As a general rule, Roth accounts are for people who are not in their peak earnings years, and tax-deferred accounts are for those in their peak earnings years. There are lots of exceptions to this general rule, of course. One of the most well-known ones is the Backdoor Roth IRA. But in that case, you're really comparing a Roth account to a taxable account. Of course the Roth wins hands down.
In a 401(k), you are allowed to make the “employee contribution” ($18K for those under 50, $24K for those over 50) either tax-deferred or Roth. One of The Finance Buff's most famous posts was written shortly after this option came into being, showing that the Roth option was a poor choice for most people, although even he recently acknowledged there are some exceptions. I've written on this subject before as well. Today, I'm going to talk about some other exceptions and give you a few things to think about if you have a Roth option in your 401(k).
Uncertainty and Tax Diversification
When you're not sure what to do in a financial situation without a clear answer, it can be a good idea to hedge your bets by splitting the difference. If you have a typical 401(k)/Profit-sharing plan ($52K limit in 2014 increasing to $53K in 2015) you still have a $34,500 tax-deferred contribution, even if you put the entire $17.5K employee contribution into a Roth account. Combining that with $11K ($12K in 2015) in personal and spousal backdoor Roth IRAs, you get a total of $28.5K. Since Uncle Sam probably owns a quarter or more of the pre-tax employer contribution, these amounts are roughly equivalent, ~50% in each type of account.
Roth vs Tax-deferred + Taxable
Assuming he's actually maxing the 401(k) out, in order to save the equivalent after-tax amount of money, an investor who preferentially used a pre-tax account would have to also make a taxable investment. For example, an investor with a 40% marginal tax rate could either put $17.5K into a Roth 401(k), or put $17.5K into a tax-deferred 401(k) plus $17.5K*0.40=$7K into a taxable account. Of course, that taxable account is going to grow a little slower than the Roth 401(k) due to the tax drag. So even if you're contributing and withdrawing at the exact same tax rates, the Roth 401(k) is going to be a better option. In effect, you have a larger retirement account. This is particularly important for high income employees who may not have a lot of retirement account options.
Super Savers Beware
As I've written before, you don't want to have too large of a tax-deferred account, at least if a larger Roth account is an option. This isn't an issue for most docs, who are dramatically undersaving, started too late, and are getting poor returns. The typical doc probably ought to be making all tax-deferred contributions. Same with a doc who plans to retire very early (with a smaller tax-deferred nest egg or at least many years with which to make withdrawals or do Roth conversions). But if you're a super-saver, have lots of tax-deferred options, are young, and plan to work a relatively full career, you might want to do a little more Roth. For example, I'm deferring a six figure amount this year. If I keep that up for 20 more years, I'm going to have a monstrously- sized tax-deferred account.
Consider the Required Minimum Distributions (RMD) on a $10 Million tax-deferred IRA ($106K a year for 35 years growing at 5% real) when you hit age 70 1/2. That first year the RMD is 3.6% of the account, or $360K. Combined with Social Security, and possibly rental real estate or other taxable income, that type of RMD is going to get you into a high tax bracket. By age 80, it's 5.3%, and if that account kept up with inflation despite the withdrawals, it could be $530K a year, well into the top tax bracket even for married folks not including other income. A larger Roth would be very useful in that type of situation.
What do you think? Are you making Roth 401(k) contributions despite being in your peak earnings years? Why or why not? Comment below!
I have a large ret plan age 65 Should I convert some yearly to a Roth Ira
Does it make sense as I will hopefully never touch the principal
Absolutely it makes sense, especially if you’re not yet taking Social Security. Take a look at James Lange’s Retire Secure for more details.
What do you think is best for a military doc just out of residency?? We make about 125k but much is tax exempt housing and food allowance. I’m planning to max my 401k and IRA but am on the fence about how to contribute. Right now I have it set up for traditional but was thinking of doing 50/50 split with a Roth IRA. I’m in derm so expect salary to be much higher when I get out. I read the finance buff articles and now wonder if I shouldn’t split. Appreciate any advice you can offer. I LOVE this blog and it has been such a huge help to me!! Thank you!!
