[Founder's Note: This is a column I wrote for MDMag.com. It's all about one of the best things the government has given the typical physician—tax-deferred retirement accounts. Not only is there an up-front tax-deduction, but you get tax-protected growth and if you're like most docs, a big tax rate arbitrage at withdrawal. I'm always surprised to see how many doctors aren't maxing these out due to inadequate savings or investing in a taxable account instead.]
By Dr. James M. Dahle, WCI Founder
Anybody with a reasonable understanding of math, the US tax code, and the typical earnings cycle of a physician can quickly see that one of the greatest gifts the government has ever given physicians is the ability to use tax-deferred retirement accounts. Despite this, there are many people out there that would try to convince you otherwise.
Sometimes these people have ulterior motives, wanting you to pull money out of your retirement accounts in order to purchase an investment or insurance product that will pay them a big commission. Others, including at least one prominent radio host, advocate that you always use a tax-free (Roth) account preferentially when available. Even well-meaning folks may cause you to worry unnecessarily about large required minimum distributions, investing fees, difficulties accessing money in retirement accounts prior to age 59 ½, and rising taxes.
Will a Doctor Benefit from Tax-Deferred Retirement Accounts?
However, the truth is that for most physicians, the very best place to invest their next dollar is inside a tax-deferred retirement account such as their employer’s 401(k), 403(b), defined benefit/cash balance plan, or a 457(b). And, for the self-employed physician, an individual 401(k) or cash balance plan.
The Difference Between Tax-Deferred and Tax-Free
It is also critical to understand the difference between a tax-deferred account, such as a 401(k), and a tax-free account, such as a Roth IRA.
Tax-Deferred
When you contribute to a tax-deferred account you contribute pre-tax money, which then grows in a tax-protected manner until it is pulled out, at which time you owe taxes on the withdrawal at your ordinary income tax rate.
Tax-Free
When you contribute to a tax-free account, you contribute post-tax money, which also grows in a tax-protected manner just like a tax-deferred account, but then can be withdrawn completely tax-free in retirement.
The Physician's Earning Cycle
In order to understand why a tax-deferred retirement account is such a great deal, it is critical to understand the typical earnings cycle for a physician. A typical doctor has no significant income until her late 20s when she enters residency. Then, for a period of 3-6 years during training, she has a low income, which rises rapidly over the next 2-5 years to her peak income, usually by her late 30s or early 40s. Her income then remains high for 15-25 years before decreasing for a few years as she cuts back on work and then retires completely typically between ages 60 and 70. The vast majority of her retirement savings will come from earnings during the peak earnings years of her late 30s, 40s, and 50s, when she is in the highest tax brackets of her life.
An Example Using EQUAL Marginal Tax Rates
If the marginal tax rate on the contribution and the withdrawal are exactly the same, the two accounts are essentially equivalent. Consider an investor with a 24% marginal tax rate now and a 24% marginal tax rate in retirement.
If she earns $5,000 and wants to put it toward her retirement, she may have the choice between a tax-deferred and a tax-free account. She can either put the $5,000 into a tax-deferred account, or she can pay the taxes due and put $3,800 into a tax-free account.
After 20 years at 8% growth, the tax-deferred account has grown to $23,305 and the tax-free account has grown to $17,712. However, once you subtract the taxes due on the tax-deferred account ($5,593) you end up with precisely $17,712, the exact same amount as the tax-free account.
So despite the fact that you would pay over four times as much in taxes on that tax-deferred money ($5,593 vs the original $1,200), you would end up with the exact same amount of money after-tax.
An Example Using the Typical Physician with UNEQUAL Marginal Tax Rates
However, a physician will typically contribute money to her tax-deferred retirement accounts at a much higher tax rate than she will withdraw it at. A physician in her peak earning years is likely to see her marginal tax rate, including the PPACA associated taxes but not state taxes, in the 24-35% range. However, in retirement, particularly an early retirement before starting to collect Social Security, she will likely be able to pull some of that money out at 0%, 10%, 12%, and 22%, filling the brackets as she goes along.
Saving taxes at a 35% rate and then paying them later at around 12% is a winning strategy. Even if the tax brackets climb a bit, the fact that a large percentage of tax-deferred account withdrawals will be used to fill the brackets completely overwhelms the effect of the higher tax rates.
Lower Income Needs in Retirement
Even aside from the effect of filling the tax brackets, a retiree is likely to have, and need, a much lower income in retirement compared to her peak earnings years, even while maintaining the same lifestyle. As a retiree, she will have lower income taxes, no payroll taxes, no need to save for retirement or college, no child or work-related expenses, and hopefully no mortgage payment. Even if her health care and travel expenses go up, she is likely to find that she needs 50% or less of her pre-retirement income to maintain the same lifestyle.
This is a good thing since most doctors don’t save enough money and don’t invest their savings well enough to replace their entire pre-retirement income anyway. In fact, the less retirement savings you’ll have in retirement, the better deal a tax-deferred retirement account becomes.
What About the 10% Penalty If I Plan to Retire Early?
Some investors who plan an early retirement invest outside retirement accounts because they are worried about the 10% penalty applied to retirement account withdrawals taken prior to age 59 ½. This fear is dramatically overblown. There is an exception to that penalty for every reasonable issue that could cause you to need to access that money prior to age 59 ½.
There are exceptions for
- large medical expenses
- health insurance
- disability
- higher education expenses
- a first home of your own or a family member
- a tax levy
In addition, the substantially equal periodic payment rule allows for an early retirement. It essentially allows you to withdraw from your retirement accounts for any expense without paying that penalty, so long as you take out the same amount each year for five years. A planned early retirement is no reason to pass on the substantial benefits of investing in a retirement account.
Will the Required Minimum Distributions Push Me into a Higher Tax Bracket?
Other investors worry that large required minimum distributions (RMD) after age 72 will push them into a higher tax bracket. While this is possible for a supersaver, it is a wonderful problem to have. The IRS mandates you withdraw a reasonable amount of your tax-deferred money each year, starting at about 4% at age 72 and climbing to about 9% at age 90.
For most people, they will need to withdraw this much or more to provide the income they need each year anyway. If you don’t need all of that money to live, it can be reinvested in a taxable account and left to your heirs income-tax-free due to the step-up in basis.
For the supersavers, the best solution to this problem IS NOT to avoid contributing to tax-deferred accounts, but to make Roth conversions of some of that money (enough to fill the lower brackets) during late-career and early retirement years. Again, a great problem to have.
