Resident to Attending Transition: Retirement Account from Residency

Home Personal Finance and Budgeting Resident to Attending Transition: Retirement Account from Residency

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    Status: Physician
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    Once you have a firm grasp on your short and mid term financial goals I think your decision becomes easier. If you need the cash in the short term I wouldn’t put it into a retirement account. An FDIC high interest savings account, taxable account with money market fund, treasury bills, or the like would perhaps better suite your needs. If you have an adequate emergency fund and believe you can save the cash you need for additional life expenses from your new attending salary, it does make sense to put it away into retirement accounts now while you have these extra options. A caveat is to be careful not to overestimate how much you anticipate making in your first half year out of residency, unless you are 100% hourly salaried with guaranteed hours. If there is a productivity component, that will often be delayed until billings go through and charges per provider are posted, which might mean getting the money distributed to you months after you worked for it, so for the first several months your paycheck is smaller. You are also unlikely to be as productive as the people who have been working there for some time when you first start, so an average earned hourly quoted to you is likely to overestimate your actual income.

    Presuming you do end up wanting to save in retirement accounts, deciding if post or pre-tax dollars make more sense is a complicated topic. ( Don’t forget to account for the mandatory pre-tax contributions you have already made to your 401a throughout the duration of your residency, which you mentioned is ~$18k. You can roll this into your Roth IRA after separating from your residency, but it will be added onto your taxable income in the year you do this. You could also roll this into a new 401k or leave it where it is to avoid that tax burden. If you really want to save as hard as possible putting as much extra into the 401a after-tax to convert to roth makes sense as these dollars are worth more in retirement (not taxed) and cost you more to save now. Then after separating from residency and losing the ability to contribute to those accounts, you can fully fund your Roth IRA for the year (or backdoor roth if you don’t qualify) and fund your new work 401k either roth or pre-tax. Hard to say what the right choice is. I think it depends on how much you anticipate withdrawing in retirement every year as you mentioned. I am far from this time of life, but from reading WCI book it sounds like you actually get by on less than you would think, since several of your current/working-life expenses (disability insurance, malpractice, retirement savings, mortgage, kids, student loans) are no longer part your regular expenses in retirement. It may be that in retirement you are drawing less out of your accounts than you will make this year with 1/2 year resident salary, 1/2 year new attending salary, + spouse income (if any). Keep in mind once you reach a certain tax bracket level with your 401k distributions you can supplement this “retirement income” with withdrawals from your Roth IRA. An additional thing to consider is how long you believe you will work and will it be full time, maxing out your 401k? If you believe you are going to work a 30-40 year career maxing out your 401k, you will likely end up a pretty big 401k, and eventually end up with larger required minimum distributions than you would like. If this is so you would be better off putting this money into roth now. If you think you might retire early, go to part time at some point, or for another reason not end up with a mondo 401k balance, then it makes sense to me to balance between pre tax and post tax contributions at this stage. So if you really wanted max out your roth savings for the year you could get to a hefty sum: $18k (current 401a balance, rollover to a roth) + $4k (after tax non-roth 401a contributions conver to Roth IRA) + $6k 2019 Roth IRA or backdoor contribution + $19k Roth 401k contributions at your new job = $47,000 of roth savings in 2019 which is not bad. And of course you could mix and match the above amounts, all of which you could instead invest as pre-tax with the exception of the $6k 2019 direct/backdoor Roth IRA contribution. And as you know whatever component of this goes in Roth you have to pay taxes on, so at a minimum you will be looking at a marginal federal rate of 24%, quite possibly 32%, and if you stay in California an additional state income tax marginal rate of 8-9.3% for a total of ~32-41.3%, and you may have even more social security and medicare tax if your new job will be 1099 income.

    On a side note, fidelity will let you keep running your 401a/403b/457b indefinitely after separating from UC, and I think the fee is ~$30 per year (I was told this fee is not charged per type of account rolled all my funds out anyways, so can’t verify that), and you get access to several institutional class broad index funds for cheaper than you could on your own, and can also open and operate a brokerage account for free attached to any of these with access to all fidelity’s funds, so I wouldn’t feel any pressure you have to move the money out quickly (just by the end of 2019 if you are rolling the mandatory pre-tax 401a contributions to your Roth IRA, as they will be taxed in the year that is done).

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