Military? Derm and planning to get out? Roth roth roth roth roth roth. I would 100% Roth 401(k) contributions, personal Roth IRA, spousal Roth IRA, and anything I was allowed to convert to Roth IRA, I would do so. If you moonlight, do a SEP-IRA and convert it that same year. I see no reason to split anything. Rothify it all.
THANK YOU!!! Appreciate the simple answer 🙂
It’s responses like that that stick with you. I now have no doubt Mary will Rothifiy it all and not look back.
Sometimes the world is gray. Sometimes it’s not. 🙂
From an older Derm and also HPSP Navy, I agree 100% with WCI – You will likely have many years of high-earning (unless you’re going part-time?) where it will make more sense to do traditional for the immediate tax savings…. wish I had put a lot more into Roth when my salary was lower. Luckily I did convert IRA to Roth IRA years ago when they offered the option to spread out the tax burden, so now I can at least do Back-Door … still only 20% of my total retirement dollars are Roth, the remaining will all be taxable. Not a bad problem, but a 50/50 split would be more desirable as I think about retirement.. Good luck! Rich
This is interesting and complicated stuff. The big picture is that doctors need to be maxing out all options. Which ones they use is of much lesser importance. Since I have half in a 457(b) [before tax] account and half in a Roth 401 (k) with employer matching I guess I’m in the “split the difference” camp. My other savings go into taxable accounts and non-deductible IRAs (e.g. “backdoor Roth”). Given the current fiscal and macroeconomics in this country I expect future tax rates to be higher than the present ones so paying a smaller percentage tax on a smaller amount may make some sense. Then again, it could go the other way which is a reason for hedging your bets.
Not enough has been written about maximizing the value of IRA recharacterization. I haven’t been able to fully put my head around the math, but it seems like there should be an advantage to routinely converting pieces of TIRA to roth in January and then recharacterizing or paying the tax based on what the market did, and how much money you ended up with to pay the tax, or even interest rate to borrow to pay the tax. Maybe a future post could tackle this, or maybe you know of a definitive treatment? Some authors have also pointed out that splitting your IRA into components (e.g. large cap, small cap, bonds) prior to recharacterization can offer a benefit. It seems like even in peak earning years, given suitable market conditions, you could come out ahead paying the tax to convert.
To answer your question I’m all about converting to Roth, some of that is lifestyle choice. I hope to not retire (programmer, self employed, love my job), so Roth is superior for estate planning and general safety net. I’m 100% TIRA now, trying to figure out smartest way to start shifting that.
Sure, the recharacterization strategy works, but I can’t get people through the 8606 for a backdoor Roth effectively. The issue with the multiple recharacterization strategy is that it is a fairly large hassle for a fairly small benefit.
Lol 8606 is a real bastard alright, finally figured it out !
Too late for 2015 tax yr extension to start a solo401, sep or any shelter?
You can have several 401k plans right- one SD, VG, Fido?
Relatedly, for asset protection why is this true: 401k>IRA>solo401k>taxable? I have to get rid of tIRAs and maybe my old job’s ROTH401k, but am reluctant to get a solo 401k which is less protected I gather.
You should still be able to do a SEP, but not a 401(k). Those have to be opened by the end of the calendar year as I told you in the last thread you posted these questions in 5 minutes ago.
As I said in the other thread, that isn’t true. In some states 401(k)>i401(k) = IRA > taxable, in some state 401(k) = i401(k) > IRA > taxable, in some states 401(k) = i401(k) = IRA > taxable, and in some states 401(k) = i401(k) = IRA = taxable. Look up your state’s rules.
Maybe it’s my lack of understanding but a doc in my practice regularly warns of a few things that could occur in the future. The first is a conversion to a higher tax rate on 401k withdrawals over a certain amount. The second is the possibility of reducing or eliminating social security to those with large enough 401k accounts. The third would be a conversion of 401k dollars into an essentially government guaranteed annuity check and the government essentially confiscates 401k dollars to pay debts it owes with a ever increasing debt burden with no or few cuts in spending. Many other ideas come up but what do you all think?