Bear in mind that in order to have an RMD that by itself pushes a married couple into the highest tax bracket will require a tax-deferred account at age 70 of over $14 Million. That simply isn’t an issue for the vast majority of physicians. Even if a doctor contributed $50,000 a year for 30 years and earned an annualized 8% on it over that time period, she would have less than $6 Million and an RMD at age 70 of just $207,000, squarely in the middle of the 24% bracket for a married filer.
But My 401(k) Offers So Few Options
Some investors worry about the poor investment choices and high fees associated with some employer-provided tax-deferred accounts. This problem is rapidly correcting itself as employers are beginning to understand the fiduciary duty they have to their employees. Those who didn’t learn fast enough are now learning this lesson in court.
Even if your 401(k) is not ideal, the presence of a potential match and the likely opportunity to transfer it to a better 401(k), an individual 401(k), or even an IRA later still argues strongly to use it for your savings.
Even ignoring the likely difference in marginal tax rates between contribution and withdrawal, the tax-protected growth available in retirement accounts may add as much as 0.5% to your annual returns when compared to investing in a taxable account. Over the course of 50 years (including both earning years and retirement years), that difference can result in you having a 20% larger nest egg (and thus retirement income.)
When Do I Use a Tax-Free Account?
This is not to say that there are not times to use a tax-free account. Retirement contributions during low earning years such as residency, fellowship, military service, and sabbaticals are great times to contribute to tax-free accounts. If you cut back on work or go part-time, that may also be a great time to make tax-free contributions or Roth conversions.
Serious savers will take advantage of the Backdoor Roth IRA even during their peak earning years in addition to maxing out their tax-deferred accounts.
Of course, Roth conversions near career end and in early retirement can also make a lot of sense. But if you are in your peak earning years and have not yet maxed out your tax-deferred account contributions, that is clearly where you will see the most bang for your buck.
Get Your Tax Break While You Can
Retirement accounts also provide for easy estate planning. Not only can you pass those assets to your heirs immediately outside of probate by designating beneficiaries, but the tax advantages can then be “stretched” for 10 years by your heirs themselves. For many doctors, leaving heirs a tax-deferred account instead of a tax-free account is a savvy tax move because the marginal tax rate for the heirs is lower than for the doctor.
Using a tax-deferred account for a charitable contribution at death and leaving the taxable account (with its step-up in basis) or, better yet, a stretchable tax-free account to the heirs can also be a smart move. But none of these options are available if you do not contribute to the tax-deferred account in the first place.
The tax code may change in the future. Perhaps a flat tax or a value-added tax will replace our income tax system. Perhaps there will be an additional tax placed on Roth IRAs. However, these concerns argue FOR using a tax-deferred account. Get your tax break now while you still can. Take the bird in the hand instead of the two in the bush.
In early career, a physician typically has a high income, a low net worth, a high tax bill, and significant liability concerns. Large contributions to tax-deferred retirement accounts are the perfect solution. Don’t say the government never did anything for you.
What do you think? Do you use tax-deferred retirement accounts? Why or why not? What do you consider the valid reasons to not max them out each year? Comment below!
[This article was originally published at MDMag.com.]
its odd that the govt sets Roth up so it benefits high earners the most but the tells them they cannot use it because they make too much (back door aside)
Also I’ve been thinking about this a lot and I don’t think Roth is as great as every one says it is. *Correct me if I’m wrong* but Roth is only really beneficial if your maxing out your retirement accounts … Right? (I’m Not counting minimum distr advantage)
JN Said:
>Also I’ve been thinking about this a lot and I don’t think Roth is as great as every one says it is…
I agree. As compared to regular *tax deferred* options, I think the math shows your Roth saves you taxes only if the rate you’ll pay on withdrawals in retirement is higher than the rate you save at when you’re working and making contributions. That scenario is unlikely if you look at the way most people save.
Roth IRAs have benefits, but the right answer for most in their peak earnings years is tax-deferred when given the choice between the two. Now if you’re choosing between taxable and Roth, like with a Backdoor Roth IRA, then the Roth is a no-brainer. But most people don’t realize what a great deal a tax-deferred account is, especially for those who aren’t super savers. It’s a REALLY great deal if you’re a poor saver.
Any year we can make direct Roth contributions our tax rate is usually lower or same rate as we expect in retirement- years we’re on sabbatical, now my husband has quit medicine, etc. We’re also doing some Roth conversions those years up to next bracket. Similarly I advised my daughter to do the Roth TSP at NASA this year since she just started this month so her tax rate will be much lower this year. Will recalculate that decision with her when the next calendar year rolls around. Might still expect more retirement income and higher tax rate than a beginning govt worker if she plans to make it a 40 year career.
I defer as much tax as humanly possible. I do have Roth options for both my 401(k) and 457(b) but I go with 100% traditional tax-deferred contributions. I also max out the HSA.
The only Roth contributions I make are in a personal Roth account, via the back door. If the Mega Backdoor was open in my employer’s plan, I would make that work, but the plan doesn’t allow for non-deductible contributions after I’ve put in my $36,000 to the two accounts.
Best,
PoF
“maxed out 401K and 457b” If you are a business owner or 1099 employee, then I assume you have a customized plan that can allow for up to $1,000,000 contributions depending on your income, age, and martial status, because if you don’t, then you should reach out to me
[Attempt to solicit business on the first day on the website deleted.-ed]
The 401h is the trifecta of deferred plans. It is like a Roth for for healthcare related expenses. Tax deductible when funding it, tax free capital gains, and tax free withdrawals when using it for anything related to medical expenses (including insurance). But one needs a customized plan to get one.
Hi, Rocco, You wouldn’t happen to be selling anything, would you?
I don’t actually need to sell anything. When you show people how to save $500K a year in income taxes buy increasing their 401K contribution limits to $1M, they seem to find me. But yes, we help create these customized retirement plans for clients.
I’ve never heard of this customized 401k contribution limit to $1 Million. Is this for real? Could you care to educate us more?
[Attempt to solicit business on the first day on the website deleted.-ed]
[Attempt to solicit business on the first day on the website deleted.-ed]
Responding to someone asking for more information and showing where they can find it is not soliciting.
Soliciting, like pornography, might be hard to define with exactitude, but I know it when I see it.
As the many financial pros who frequent this site have discovered, simply educating people without the “sell” brings plenty of business and does a lot of good on the site.
