By Dr. Jim Dahle, WCI Founder
A Roth IRA has a lot of advantages with regards to investing, tax reduction, asset protection, and estate planning. Even high-earners should be grateful to Senator William Roth, who was the sponsor of the legislation that established them back in the 1990s.
Roth IRA Basics
Roth IRA Contribution Limits
Anyone with earned income can open a Roth IRA and contribute up to $7,000 per year for the 2025 tax year. If income is sufficient, one can also open a Spousal Roth IRA and contribute another $7,000. If you're over 50, those limits are raised to $8,000 per year.
Roth IRA Income Limits and Utilizing the Backdoor Roth IRA
There is a contribution income limit, meaning if you have an adjusted gross income of more than $150,000 (single) or $236,000 (married) in 2025, you can't contribute. However, there is no income limit to Roth IRA conversions, so that leaves the option for a Backdoor Roth IRA wide open for most physicians.
After-Tax Contributions into Roth IRA Account
You contribute to a Roth IRA with after-tax money, but it is never taxed again. You don't pay taxes on capital gains and dividends as the money grows, and it comes out tax-free in retirement. You generally can't access the money before age 59 1/2 (see the exceptions here), but, unlike a 401(k) or traditional IRA, there are no required minimum distributions beginning at age 72.
Roth IRA Benefits and Investing Advantages
Tax-Protection
Roth IRAs are tax-protected. This allows you to invest in tax-inefficient investments, like REITs, TIPS, taxable bonds, and peer to peer lending. You can also buy and sell investments to rebalance, or simply change your portfolio without tax consequences.
More Investment Options and Less in Fees
Unlike a 401(k), you are essentially unlimited in the investments you can choose for a Roth IRA. So you can choose the best investments. If you go to a low-cost provider such as Vanguard, you'll almost always pay much less in fees than with your 401(k). In investing, you get (to keep) what you don't pay for.
I love canyoneering while my Roth IRA is hard at work for me.
Tax Advantages
I already mentioned that you get to save a lot of taxes since, after the initial contributions, it is never taxed again. The fact that both pre-tax (like traditional IRAs and 401(k)s) and post-tax investment accounts are available allows you to diversify your taxes, minimizing the taxes you pay over your lifetime.
For instance, a resident ought to preferentially use an after-tax investment and an attending ought to preferentially use a pre-tax investment. Roth conversions can be done during years of low income, and then in retirement, tax diversification allows you to minimize the taxman's bite.
In addition, practicing physicians ought to continue to make Roth IRA contributions via the Backdoor Roth IRA, as long as they can max out their tax-deferred options like 401(k)s first.
Asset Protection
Roth IRAs are generally protected from your creditors in most states. Many states offer unlimited protection of a Roth IRA.
Many of the steps you do to facilitate estate planning, reduce taxes, or protect your assets have nasty side effects. For instance, some asset protection techniques increase your tax bill or hurt your estate planning efforts. Tax reduction techniques can often hurt your investment return. But with a Roth IRA, you get all these benefits without side effects.
Utilizing the Roth IRA for Estate Planning
Thanks to maxing out my Roth IRAs in residency and during military service, some Roth conversions, and continuing to use backdoor Roths, some of my retirement portfolio will never be taxed again. If you want a great start for your nest egg, I can think of no better vehicle.
How are you using the Roth IRA to diversify and minimize taxes? Comment below!
I’m completing my first year out as an attending. From my moonlighting years I’ve contributed to a solo Roth 401k and a SEP-IRA. I also a Roth IRA, all three accounts at Vanguard. Now i’m wanting to do a backdoor Roth IRA, but have the pro-rata rule inbetween my SEP-IRA (~30K) and doing it with no tax consequence. Apparently my Vanguard Solo Roth 401k doesn’t allow another 401k to be held somewhere else and it also doesn’t allow IRA rollovers into it – thus making it hard to get rid of/ hide my SEP-IRA. I also now have a 403b through my current employer, but they use VALIC and ERs aren’t very favorable. With the goal of getting rid of my SEP-IRA so I can perform a backdoor Roth without invoking the pro-rata rule – which of the following would you suggest:
1)Convert my SEP-IRA to a Roth-IRA, paying taxes at my now higher marginal tax rate.