How about ISIS sets off Iranian nuclear bombs in Washington, NYC, LA, and SF? That would probably have a rather significant effect on my 401(k) as well and seems at least as likely as all that happening. Seriously, predicting what Congress will do in the future is at least as difficult as predicting future interest rates, future currency rates, and future stock market movement. I think it is far wiser to take the laws currently on the books, project them forward to make your plan, and when and if they change, adjust your plan accordingly. The ratio of changes that actually occur to the changes that could occur is quite small.
Agreed. Another potential complication would be a move to a consumption tax, which would eliminate a great deal the utility of a ROTH IRA. that said, I just don’t think you can account for all the possible changes that could occur, and one can only account for what we know to be the case now.
Thank you for the mention. Do most doctors get pre-tax profit sharing that maxes out the $53k or multiple $53k’s? If that’s the case I’d say sure go Roth. It’s only $18k one way or the other in the end. If you only get a few thousand dollars as a match, then you need more pre-tax dollars.
Many docs certainly do get $53K or more into tax-deferred accounts. Most? Maybe not, but probably because they’re not saving that much!
Being at the 39.6% tax bracket, I have no interest in doing a Roth unless it is a Backdoor roth.
My plan will eventually be to retire early. At that time I can evaluate the current tax structure and make Roth conversions at a much lower tax bracket if it still appears to be a wise decision.
Even if I retire at 60, I can do convertions for a few years. Maybe at that time even up to the 25% tax bracket.
Either way saving 39.6% now to pay up to 25% later is definitely a better deal.
Frankly I just don’t understand why someone in a high tax bracket would ever want to contribute to a Roth other than a back door Roth. Am I missing something?
Sure, that’s what the article is about. For example, if you have $10 Million+ in tax-deferred accounts, it makes a lot of sense to do Roth instead of more tax-deferred contributions. But if you have just $500K in there and you’re making $500K a year, then sure, pre-tax to da-max!
My wife and I are both independent contractors in CA. Not as bad as you think tax wise given all the contributions and deductions we have access to.
Our take home is about 450k pretax, may increase 50-100k in 3 or so years. We max 401k, FSA, HSA (for stealth), Roth IRA, I-bonds and some taxable each year.
Our 401k does have a Roth option. I haven’t been using it.
We are in our earlier 30s.
Right now saving over 85k in the 401k between the two of us.
My plan is to continue going traditional 401k until one of the following happens:
1) My wife decides to cut back on hours or flat out retire (not unreasonable to consider in her mid 40s.
2) I decide to cut back on hours
3) The 401k reaches 7 figures
Once any of these events happens, i’ll re-evaluate our tax situation and likely start contributing the 17.5k to the Roth.
As it stands now, at 450k pretax even with all of our deductions / contributions, still doesn’t feel right paying state/fed tax now on that money.
10 years from now when my wife is working half time, I’m working 3/4 time and the 401k has >1M in it, I could see it being reasonable.
Our plan is financial independence by our late 40s/ early 50s. Which is contingent upon whether or not we buy a house in this HCOL area. For now we are paying excessive rent, but I think it’s a lesser mistake than buying a $2M house.
Even if we hit FI in that time frame, we still have to come up with how to manage health insurance. Luckily I can work 600 hours / year and still qualify for health insurance, so will likely do that going forward, which will put us in a pretty low tax bracket. At that point I’ll likely start converting my wife’s accounts into Roth accounts until we officially stop working.
We also have access to a DBP of up to $35k/each.
I don’t contribute to it currently for several reasons:
1) I think it’s overkill given our current saving rate / trajectory
2) Every dollar not going into a retirement account is being saved for a potential house down payment
3) I don’t think we could actually afford to do it with our current lifestyle
I may take advantage of the DBP in the future if our income/lifestyle allows us. But I question the benefit over otherwise contributing money to a taxable account and buying muni bonds. They would offer us more flexibility and only minimal tax drag.