So you want me to publish the full 4 page free report we offer in the comments section of this article? Or would you rather me leave a link where it can be attained by readers that are interested. I am happy to do either. Readers who are interested can easily find me by clicking on my name to get to my website where my phone and email are located.
You mean the “free” report that requires them to be placed on your email marketing list? Instead of complaining about me deleting your phone number, why don’t you send in a guest post about 401(h) plans?
So we are maxing out our HSA and my back door Roth IRA (my wife’s traditional IRA was already really large by the time we learned about doing backdoor Roth and we were in too high an income bracket to think converting it was really a good idea…). Anyway, I am also maxing out my 401k/profit sharing plan with my group but I’ve been doing the Roth 401k option just for diversification’s sake. But do you think it’s a better idea to switch to a traditional 401k?
Rough numbers, you can (among other ways of thinking about this) look at the situation this way:
Say you make $250K a year… you’re paying 28% top federal rate as a guess if this is case.
To get to $250K a year in retirement, you maybe (roughly) get $50K in Social Security benefits, so that means $200K a year from your savings. You need a lot of savings to produce $200K a year. Like as a guess, $4M? Not to bum anybody out, but you’re really unlikely to hit $4M (in current day, uninflated dollars) using tax-deferred retirement accounts… Which means you’re unlikely to be drawing any money out of your retirement accounts and paying that 28% rate.
I’m simplifying and rounding wantonly here… and one can easily construct special case “exception” scenarios… but if you build spreadsheet models it’s tough to make a something like a Roth-IRA or Roth-401(k) look better than a regular tax-deferred option.
However in retirement you won’t need 100% of your working income. Maybe closer to 40% (no mortgage, student loans, disability & life ins., retirement savings, etc). Using the above numbers you need $2M or less.
For a defined benefit plan, they assume approximately 2.6 million to give you 200k in retirement
Hi R.E. and Rex, Sorry. I wasn’t saying you needed $4M… I’m trying to explain why it’s really unlikely you’re saving taxes with a Roth.
So let me try again, If today you’re making $250K, you’re maybe paying 33% on those last dollars of income. (The money you would save.)
If you plan to retire with $2M of savings and so draw (say) $80K a year and then live on that and another (say) $50K a year of social security, your tax rate in retirement will mostly be 15%… (A little bit will be 25%.)
You won’t save money with a Roth by paying the 33% tax today so you can skip paying a 15% tax later on. That’s the rub with these Roth accounts.
Hope that makes sense.
Dual military pensions valuing 200k per year adjusting for 2.5%, social security and retirement accounts will get easily to the 28% tax bracket in retirement. Realize my Roth won’t help me much. Still have the backdoor which I started only a couple years ago for heirs. This posting is very assuring to keep contributing toward the tax deferred if I understand correctly.
Military pensions of $200K/year would really make me want to do Roth contributions and conversions because those pensions will fill up all the lower tax brackets. More info here:
https://www.whitecoatinvestor.com/roth-versus-tax-deferred-the-critical-concept-of-filling-the-brackets/
Make sure you understand that concept before making your decision.
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
WCI
In addition to private savings, back door Roth, and HSA super Roth I put a total of $53k in my groups defined benefit plan. 17k is going into this as a Roth IRA. I am 40 and plan to retire before 60. Annual spending is about 100k, income is $350 w2.
Is the Roth portion of the 401k a good idea? I know there is no consensus, but value your opinion.
Thanks!
Looks like a similar question posted simultaneously as mine.
And my stats are pretty similar to yours! Age 35, $400 W2
Slightly younger and richer?
My stats are way different but I have the same question about whether Roth is worth it…. Specifically is it worth doing Roth when your not maxing out 401k/ira
Benefits to Roth IRA, even if not maxing out pre-tax:
1. No RMDs at age 70.5
2. All growth is tax-free (you are paying taxes only on the initial contribution). With a TIRA/401k, you are saving taxes only on the initial contribution.
3. Children can inherit tax free
4. In real life, it’s relatively rare for people to calculate the taxes they pay on “not” deducting a Roth and then invest the difference. The taxes get absorbed in cash flow.
1) I don’t really care about the rmd… Rmd seems fair to me… Gotta pay taxes some time …and there are worse problems than having too much money in my golden years
2) capital gains is 20% max …15% is more realistic and both are far lower than earned income tax
3) doesn’t concern me right now but this might be a great point for others
4) true but we are talking about when you contribute less than the max, so I’m not sure this point is relevant
If you’re in your peak earnings years, you would probably be better off with the tax-deferred first. If you’re a fellow or something, then sure, go Roth.
Todd, assuming a 5% real return, and a 42% federal marginal tax rate, it will take you 16 years to earn your money lost to taxes back again.
The upside for Roth money:
1) good for long term legacy inheritance , assuming you never need to use it yourself.
2) can use it strategically to hit retirement income sweet spots.
No such thing as a Roth defined benefit plan. You sure you don’t mean a 401(k)/profit sharing plan? In that case, you could do the employee contribution ($18K) as Roth, but it’s probably not the right move for you unless you’re an exception to the general rule. You might be though, you’re quite a saver.
You are right, it’s a 401k profit sharing plan. $53k total, $17.5k currently going into Roth. Based on what I’m reading, will reduce the Roth portion. Maybe $5k/year going forward.
All said is true if taxes remain the same But if tax rates go up significantly in the future, then having placed your money in a Roth account significantly improves your returns. I see it as a form of diversification over time
I have a Roth 401k and I max that out ($18,000) even though I am in a high tax bracket. The reason is it allows me to save more in a retirement account (I also have a taxable account and Roth IRA). The company match and any profit sharing is traditional tax deferred. Thoughts on doing a Roth 401k so you can technically invest more money in a retirement account?
@Clay, I do the same thing (Just as an aside, I think what I’m doing is mathematically wrong as other posters have pointed out but I have a few reasons for doing so as listed below)
I’m also a high earning W2 living in a state with no income tax. Also plan on working for a while (for now). My employer does NOT allow profit sharing in the 401k plan and offers zero match so I get to squirrel away 18K and that’s it.
I opted to put it towards a Roth 401k for the following reasons:
– Political/Economic Considerations = I tend to be a pessimist and feel that future tax rates will be much higher than current tax rates. I’m making the Roth contributions now at what I believe will be a lower rate.