2)Transfer my solo Roth 401k to another institution like Fidelity which apparently does allow roll-overs from IRAs, then roll over my SEP-IRA into it. Then ultimately transfer the solo Roth 401K back to vanguard.
3)Roll my Solo Roth 401k into my Roth IRA, which would close the 401k allowing me to establish a different solo401k somewhere else like Fidelity, roll over my SEP-IRA into, then ultimately transfer to Vanguard.
4)Roll my SEP-IRA into my 403b plan at my current employer and effectively put that money into a higher ER.
5)Other suggestions you have?
Thanks!
Sounds like you have a good grasp on the options. If the SEP is small, I’d just convert it. That’s what I did with mine the year I got out of the military. There’s nothing wrong with the Fidelity Solo 401K, so if you decide to go there I wouldn’t feel like you then had to come back to Vanguard. Keep in mind that your state may treat a solo 401K, a Roth IRA, and a rollover roth IRA differently for asset protection purposes. Option 4 is the simplest. I don’t see a bad option there. Some are slightly better, but involve more hassle.
Both my husband and I are resident physicians with significant federal student loans. We decided to file taxes “married, but file separately” because our monthly student loan payments will be much smaller. If we file jointly, our IBR monthly payment would be ~$2000 vs ~$700 total for the both of us. We decided to minimize our monthly payments to take advantage of the PSLF. According to the books I have read, it says that if we file “Married, but file separately” then we are not able to contribute to a roth IRA. In this case, can we contribute via the back-door Roth IRA? Thank you!
Yes.
Quick question, which I’m sure is answered somewhere else on the site but I haven’t found it yet (I’m going back and reading all your posts). Is there a limit to how much you can rollover from a traditional IRA to a Roth each year? Does the 5500 limit apply to rollovers too? Hypothetically if I have 15k in a resident 403b when I finish residency can I rollover all of that to a traditional IRA and then into my Roth for the same year? Thanks.
No, no limit on conversions.
WCI,
Firstly, huge fan. Found your site in October 2013 and have now learned a ton from you, on Bogleheads, and from Swedroe, Bernstein, etc.
My wife and are physicians and we expect to be well into the 39.6% marginal bracket yearly for the rest of our careers. Would expect to be in the 25-28% marginal bracket in retirement (we love to travel).
My question is, should we choose nondeductible Traditional IRA or Backdoor Roth IRA? The numbers seem to favor the nondeductible TIRA given the substantially lower bracket in retirement. But the thought of owning tax-free money, the modulation of taxable income in retirement, and the step-up in basis at death, those are all appealing aspects of a Roth IRA. Your thoughts? Thanks in advance
That’s a no brainer. Everyone should choose backdoor Roth IRA over a non-deductible traditional IRA. The numbers certainly DO NOT favor the non-deductible TIRA. You have some misunderstanding about this, and I’m not quite sure what it is. It works like this:
1) Earn $5K. Pay taxes on it.
2) Contribute $5K to non-deductible traditional IRA.
Now you’re left with a choice. Do you convert that IRA at NO TAX COST TO YOU or do you leave it in the non-deductible traditional IRA? The tax cost is the same, $0. But if you leave the money in the traditional IRA, you will pay taxes on all the earnings at your regular marginal tax rate in retirement. If you convert it to a Roth, you don’t. Why in the world wouldn’t you want to convert if you could?
Sorry for reviving an old thread but I have a newbie question. During my last year of residency, can I contribute to a Roth IRA? I’ll probably start working in July of that year but I figure my income for half a year will still be above the income limit. If I’m not sure what my income will be, is it better to just put my money in a traditional ira during the last year of residency? Thank you so much for your help !