Sounds like a good, moderate, balanced approach.
I probably should have mentioned that I do not share my colleagues pessimistic view but that his point is tax diversification in different kinds of tax advantaged accounts may be wise even if it’s a decision between maxing a 401k vs some 401k and then some back door Roth. I will be using both accounts maximally myself this year for the first time which feels great!
Via email:
I have run into the exact issue being brought up here as I have just retired at 65 and saved the maximum tax deferred Keough/401K for many years. So I have a huge tax bill coming when I take the money out, or if my inheritors get it. I went to a trusted financial advisor (I usually do everything myself as does The White Coat Investor) (and enjoy doing that) but felt I needed some advice beyond my capability. He “Monte Carloed” it and looked at many permutations, etc. and the best thing financially would be to convert entire amount into Roth asap and pay the required taxes now. I will partially take his advice and do it over 6 years as I am trying to pay the tax with already tax-paid savings and thus keep the Keough money growing in the tax free account for the future.
I agree doing it over 5-6 years would be wiser, especially assuming you’re delaying SS to 70. I also cannot imagine that converting it ALL is the right move unless you have lots of taxable income outside of tax-deferred withdrawals.
Early retiree Go Curry Cracker has a good post on how he is timing his conversions (over a longer time) to get his taxes down to zero. You can take that concept for your situation and try to fill the 15% (or 25%, 28%, etc.) brackets before the RMD to see which works out best.
http://www.gocurrycracker.com/gcc-vs-rmd/
My wife and I currently earn $135,000 a year. (She is in residency). In 1.5 years, our income should increase to $350,000. Around, the same time, we will finish paying off our 15 year mortgage, further improving cash flow.
Right now, we usually end up with an extra $500-1000 per month.
Would you recommend:
1) Invest in Roth IRA
2) Pay off student loans (6.5-6.8% approx 200k)
3) Pay off revolving credit card loans (0%-2% interest until summer, 2016)
4) Invest in 403b (tax deferred)
Finally, would you borrow money from a credit card at 0-2% to max out the Roth IRA?
I was going to do option 2, but this article has me second guessing myself…
I know you want to hear WCI’s advice, but I would recommend maxing out your Roth IRA while you’re in a relatively low tax bracket, but definitely not with credit cards. If you can’t max out both your wife’s and your Roth IRA each year on your current salary, then you are only compounding the problem by using credit cards to do so (even at 0-2% interest). With an income of $150k, you should be able to max out the Roths and still put some towards the student loans. Once your income/tax bracket goes up, I would then shift your payments to your student loans until they are paid off and then start doing the back-door Roth (assuming your are maxing out your pre-tax contributions at that time).
A few comments.
I can’t say I never borrowed money off a credit card at 0% to fund a Roth IRA, because I did. I had the loan paid off before any interest was due. My situation was a bit different from yours. First, there was no such thing as a backdoor Roth IRA, so I thought it was my last Roth IRA contribution ever. Second, my household income was $40K, not $135K. That’s more than I made my first 4 years as an attending. It seems silly to me to not be able to max out retirement accounts on that income.
The student loan plan seems ill-defined. If you’re going for PSLF, then don’t pay extra on the loans. If you’re not, then refinance them as soon as you know it and can afford the payments. Then pay them off like Dave Ramsey’s infamous gazelle.
Revolving credit cards loans make sense mathematically. I’ve played those games before too. But I can tell you this. Rich people don’t play games like that because they don’t need to. Your focus should be on what percentage of that $135K a year you’re using to build wealth right now, not how many 0% credit card deals you can find.
But you guys seem to be doing awesome. You’ll have your mortgage paid off by residency graduation? That’s pretty cool, so you’re doing something right. You may be able to use that home equity to help the student loan situation as well.
At any rate, you’re choosing between 4 great options. All of which will help you build wealth. There isn’t a bad choice there. Why not live like a resident and do them all?
