, and should hold on to it as cash for near future expenses (wedding and purchasing a home in the next 2-3 years). As of now I probably have about 4months’ worth of monthly expense saved and thats about it.

    #196926 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6929
    Joined: 01/09/2016

    If you need the $ for a wedding and downpayment in the next 2 – 3 years then, yes, you need to keep it in cash. Have you already calculated that you will not be able to save enough from your attending salary for these goals? If you can afford to, go with post-tax contributions.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #197440 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3033
    Joined: 01/08/2016
    as this may be my last chance to put money into my roth ira while still in the lower “transitional year” tax bracket

    Click to expand…

    did you read about the backdoor rIRA?

    #197445 Reply

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