Depends. If you’re above the limit, you can only do it through the Backdoor. If not, then you can make the contribution directly. If you’re not sure, do it through the backdoor because recharacterizing is a pain.
WCI,
Thanks for the great website. Truly has been a help and I have recommended it to several of my colleagues.
I am currently a resident and have a 403b (mid five figures) from an old employer. I wanted to do a conversion to a Roth IRA this year. My rationale is that I am at a lower income bracket for the taxes on the 403b than I will ever be. After I have converted, I will be able to grow the money in the Roth IRA and never pay taxes on the 40+ years of growth.
Does that sound reasonable? Would a good plan be to convert my 403b yearly to a Roth IRA while at my lower resident income bracket?
Thanks,
Yes. You might want to spread it out over the remaining years of residency you have.
Oh, so to decrease the amount of taxes that I would pay in any year, you would suggest that I would pull out and convert the amount equally over my three years of residency?
This would only apply if the amount withdrawn from the 403b would jump me to the next tax bracket correct?
Thanks again,
Converting up to the top of the bracket you’re in is wise, but my bigger concern was simply cash flow. You have to have the money to pay the taxes!
Hi, I’m confused about something you said in a comment way back in January 2012: “Remember that with a Roth IRA you save on taxes at your marginal rate, then pay taxes at your effective rate in retirement.” Isn’t this an incorrect statement? With a Roth you PAY taxes at your marginal tax rate in the year you contribute. Vs. a traditional IRA with which you do SAVE on taxes at your marginal rate and then pay at your effective rate during retirement. Right?
That is just one reason I don’t understand the value of a Roth – another being that while I hope my income (and tax bracket) will increase up until the point I retire, I can’t see why it would actually be higher IN retirement.
Your insight is very appreciated!
I’m still interested in your input to this question. Thank you so much for your insight. Love your site.
Hi, I’m still interested in your (or anyone’s) input on this question. Thanks – your insight is very appreciated. Love your site.
Yes, you are correct. I don’t know where I say that. If you can point it out (post and comment number), I’ll change it.
The value of a Roth IRA is to fund it in your lower income years- residency, military service, sabbatical, part-time, after retirement before Social Security etc. Or, to fund it as a backdoor Roth IRA, in which instance you are comparing it to a taxable account, not a tax-deferred account, since high income earners cannot usually deduct a traditional IRA contribution.
It was comment #4 on this post.. I was confused when I saw that too.
Fixed now. Thanks!
Can a Canadian resident on a J1 visa contribute to the ROTH IRA??? Lets say I potentially will stay in the US after the training and long term? Thanks
Non-US residents have country-specific restrictions. But I believe Canadians working in the US can have a Roth IRA. More info here:
https://www.sunnet.sunlife.com/files/advisor/english/PDF/IRA_401k_to_RRSP.pdf
First of all, thanks so much for this incredible site and book. They have increased my investing confidence significantly and I recommend the book to everyone.
My questions: I have a 401a retirement account through the state university where I did ophthalmology residency, with about 17k, making about 3%. All contributions to this account were employee contributions and were pre-tax.
I am in my last year of fellowship (making 50k base + 20k stipend from the practice that I signed with for next year – still eligible to make direct contributions to Roth IRA) and wondering if it would make sense to try and roll the 401a over into a Roth IRA? I want to max out the 11k limit for my wife and I.
My thinking is that I’d rather pay the taxes on this 17k up front (in order to convert to Roth IRA), while in a lower tax bracket, than to pay taxes on the back end, when I am in a much higher tax bracket. Any reason not to do this? Thanks!
Read the 401(a) plan document. If it allows you to convert it to a Roth, that’s probably a good move in the year you finish training. More details on 401(a) here:
https://www.whitecoatinvestor.com/401-a/
Hey WCI, thanks for all the info! Quick question…I couldn’t find anywhere in your book or website re: the benefit of maxing out a Roth IRA every year in residency vs. just applying the money to student loans. I’m trying to understand why it makes sense to start investing now with a Roth when I have a massive loan accruing interest every day. At what point does it make more sense to just use my disposable income to pay down my loan instead of invest?