– Estate Planning Considerations = I’m saving ~50% of my gross income annually. The vast majority of this is in a taxable account. My wife and I tend to be pretty frugal and while I wasn’t planning on leaving an estate behind, it looks like I probably will. Roth contributions tend to be more helpful when planning on giving to heirs due to a lack of RMDs (for now)
– Ability to Contribute More = Like you alluded to, by making Roth contributions, I’m getting more money into my retirement account (on an after-tax basis) since it is one of the few accounts I have that receives preferential tax and asset protection.
– State Taxes = I currently live in a state with no income tax. I plan to return home to California for retirement. The Roth allows me to bypass California’s highly progressive state taxes.
My wife (who has been working for much longer than I have) has been contributing to a traditional 401k since her first day of work so we should have some tax diversification amongst our retirement accounts. (We also both have Roth IRAs that we contribute towards via the back door)
You’ve got lots of great reasons to go Roth. Most readers of this comment should be aware that this sort of situation is fairly rare- I mean, a supersaver in a no-tax state planning to retire in a high tax state etc. Very rare.
Great article, as evidenced by the number of posts. DarrVao has some good reasoning for the Roth. I am in the opposite boat, currently living in a state with a high income tax rate (almost 10%), but with plans to move in retirement to a state without income tax.
I think this is an even stronger argument (in my case) for tax-deferred retirement accounts. I work for the state, and will get a defined benefit pension, but I also have a state-directed pre-tax savings plan, and I max out the 403b, 457b, and contribute 16k to a 401a. Wife does something similar with a 403b and 401a.
Those who comment on this blog are often supersavers. The more you save, the less advantage you’ll see in a tax-deferred account compared to a Roth account, so it gets complicated. But despite being a supersaver, I’m still taking tax-deferred whenever available. It will take a massive IRA in retirement for me to be better off paying 38-45% now on that money.
I work in one of the few groups left in the country that provides a pension based in years of vested service. By the time I am of retirement age, I will be able to receive 50% of my highest average compensation. Even if I use today’s income numbers (which hopefully is an underestimate since I’m still over 20 years away from retirement), that would put me in the mid 200k per year. Based on this, I put all of my 401(k) money into a Roth account, not traditional, since I’m pretty sure my pension by itself would put me in the highest tax bracket for any 401 k withdrawals. But at least this way I avoid RMD’s, which I probably won’t need. Of course I can never be sure the pension will be there for me in the end, but I have to plan based on currently available information. Hopefully it works out the way it’s supposed to…
Thats awesome and simultaneously difficult. Its great if it comes to fruition, but if things continue the way they have for a long time that pension is at risk. Of course there is no right answer, but sounds like you’re trying to mitigate it somewhat.
Agreed Zaphod. You can never know what will become of that pension 25 years from now. Because of that risk, I don’t include the pension when deciding on how much to put into retirement savings every year. That way the pension is just a big bonus and I end up with more to spend on charitable causes and more to leave my kids. But I do feel that I’ll probably get at least some of that benefit, so my retirement tax planning still includes the pension. I might regret my decisions later, but at least I’ll know I made those decisions thoughtfully and incorporated all the information I had at hand.
Yup, a huge pension is a great reason to favor Roths. An exception to the general rule though. Somehow this comments section went crazy in the Roth vs traditional issue, when the main point of the article was to get people to put more into tax-deferred accounts that would have been either spent or invested in a taxable account. Roth contributions, while perhaps not optimal for most, are still a pretty good thing to do.
I’m totally with this advice, and live by it. I max out a 403(b), a 457(b), my family’s HSA, and have a mandatory 401(a). If people are worried about the tax burden in retirement, with an accurate assessment of brackets as per WCI’s linked article, then the answer to that “problem” is that they should have retired 5 years earlier!
Good article.
One of the items the article briefly touches on, but many miss out, is the protection that retirement accounts provide. In many states, the entire balances of your qualifying retirement accounts are exempt from seizure by judgment creditors, and tax-deferred retirement accounts are a great vehicle for stashing away substantial amounts of money over a career. Few other investments offer this sort of preferred treatment.
Heirs having a lower marginal tax rate is also a great point that is often overlooked. Even in the event your post-retirement marginal tax rate is high, which is a great problem to have, chances are your children will be in a much lower tax bracket, particularly if you have several children with which to spread your estate around.
Retirement plans are forced savings which most Americans need
Most professionals have created their wealth through ret plans
Nothing sweeter than living off UNEARNED INCOME and compounded profits
If you have kids, THINK ROTH IRA FOR EACH ONE; a no brainer
The kids need to have earned income to make this legit. WCI pays his kids for modeling for the blog, so there are ways around this, but keep this in mind before blindly contributing on their behalf and getting hammered on the audit.
baby sitting, cutting the lawn, office work, etc etc etc
start age 12
did it for all 3 kids
It needs to be earned income for their business or as employees. Doing household chores doesn’t count. Be careful out there.
I spent a good deal of time last week trying to convince a physician colleague not to invest in a whole life policy with $2 million face value where he pays $80,000 annual premium. He insisted it was the right choice for him b/c it allows him to borrow the money immediately after paying the premium and then pay it back with interest of 5%. I begged him to at least max out his 401K. But he stated that he has actually stopped putting money in his 401K b/c it only allows him to borrow a max of $50,000 from it. He wants to have the possibility of borrowing more than that to do ‘any high-interest’ business that comes up once in a while (like real estate, according to him). I sent him a link to WCI’s wonderful 4-part series on “Debunking The Myths of Whole Life Insurance” https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/. He still insisted this whole life insurance deal was a better fit for him and gave me numerous reasons why. I just couldn’t understand why he cannot at least max out his 401K before dabbling into this junk.
This article and post today would clearly help him understand why. However I could send him a link, but I know he won’t read it. Sigh….
Some people cannot be saved. They do not listen to facts. The insurance agent is a good buddy right?
He claims his insurance agent is one of the best in the area. I agree, this guy cannot be saved and it is just so sad…
Well he is right on one point. This is one excellent insurance salesman!
Wow, thats wild. His premium cant be 80k/yr though right? Thats more than lifetime 30y term for my 5 million policy. How does someone so concerned with being able to draw loans have that kind of cash flow around. Easier than drawing a loan is to never have paid the premium in the first place.
He sent me his policy to look over. He will pay $80K yearly for the first two years, then $40K annually for the next 10 years. from year 13, his premiums decline to about $9K per year. He claims he will pay this premium, then immediately borrow it out to pay his mortgage and meanwhile pay them back interest at 5%. He claims his $80K premium meanwhile will be earning dividends at 4% and that he can find some investment that he can use the extra money he had borrowed to make more than 1% so he can get even. I wish I am making this up!