Thank you Jon and WCI for the feedback. I really appreciate your help.
Delayed gratification is tough… but we see the light at the end of the tunnel…!
I contribute 18K to Roth 401k and 18k to 457b (tax deferred). I just like the idea of tax diversification. Of course I’m only 30 and not in peak earning mode. Excellent article. Keep em coming.
Great article as always. After contributing $18k to 457, $18K to 403b and $12K to personal and spousal backdoor Roth IRA, is there any other retirement vehicle that can be used for an employee?
Maybe an HSA. Definitely a taxable account.
I’m in the same boat. There’s really not a lot. HSA as WCI mentioned. Your question implies that you’re looking for something other than a taxable account, and I assume that where your extra savings goes now.
Other than that, the only thing I can think of is the whole start a side business, get second job as independent contractor for the main goal of getting more tax-free/deferred options.
You nailed it. HSA however, is tough for us to do as that would imply getting a high deductible health plan. We go to the doctor too much, fortunately for minor stuff.
I thought about starting a side business. But then the tricky question is If you could potentially deviate money from your income as an employee to fund a retirement plan through your “business”. Or if the money you contribute necessarily needs to come from your side business itself which kinda defeats the purpose.
Yes, it needs to be a real, profit-generating business.
This is a good example of how docs get swindled too. They have this terrible image of a taxable account and so end up in some crappy life insurance policy or annuity. A taxable account, while inferior to a Roth or tax-deferred account, isn’t THAT bad.
Yeah mostly this. Assuming you want to go about the whole thing without an legal issues, it needs to be real business. As far as profitable, it just needs to be profitable to you in the casual sense, but there are businesses one could theoretically set up which are not technically “profitable” in a legal sense, but are beneficial to you financially.
I did Roth 401k only in my first “year” out of residency (FY July – Dec). One reason is because it will be the lowest income I have most likely until things start to wind down. Second reason is that if I switch jobs, then I can toss the Roth 401k money into my Roth IRA account at Vanguard (right?), helping to boost my overall Roth amount.
I think that’s very smart of you.
“I can toss the Roth 401k money into my Roth IRA account at Vanguard (right?), helping to boost my overall Roth amount.”
Is that a true statement? Would be nice. Currently pgy-1 and contributing $18k to Roth 403b, would love if I could throw it all into my Roth IRA (also max contributing with wife) at Vanguard at the end of residency; I haven’t gotten to that point in researching roll-overs/transfers yet. We aren’t contributing anything via wife’s employer retirement since she won’t be vested for any match before we move again, so anything else is going to her loans.
Yes, when you separate from an employer (and sometimes even before in some 401(k)s you can roll Roth 401(k) to a Roth IRA or convert a traditioanl 401(k) to a Roth IRA. Probably shouldn’t just roll over traditional 401(k) to a traditional IRA though if you want to do backdoor Roth IRA contributions.
I don’t think answers to Roth vs Traditional 401K or IRA are as cut and dry as some would make it out to seem.
You are basically reading the tea leaves of what tax rates will be when you are of the age and inclination to take withdraws from these accounts. I think the better answer to everyone’s questions whether roth or traditional 401K/IRA is to hedge your bets with a little of both.
Another wild card which has not been discussed, is what if the government changes the rules on retirement accounts, whether Roth or Traditional?? The government realizes all the trillions locked up in these account. If they can get a fraction more of it, they will. Our government is broke. It wasn’t all that long ago there was an “excess distribution penalty” on retirement accounts if you saved and invested prudently.
I agree that tax diversification is useful.
One other consideration is that in situations where you may regret not having done the Roth are ones in which you will be okay anyway (effectively having too much money in tax-deferred accounts, whereas ones in which you might regret contributing to a Roth are ones where things didn’t go well (unexpected early end to working career due to disability, prolonged down market).