Thanks!
Also, I recently had a life insurance salesman try to sell me an IUL. Do you have any posts about these? He presented them as being superior to Roth IRAs
https://www.whitecoatinvestor.com/rebutting-the-arguments-for-indexed-universal-life-insurance/
Not even close to being superior to Roth IRAs.
Great question and one we all wrestle with, both before and after residency. If it isn’t student loans, it’s a mortgage. More discussion here:
https://www.whitecoatinvestor.com/student-loans-vs-investing/
In short, paying down your loans MIGHT be your best investment. But that’s assuming you don’t die (and get them forgiven) go into PSLF (and get them forgiven) or outperform the effective interest rate with your investments and that you don’t later wish you had more “Roth space.”
Awesomeeee thank you so much, that link is exactly what I was looking for. Thanks for the advice. Love what you are doing, love the book too! Too bad I didn’t realize you were based out of Utah until after I interviewed there for residency or I’d have tried to say hi while I was in the area! I went to school up there at the Y 🙂
Thanks a lot for the blog and the book… I have to say that I learned a lot from you and most importantly I started increasing my saving rate.
I’m a first year PCCM fellow and my wife is an intern and we have a baby. I started a 401 K plan and I’m contribute only 6% of my salary to get all the hospital match. My wife has to spend one year before they can match her contribution.
Do you think we should open a Roth IRA for her or just add that money to my 401K until we can open hers next year? Also do we have to open a college saving account now for our baby or this can wait?
Thank you
Roth IRAs generally have lower expenses and better investing options than 401(k)s. If no match, I’d start there. And no, I wouldn’t start a college savings account as a fellow or when still struggling to get to 20% for retirement.
Thanks a lot and thanks again for the book!
Hi WCI- thanks SO much for such an amazing website. As a young single new attending, I had never imagined I could do this all on my own, and your website and book have given me the confidence I need! Question about backdoor roth:
I am planning to contribute 5500 this year to a trad IRA, and rollover to roth IRA. My question is- how does this work every year? Do I rollover the new 5500 (next year) into the same roth IRA I opened through the backdoor this year? Or would I have to create a new roth IRA each year through the backdoor process?
You can use the same one.
WCI I have a question for spousal IRA, she stays at home, our income exceeds limit for direct contribution. Should she open a traditional IRA and then make Roth conversion same as I did for mine? Thanks!
Yes. Same process.
Thanks!
Hey WCI! As an R1 setting up my first Roth IRA with Vanguard, I’m a bit overwhelmed by all the different funding options to choose from. What do you recommend putting the $5500 towards if i’m in the in the middle/slightly aggressive region of the conservative-liberal investing spectrum. Thanks for all your help as always.
If that’s your only investment and you’re not yet sure what asset allocation you eventually want, life strategy moderate growth is a pretty good default choice.
Thanks for all your work in making this site, it’s truly amazing! I have a question about filing taxes as married filing jointly vs married filing separately. I’m an ortho resident and my fiancee is an internal medicine resident. We each make about $50k a year. I have $90k in federal student loans and she has zero loans. After we get married, if we file taxes as married filing separately, it will keep my income based repayment plan monthly payments low but i found out today that we won’t be allowed to contribute to a roth IRA if we are married filing separately. If we file taxes as married filing jointly, our combined salaries will increase my loan repayments dramatically but we’ll be able to contribute to our roth iras. Which do you think we she choose, to file taxes as married filing jointly or married filing separately?
First, you’ve only got $90K in loans and two physician salaries. Is there some reason you can’t pay off this debt by Halloween of the year you graduate? Who cares what your IBR payments go to? How long do you plan to keep this around?
Second, you can still do a backdoor Roth IRA while filing MFS. But I don’t see any real point in doing MFS for you guys, at least not after residency.