Sounds like some kind of universal life policy. You sure it’s whole life?
I looked over the 31-page policy. While it sure is complex, it says ‘Whole Life Policy”
Wow, thats fascinating and sad all at the same time. Was there anything in there about these guaranteed rates of return? 4% in this era is no slouch and doubt its guaranteed. Arent there often structured note type clauses that make it appear you’re earning something nice when you really are not?
Sounds like a money makeover would do him good, with a plan and a handle on cash flow no one should feel the burning need to have borrowing capability so badly.
I would be suspicious of that and the whole instrument… 4% before “fees”?
The good news is if you save $80K a year into anything year after year you’ll probably be okay.
There is at least some arguing to be made for the Bank on Yourself/Infinite Banking idea once you’ve maxed out all possible retirement accounts (tax-deferred, HSA, Roth.) But to do it instead of a 401(k)? Definitely a mistake. The tax benefits of whole life pale in comparison to a tax-deferred account.
And therein lies my point to him…even as he is so convinced this is a good deal, why not max out his tax-advantaged plans first before doing this. This guy has not even heard of a backdoor Roth IRA before. And he insists, he cannot keep putting his money into a 401K that will never allow him to borrow more than $50K, so he’s done with it. Really sad
I think “I need to borrow” says it all. This person should focus on eliminating his need to borrow 50k.
I love how people justify things. How people say they *need* something or how they can justify a bad “financial instrument” because it has one feature they like. This reminds me of a few articles ago where some people (or one guy?) justified paying exorbitant amounts on a “time share”
still have a good friend who is a very high income (non MD) who has nothing for savings/retirement but a whole life policy. no tax deferred accounts, no college savings, nothing.
says he’ll borrow from his WL policy to pay those things out.
borrowing money from yourself at age 50 to pay kids college when you’ve been earning $200k+ since you were 30.
*sigh*
If you look at the illustration and use the guaranteed column you will find it isn’t 4%.
He also likely doesn’t understand the cost of the loans.
Thanks for the great article!
I’ve been contributing to a Roth IRA (and last year a Roth conversion for the first time) for several years now. I questioned last year whether it was the right thing to do (fund the Roth IRA vs. payoff more towards the loans vs. contribute more to the 401k). I went with the Roth conversion because it was habit to contribute to that account, but this article has really changed my perspective for next year.
I fund my 401k to 5% to get the max match of 4% with my employer. After reading this (and your student loans vs. investing post from 2011) I’m starting to think I should hold off on any more Roth IRA investments until I’ve paid off the loans.
My question is: Should I take the extra $5500/year and apply it to my 6.3% student loans (working on refinancing, but for this exercise let’s say they’re staying at 6.3%) or should I up my contribution % to my 401k?
I know what my gut says, but I’d love to hear your thoughts.
Thanks!
It would be helpful if you would share your age, income, amount of student loans, and interest rate.
31.
250k gross income (wife and I combined).
290k @ 6.5% (wife and I combined).
Thanks!
Ouch, sorry, you’d already provided the rate (which has edged up in the last 24 days). I would say continue to contribute to your 401k, refinance (can’t leave that alone), and go back to living like a resident so that you don’t have “only” the extra $5,500/yr. Should be throwing extra $$ at the loans.
We’ve had our baby since my last post, which is why I haven’t been back in a while. I think I had a typo when I typed 6.3% on my last post. It’s not a variable rate.
Let me be clear, we DO throw extra money at the loans – try to put at least $7500 on them a month (our minimum payment is $2200). Goal is to be paid off by mid-2020.
The $5500 I asked about comes from that being the Roth Max – it is the amount I traditionally hold back over the year so that I can do a Roth conversion at the end.
So my real question is, is that worth it? Should I even worry about funding the Roth anymore until I’m debt free?
If not, then I need to decide if I want to take the $5500 and add it to the already significant extra payments I put on my loans OR if I want to increase my 401k contribution (up it from 5% I already contribute) to lower my taxable income.
As far as the refi goes, I’d like your opinion in that as well if you don’t mind.
If we refinanced today, we would save about 13k in interest over the next 4 years (at which point the loans would be paid off).
Only thing holding me back is that our minimum payment now is $2200, and if we refinance it would be ~$5600. We pay over $7500 so on the face of it that increase in minimum payment wouldn’t be an issue. Only thing I worry about and consider is that if something were to happen and I “needed” that monthly wiggle room (disability/job loss/partnership opportunity/etc… There’s a lot of things I could put here).
In some ways the extra interest I’m paying feels to me like an insurance policy to keep my minimum payment low, just in case I would ever need it to be. Does that make sense?
Sorry for the length, but I appreciate your insight!
Well, this is my personal opinion, but the refi still makes sense to me. Your emotions are keeping you from pulling the trigger (the word “feels” speaks volumes) and one of the truisms we abide by in our practice is that emotions and finances are always combustible. You have to base your decision upon what is best given all of the information you have at hand, not all of the possibilities that will likely never come to pass. Funny how we never consider a positive change, only negative 🙂
Again, personally, I would continue the Roth contributions. You are 2 brackets down from the top, don’t know about your state tax situation, but every year missed for a Roth can never be recouped and I’m a big Roth cheerleader for many reasons.
Hi WCI readers,
Maybe because it’s late I’m struggling with this, but the more I think about it, the less I understand the point of a Roth 401k. I’m currently a fellow and recently got married, no kids. We’re in a position to contribute to Roth IRAs fully x2, and contribute to 401k’s fully, but just barely. Even though our marginal tax rate is 25% now, I can’t see how contributing to a Roth 401k now would be beneficial over a traditional tax deferred 401k.
In the pitcher of my current income, only the money at the highest bracket at the top can flow into a 401k, so I either pay or defer 25% income tax. At the other end, when I’m filling the income pitcher in retirement, that money from the top of the original income stream now fills up the bottom of the income pitcher meaning that I can take almost $150,000 in income at an effective tax rate of ~15-16% assuming the tax code is the same. It seems like the only benefit to paying 25% now is that it would save me 15% later. That doesn’t seem very good.
It seems that Roth contributions should only be made to cover income needed in retirement in that would be taxed at withdrawal above the *marginal* rate at the time of contribution. So if I anticipate needing less than $150K per year in retirement, I shouldn’t really bother with trying to expand my Roth space now because my effective tax rate on the withdrawal from the deferred account is lower. Am I crazy?