For now I’ll take my changes with accumulating too much tax-deferred
Great article. I’ve gone back and forth on whether to do a traditional vs Roth in my TSP. Currently it’s Roth, mainly because the match is traditional, and my profit sharing contributing for my solo 401K is traditional; I do a backdoor Roth IRA too, or course. So the tax diversity seems to be the driving factor. I also did the math on an 18K traditional contribution, it would save me $6000k (at the 33% tax bracket), but divided over 26 paychecks it’s only like 230 bucks, so I don’t really notice it. If I had to make the contribution in a lump sum…I might choose differently.
That seems like a pretty good way to split the difference.
I have the option to split my contributions into a traditional and a roth 401K where I am employed (no employer match). I am only a few years out of residency so my salary is still relatively low for my field (175K for Ophtho, but I am maxing out my contribution now. Wife does a traditional IRA and we don’t have enough left over for a backdoor at this point. After talks with both financial and tax people, I have decided to split my contributions 50/50 so I still get some tax deferred benefit and also get protection on future taxes. The reason we decided to go with some Roth 401K is our country has a large debt that will need to be paid some day. My guess is it will be on the backs of the top 10% of earners and not those with Obama Phones. Not sure how sound the strategy is but it helps me sleep at night.
Seems reasonable. However, at an income of $175K if you are unable to max out a 401(k) (I assume since you are an employee and there is no match that limit is just $18K) and a personal and spousal backdoor Roth IRA (that’s only $29K, or 17% of your income) I’d start working hard to get my savings rate higher. I hope the reason you can’t save more is that you’re making huge payments on your student loans rather than that you’ve mostly grown into your income already.
Via email:
Paying about triple my monthly payment on loans (only 80K from 130K left at 6%) and bought into a surgery center so not able to go all in this last year. May consider re-financing the student loan soon and hopefully add the back door Roth IRA for myself this year.
Thanks for the website, great info I wish I had read as a med student.
I had a question about having a traditional employer 401k and a roth solo 401k in the same financial year.
For the first half of 2015, I was a full time employee on a W2, and I maxed out my $17.5K contribution to the employer’s traditional 401k plan.
I have also already done a backdoor Roth IRA.
For the second half of 2015, I am quitting my full time job and will be working per diem on a 1099.
Since I already maxed out the traditional 401k with my previous employer, can I still open a Roth 401k and contribute to it from my new part time 1099 job?
Thanks
You can open an individual 401(k), but can only do employer contributions into it, and those cannot be Roth.
WCI
In the article you state that you are deferring 6 figures this year. I am interested in that breakdown, since my wife and I are maxing our contributions to 401k/457b and hit a max of 72k. If we both put in a max HSA contribution of about 4k, it still puts us at 80k. Are you counting employer match into that deferral as well? Are there other deferral vehicles about which I am unaware? Can I become a polygamist and increase the amount of deferred contributions I make in a year (this would be the least favorable option for my wife(s) and myself, of course)?
Why get another wife when you can just get another job? Much less work in the long run.
Partnership 401(k)/Profit-sharing Plan: $53K
Partnership Defined Benefit Plan: $30K
Individual 401(k) for second job with unrelated employer: $53K
HSA: $6650
Total: $142,650 for 2015. If I put my wife on the WCI payroll, it’ll be even more. If she gets a second job, it could be even more.
And I’ve never gotten an employer match. That must be nice. 🙂 I would count that of course, as it is really part of your salary.
I was unaware that you could defer twice the amount if you had 2 401ks with different employers. I thought the max was the same regardless.
And although an employer match is nice, I would prefer to have employer put in 53k over my 17.5k max (now 18) plus 3 percent of salary…
Anyway, I’m happy with just one job (and more happy with just one wife). It wasn’t my intention to be nosy, just informed. Thanks for the info!
https://www.whitecoatinvestor.com/multiple-401k-rules/
Hi,
I debate back and forth if I should roth 401k or 401k. I am 33 years old working as an ER doc–so basically making my max salary at this point except for market adjustments. I am employed and receive a w-2. I max out my 401k yearly. My wife and I contribute fully to backdoor roth IRA and we max out HSA, as well. I live in Florida and my tax rate is 33% bracket. I would think the best way to know when to contribute to roth 401k would be to see at what point the loss of the pre-tax contributions would bump you into a higher bracket. No? On the other than, my accountant says if I max out my 401k every year, I could end up with a lot of taxable income in my 401k when I retire–maybe more than I would want. What are your thoughts in terms of choosing roth 401k vs 401k in this situation, which is probably many other ER docs similarly?