If you’re maxing out two Roth IRAs and two 401(k)s as a fellow, you’re likely a supersaver. That means you’ll probably have a YUGE tax-deferred account later. You’ll be glad to have more Roth space, even if it cost you 25% now.
But it’s not like putting money in a tax-deferred account is bad. But I’d still go Roth until you’re out of training.
Hey WCI,
I think I made my post when you were on vacation, but do you mind glancing at the conversation above when I questioned contributing to a Roth IRA vs. Paying that money towards loans vs. contribute more to my 401K?
I’d appreciate your insight. Let me know if you need more information than the posts I made in the brief exchange above.
Thanks
Here’s the deal. Everything you’re talking about is a good thing to do. A backdoor Roth IRA is good. It builds tax-free income later and increases your net worth. A 401(k) is also good. The money probably gets significant asset protection in your state, it builds your net worth, it gives you a tax break you can really use now, and probably a tax arbitrage. Paying off your loans gives you a 6.5% guaranteed return, will eventually free up cash flow etc. They’re all good. Not a bad choice there. So don’t sweat too much about making the choice perfect.
There’s probably no right answer. If I were you, however, I would try to do them all. I would try to max out the backdoor Roth(s). I would try to max out the 401(k). And I would try to throw tons of money at the loans to pay them off rapidly. The key to doing that would be controlling lifestyle. That’s where I’d focus your energy and effort. The more you control your lifestyle, the faster you will build wealth, in whatever form.
But if you’re going to force me to choose/rank the three, I’d probably do it like this:
1) Get 401(k) match
2) Make minimum REFINANCED 5 year fixed (or variable) payment on the loan
3) Max out the 401(k)
4) Pay extra on the loans
5) Backdoor Roths
It wouldn’t be unreasonable to swap out 4 and 5. But that’s what I would do.
Well I do appreciate your advice.
As I alluded to above, my main concern with refinancing is tying up cash flow. It wouldn’t be an issue now because I pay far above the minimum anyways, but I am concerned about the future.
Namely, I may have a buy-in opportunity in the not too distant future. I worry that tying my cash flow up in my student loans at a refinanced rate will make banks less likely to loan to me for a practice purchase opportunity. In my case, refinancing would tie up about $4,000 a month that currently goes to the loans anyways voluntarily, but could be pulled back if need be to finance a business purchase.
Do you think this is a valid concern?
If the buy-in opportunity is sure, well-defined and coming up fairly soon, then sure, you’ve got to consider the cash flow. If this is some vague idea about a potential investment opportunity at some point in the future, I’d refinance. You can always refinance later into a longer term or borrow again for the buy-in. In the meantime, you’ll be coming out ahead.
Well, coming back to this now because it’s time to think about something else… health insurance.
I’ve followed your advice above and maxed my 401k, gonna do a Roth conversion before the end of the year, am paying on the loans as fast as I can.
Looking at health plans for my wife, though, I continue to come back to the question of using an HDHP or not. What’s really eating me this: Is it dumb to fund a Roth but not use an HSA?
That’s the situation I’m in now. I could change next year and find an HSA if I decide to, or continue to fund my Roth, but I don’t think I can do both.
How big of a mistake is it to find a Roth if I haven’t yet taken advantage of an HSA? And if funding an HSA is the right decision, does it make sense to invest it all for retirement?
Thanks!
Decision # 1- Is a HDHP the right plan for you and your family?
Decision # 2- If the answer to # 1 is yes, then the first account you should fund each year is an HSA. If the answer to # 1 is no, then it isn’t a mistake to fund a Roth instead of buying the wrong insurance plan and getting an HSA with it.
Thanks for the reply.
Decided against it this year.
In many regards you are correct for someone in a lower tax bracket, in a low income tax state, that does not pay self employment tax, FICA Tax, Obama tax (3.8% for those making over $200k) or an Alternative Minimum tax, it might NOT make sense to contribute to a 401k. You need to play with the numbers with your accountant to see what makes sense for you.
If you live in a highly taxed state like CA or NJ, and are self-employed or a 1099 employee, then you are likely paying 50-60% in total tax because you are required to pay all of the aforementioned taxes. The 401k makes a whole lot more sense. When one takes it out in retirement, they will only take out what they need, 100-200K a year and they will have avoided the Obama tax, self employment tax, FICA tax, so they will likely drop into the 15-25% bracket in retirement.
For you it might make more sense to pay the tax now and put it in the Roth.
I currently make 1.2m a year. How much should I contribute to 401k? I already contribute to my two kids 529 plans. I’m trying to figure out where does the money go next. I live in California and am married. I’m paying nearly 50% in tax on all income above 450k. I own my own practice and we have a defined benefit plan. I’m trying to decide whether it’s better to max my contribution into 401k and defined benefit or a universal life plan.
First max out the 401(k) and defined benefit/cash balance plan. Then I’d do a personal and spousal Backdoor Roth IRA. Then I’d look at paying off any student loan, car, consumer, and practice debt, at least any over 2-3%. At that point you could consider paying off your mortgage or consider taxable investments such as a California municipal bond fund, a total market index fund, or real estate. I find cash value life insurance an unattractive investment unless you highly value the death benefit or asset protection (not much in California) features.
Mike, When the White Coat Investor, says “max out the 401k and DP/CBP,” he means you should be putting away $500-700K per year in there because, as you stated, you are in the highest tax bracket in the highest income tax state in the country. If your DB plan doesn’t allow such a high contribution or does not offer a 401h (article: http://www.delawareinc.com/blog/what-to-know-about-the-401h-plan/), you may need to get an actuary that knows how to achieve these results.
I certainly am NOT saying someone making $1.2M should be putting $700K away into a tax-deferred account, but the goal would be to get a lot more than $18K into one. Typically we’d be talking about something like $54K into a 401(k)/Profit-sharing plan plus another $15-200K into a defined benefit/cash balance plan. I think $150-450K into a 401(h) is probably way too much as I understand the plans (where they lose significant tax benefits if the money isn’t spent on health care.) But the guy who was supposed to do a guest post on them didn’t want to address a few questions I had about them in the guest post and then stopped answering my emails. Oh wait, that was you. As a reminder, here are the questions I wanted your post to address. If you prefer to address them here as a comment, I’m sure readers would appreciate it:
# 1 There is no mention of an HSA in the entire post, which is obviously a triple tax free way that many docs are planning to cover medical expenses in retirement. One advantage of an HSA over a 401(h) is that you can even use it prior to retirement. Another is that no administrator need be involved and costs are very low. Can you discuss how the two interact, when to use one over the other, when one might want to use both etc.
# 2 There is no mention of costs or fees to set this plan up, maintain the plan, and close the plan. Can you address that? Also, what happens if you decide after a year or two that you don’t want a 401(h) after all?
# 3 There is no mention of what you must provide for employees, if any. If you’re putting $10K in for yourself, how much do you have to put in for employees? How does that compare to an HSA?
# 4 What happens if you want to spend the money on something besides health care? Is that allowed? When? Is there an associated penalty?
# 5 You recommend a target date fund, but what other types of investments can be put in it? How much control does the employer and employee have over the investments?
# 6 I’ve read elsewhere that a 401(a) must be in place in order to have a 401(h). Is that true and what implications does that have?
There isn’t a lot on the internet about 401(h) plans, but all the examples I see talk about $8,000-10,000 per year into the account. Plopping $150-450K in there seems like a completely different matter. The examples also refer to 401(h) contributions replacing a portion of the defined benefit plan or 401(a), which obviously doesn’t raise the total contribution. Spending 401(h) money on health care in retirement instead of HSA money and then just using the HSA as a stealth IRA (or if you don’t have an HSA), but without knowing what happens to the money if it isn’t spent on health care it’s hard to say.
Posting this email here because I’m honestly not sure you’ll get it through the regular email system.
I certainly did respond several times with those questions and asked you to address them in the post. The following were your responses to those inquiries:
My records show that I emailed you on 10/9 to acknowledge receipt and on 10/11 asking those questions.
On 10/12 you said: I just wanted to wrap back around to see if this article on the 401h is something that you are going to be able to use or if you have any additional questions.
to which I responded again with those questions.
On 10/13 you said: You mentioned in your guest post policy that you would get back to us in a couple of days to let us know if you thought the post was a good fit for your blog or not so we could publish it elsewhere.
I assume, that since you asked me to write a post on the 401h because nobody seems to know anything about it, you think the subject matter is great, but if you have no intention of posting it, then I have another place I can use the article if you don’t think it is a good fit.
On 10/18 I responded again with those exact same questions. I did not hear back.
On 10/31, I emailed again: Following up on this email from 10/18 as I didn’t see a response. I worry my emails are going to your junk mail. There was no response.
On 11/18 I emailed again. There was no response.
You apparently emailed me on 12/5, an email I never received.
You emailed me again on 12/30: Please confirm that you will not publish that 401h article. It is posted elsewhere.
I replied the same day. I have not heard back from you until today.
I assume there is an email issue and that you’re not intentionally avoiding these questions and perhaps you assume I have something against you or publishing an article about a 401(h) (which I don’t.)
Please confirm receipt of this email for obvious reasons. I will also post it as a comment where it seems you are more likely to see it.
Jim
James M. Dahle, MD, FACEP
Founder and Editor
The White Coat Investor
https://www.whitecoatinvestor.com
——– Original Message ——–
Subject: RE: 401h guest post
From: “Rocco Beatrice” <>
Date: Fri, February 10, 2017 7:00 am
To:
Jim,
I apologize if there was a misunderstanding, but I sent you a 401h article to publish in October and you never used it or responded that you intended to use it. I am happy to write a new article exclusively for you and address the questions you had below if you would like. Does that sound fair? I could have it completed in 7-10 days.
Let me know and I will get on it ASAP
Again posting a reply to your last email (which I received today) here to be sure you see it!
I think I’ve still got your post almost ready to go. I just wanted to get those questions addressed in it.
I cannot for the life of me figure out why you’re not getting direct emails from me. I’ll post this again on the comments page. Just because it seems to be the only reliable way for me to get a message to you.
I think I mostly get direct emails from you. I’ll make sure I acknowledge receipt of any I get.
One more email reply (I’m also sending you an email with each of these so check your junk folder)
Okay, I got your email with the answers to the questions. I have two follow-up questions
Follow-up question about 401(a)s and defined benefit/cash balance plan. I always understood these to be two separate things but I only have intimate details of a few of each. Are they exactly the same? Are all 401(a)s cash balance plans and are all cash balance plans 401(a)s?
I’m still not clear what happens to a 401(h) if you do not or cannot spend it on health care. CAN it be spent on something else? If so, what are the penalties. If it cannot be spent on health care, what happens to it? Do your heirs pay tax on it?
Why don’t you send me the new one when you can. I’m just trying to get the questions I know are coming pre-answered in the post rather than the comments section. These plans are obviously NOT very well known.
Thanks for the above advice. My advisor mentioned a VUL was better than my practice defined benefit, as I would “lose” a lot of money handing out benefits to my employees. We have 22 employees in our practice. I am trying to decide between a VUL, defined benefit, or a taxable account. I’m 36, married with two young kids, and I have about 1.1m income in CA. I already contribute 50k to 401k and lots to the 529 plans.
Please be careful with VULs. You need to really be committed to it for the rest of your life for it to work out well. It also needs to be a very good VUL. Most are not.
If you don’t want to provide retirement benefits to employees, then you’re going to be pretty limited in how much tax-deferred space you can use. A taxable account and a VUL are much inferior for you as far as an account to use. But if it costs you money you wouldn’t otherwise give to employees as salary (it’s all the same to you), then maybe they’re better. I don’t know how well you can use a defined benefit plan to give yourself tax-deferred space without spending anything on employees. Once you have employees, you need professional help in deciding what retirement account to use. The fact that your “professional help” is pushing a VUL, however, worries me. Probably time for a second opinion.
Hi Jim. Excellent work on this website. I m now reading your book for the second time and coupled with Dr. Google and this website, its all making sense to me now. I landed from India in 2012, approx 5 yr 9 months ago and we do not have credit scores there, all govt employees get pension and basically, its a fantasy land if you are a doctor. So when they said, my credit is not good enough for 2 iphones, it was a rude awakening !!
Anyways, coming to the point, I am making myself financially educated and have started paying attention on retirement planning and financial independence from this year. I am a medical hospitalist , and as you know, the love hate situation between a medical hospitalist and a ER physician is famous(LOL), but despite that, I wanted to ask your advice for maximizing my financial independence strategy.
I am 31, medical hospitalist and wife is 33, freshly graduated dentist. Zero Student loans. No house. My only debt is one car with 2% finance rate and around 13k left in balance. Completing that picture is a brand new 2 month old.