33 years old with a relatively small portfolio (presumably) and in your peak earnings years? I think I’d be maxing out all tax-deferred options if I were you. Since you’re on a W-2, that’s probably only $18K a year plus some measly match. You already have Roth IRAs going on the side (from a young age.) You’re not making a very compelling case for a Roth 401(k) to me.
My husband is a physician who earns about $350k per year. We max out his 401k and an HSA.
I’m a freelancer and intend to open an individual 401(k) this year. I make about $50k per year. My goal is to funnel most of my income into the i401(k). The question: should I go traditional or Roth? All of our other retirement savings are in tax deferred vehicles but we’re in the peak earning years.
Other details of note: 1. We file a joint tax return. 2. I have a substantial amount in a rollover IRA, that I rolled over before there was any such thing as a backdoor Roth. Converting would create a large taxable event so we don’t currently contribute to a backdoor Roth IRA. The i401(k) would be our post-tax option.
Should I be more interested in a pre-tax contribution to reduce our taxable income, or should I be thinking about tax diversification and a post-tax Roth contribution?
You don’t mention how much Roth you have, nor your expected income in retirement etc, so hard to give you the answer you’re looking for. One thing I would do, however, is roll that rollover IRA into your individual 401(k) and then do a backdoor Roth IRA for each of you each year. That will at least give you some Roth space. But what to do with the $18K of your $28K that you can put into Roth each year, much harder decision. You can split the difference if you want, but what I would probably do is go tax-deferred with it.
I am 33yo in my final year of residency. I have been moonlighting quite a bit this year and was wondering where to put it (Solo 401K vs Roth 401k)? Ultimately I will have $50k from 1099s after deductions. As far as my W2 income goes this year it will be the lowest ( 1/2 yr Residency + 1/2 yr attending = $168) as I have not reached full earning potential (partner in 2 years @ $410k per yr). Also, next year I will be married to another physician. My employers 401k does not start till next January. So I was debating between Solo 401k or Roth 401k. The amount I am putting in will come from the 33% bracket. Obviously when we both hit our partnership earning years we will be taking advantage of tax deferred accounts. However, I am not 100% certain what to do in the few years leading to that. Our savings so far:
Mine: Roth IRA $27k
Spouse: Roth IRA $56K
I’d do Roth, but there’s no wrong answer.
I’m sure you are sick of all of these comments looking for some free and quick advice, but I might as well try and get mine as well. 35 years old, married and filing jointly, made $480k income this year (3rd year out of residency, just made partner so definitely in my peak earning years):
-maxing out the backdoor Roth IRA for myself
-maxing out a traditional IRA for my wife (she had 18k in a traditional IRA and we didn’t find your blog in time to realize how beneficial it would have been to convert it to a Roth during residency…and now it would be a taxable event, although we could probably be persuaded to convert it if you thought it was important enough)
-maxing out our HSA
-maxing out my 401K
-maxing out my profit sharing plan
-(oh and tripling our student loan payments…should finish up our $180k in loans in the next 3-4 months).
So Roth or traditional 401K at this point? I like the idea of tax diversification and I’m leaning toward a 50/50 split of the 401K contributions, but our tax rate is pretty dang high and so of course the tax savings would also be really nice. Thoughts?
Traditional and use the tax savings to convert her IRA to a Roth so she can do a backdoor for 2016 and 2017. Easy one for now. In a few years it may be worth readdressing.
And of course this “advice” may be worth exactly what you paid for it. But that’s what I’d do.