I started contributing to my 403(b) since 2018, and will try to max out at $18,500 with 1.5 % employer match. I also contributed about $2k to my wife SEP IRA for 2017. Planning to do $5500 into trad IRA and then into Roth backdoor. And started $500 monthly into 529. This year , my wife will go full time and start 401(k).
I wanted to know what else can i do with my money, to achieve financial independence, but mainly retirement and college savings. I have 100k in savings, rotting away and do plan to buy a house in the next 1-2 years, once i decide if I love my job.
I know I am treating you as my free online financial advisor , but I would be glad if you can guide me appropriately , as much as realistically possible for you.
Thanks !
The first thing I’d do with that $100K is pay off the car. Then I’d put at least some of it away for a down payment on a house and I’d invest the rest in taxable, assuming you’ve already maxed out all available retirement accounts. I might convert my wife’s SEP-IRA to a Roth so she could start doing Backdoor Roth IRAs too. $6K a year into a 529 should end up being a pretty good sum. At 8%, $200K+.
Great idea. Thanks. I do have some follow up questions.
– I didnt know if I can convert SEP to ROTH. I thought only traditional IRA can be ‘backdoored’
– do i need to do it by apr 15 ?
– I only contributed $2000 to the SEP, based on my tax guys calculations, to save on my wife’s self employed tax. do you think i can increase it to $5500, or not this year ? and if i do it, should i contribute more into SEP and then backdoor to Roth ?
– I actually used a Robo-advisor Betterment for this SEP. I dont have enough experience and wanted to try a robo advisor , do they have ROTH options ? I am now thinking its a mistake and should have picked vanguard instead ?
And , by taxable , I am assuming that you mean a regular brokerage / investment account with any of the many many brokers in the market ? is there a specific kind that i should focus on ?
Yes, taxable is a non-qualified brokerage or mutual fund account that can be opened by anyone at Vanguard, Fidelity, eTrade, TD Ameritrade etc.
Yes, you can do conversions with both of them. Remember a “backdoor Roth IRA” has no tax cost. A typical roth conversion does. They’re not the same thing.
Conversions can be done at any time. Contributions must be done by April 15th (unless you get a tax extension).
If she has enough income, she can have more contributed to the SEP-IRA.
I know Betterment facilitates a Backdoor Roth IRA with a Backdoor Roth IRA button, so I’m sure they can handle a Roth conversion of a SEP-IRA.
I do prefer Vanguard to Betterment, but I don’t know that it’s a mistake for you.
I am unable to see such button in my wife’s SEP IRA. may be its ineligible ? or is it too soon ?
No, it’s eligible. You’ll probably just have to call.
As you mentioned on Twitter, Retirement is sometimes beautified, but it’s always good to have more input on these tax hacks. My wife is in the healthcare field and there’s a ton of benefits I consume also as a spouse.
Hi Jim,
I am looking closely at my 401k investments and they have 25% of them in RWIGX with expense ratio of 0.45 % and other holdings are a bunch of variable annuities with similar fees.
Now I have started educating myself recently and have learnt till now that low fees is better, but I wanted to know what are the scenarios when a fund like this (with high fees) is better.
I asked my advisor at TIAA , who manages these funds and she told me that these were selected based on my risk tolerance ( that showed me to be a VERY AGGRESSIVE investor)
Secondly, what the hell are variable annuities and do they have any place in retirement accounts ?
I’m not a fan of loaded funds, American funds, high expense ratio funds, or actively managed funds. That said, as managed funds have gone over the years, you could do a lot worse than American funds and a 0.45% ER. Variable annuities are technically an insurance product, and no, I don’t think putting them in a 401(k) is a good idea. But chances are you’re just stuck with a crummy 401(k)/403(b) so you’ve got to do the best you can with what you have to work with. Why not post your portfolio on the forum and get a second opinion on what your advisor is telling you?
Great Idea. Here is my current allocation ( about 20k in company 403B)
TIAA Real Estate 8%
CREF Stock R2 7%
CREF Global Equities R2 3%
Vanguard Small-Cap Index Fund Institutional 17%
American Funds Capital World Growth and Income Fund – R6 27%
Vanguard Total International Stock Index Fund Institutional 9%
Vanguard Emerging Markets Stock Index Fund Institutional 7%
Vanguard Windsor II Fund Admiral 3%
Vanguard REIT Index Fund Institutional 4%
Vanguard Institutional Index Fund Institutional 15%
Vanguard Growth Index Institutional 2%
And I have a few options and I have changed funds recently in my account from target 2050 to VIGIX
I’m not sure you understand what I meant by the forum. Here is the link to the forum:
https://www.whitecoatinvestor.com/forums/
That looks like a pretty good 403b to me. I could concoct a pretty good portfolio from that. The funds I’d be using would be
Vanguard Institutional inex
Vanguard Total International Index
Maybe the small cap index (but probably not in my case)
Vanguard REIT and/or the TIAA Real Estate fund
I’d put my other asset classes in my Roth IRA or taxable account. I think you’re going to end up in a good place, but you’d benefit from starting a thread on the forum and asking all your questions there.
Thanks, is there a difference in investing in real estate ( like TIAA real estate) and investing in funds which have real estate in them ( vanguard REIT). I see an obvious fees difference, but is there a difference in terms of diversification ? should i choose one over the other ?
Lots of people are big fans of the TIAA real estate fund because it’s a bit more like investing directly in real estate. Its expenses are higher than the Vanguard REIT fund. Advantages and disadvantages for both. Not sure which I’d choose if I had access to both.
And what is the possible argument for not investing in small cap ? I though small cap companies have a lot of opportunities and potential to grow, unlike large or giant cap ( which are in a way, ‘maxed out’ , but definitely have assured dividends) ?
I don’t have any problem with using small cap. You haven’t yet told me what asset allocation you’re looking for. In my asset allocation, I don’t have a “small” allocation, I have a small value allocation. Since your 401(k) doesn’t offer a small value fund, I’d use another investing account to get that, probably a Roth IRA.
What are your thoughts on SEP-IRA? I am self employed and was recommended to me.
Thanks!
For most docs, an individual 401(k) is superior. That may or may not be the case for you.
https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/
Great post with helpful illustrations. Would you please comment on the inheritance implications of tax deferred and Roth accounts ie the tax arbitrage benefit issue can go away for a non-spouse inheritor if they have to withdraw a large lump sum 401k, correct?
Yes, at least partially, but smart planning can spread that out. It can also go away if there is a lot of other income in retirement.