Thanks for the reply! To clarify my situation, in addition to my $90k of federal loans I have $90k of private loans to deal with (from undergrad). Thus I’m trying to get PSLF for the federal component, especially since I’m doing a research year (6 years total residency, I’m in year 3 now) and fellowship (1 year), leaving me with only 3 years left as an attending before forgiveness happens (would be about $50k forgiven by my calculations). Thus I’d like to keep my IBR payments low. Seems like my best option would be MFS and doing backdoor roth. Would you agree? Thanks a lot!
That makes a little more sense. Either way, you guys are going to do fine.
I opened a Roth IRA when I earned 120k ( single). Can I still contribute to Roth IRA since I opened the account before or there are still limitation regardless?
Thanks
Sure. You just have to do it through the backdoor.
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
My combined income with my wife is currently less than $179,000, once she finish her residency we’ll be making way over that amount, is it legal/smart idea to file taxes separately for the purpose of maintaining my roth IRA account? Thanks
You’re going to love this.
No. File MFJ and do the Backdoor Roth IRA.
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
I’m looking to open Roth IRA. Which company should I open it with? Besides Vanguard, any other place I can use? Do they all have option for backdoor roth or only certain companies can do it? Thanks so much!
You can pretty much do it with anyone, but it might be more of a hassle. Typical brokerages like etrade or TDA are options, or mutual fund houses like Fidelity or Schwab or T. Rowe Price are also options.
Dear WCI,
My wife and i just started to plan our retirement thanks to you!! We just got married in 8/2017. She is a PA making 100k/year and is debt free. I’m a 3rd year resident making 45k/year with about 400k in med school loans with plans to pursue PSLF (2 years left in residency).
For 2017 She has 403b contributing 10% and will be changing that to max out in 2018. I have 401k contributing 8% and will go to 15% in 2018 (which i believe is maxed % contribution??). We have money left over and need to decide what to do with it, Combined we have about 30k In checking in addition to 6mo emergency fund. PLEASE ADVISE.
My Thoughts were to:
1. Open Roth for her and max it out for 2017
2. I plan to file taxes MFS to keep my PAYE payments low but that means i cannot open a Roth roth for myself right?
Should/Can i do the back door roth for myself?
Is it best to file MFJ?
Is there a way for me to contribute the full 18k into my 401k since i have some money left over too
Where else can we put our money to work for us?
Thanks for all your help.
If your main goal is keeping those PAYE payments as low as possible to maximize your PSLF, the way to do that is to get your taxable income as low as possible. You do that by maxing out all tax-deferred accounts available to you. So if you have a 403b or 401k, you would max that out. You make too much to deduct an IRA or contribute directly to a Roth IRA, so yes, you would have to do a Backdoor Roth IRA if you’re going to do a Roth IRA. Bear in mind I’m assuming you live together. If you don’t, the rules are different.
Bear in mind maxing out tax-deferred accounts is not my usual recommendation for residents. It is specific to someone doing the MFS/PAYE/PSLF thing.
Hi! I have a quick question regarding Roth IRA. I apologize if this question has already been answered. You mentioned that when the money comes out of Roth IRA it’s tax free. Does that apply to the interest that has been building on the money too? I was under the impression that we still pay taxes on the interest that has accumulated and not on the principal amount. Thanks for the help!
Yes, principle and earnings come out of Roth IRAs tax-free during retirement.
Hey WCI, my wife and I are both residents with a combined income of 125K. We are currently contributing to 403b (both Roth and non-Roth) through work at 20% (her) and 15% (myself). We are trying to further maximize our retirement accounts.
1. My wife has some extra money in her bank account; should she open up a Roth IRA and contribute $5500 to that from (either through direct transfer or backdoor)
2. What should we do with our Roth and non-Roth 403b’s after residency if our future employer does not have a 403b available? Leave them? Convert the Roth 403b and add to our Roth IRA?
Thank you!
1. Sure unless you have a better use for your money.
2. Give serious consideration to converting the tax-deferred accounts in the year you leave residency to a Roth IRA and roll the Roth 403b over to your Roth IRA.
Hi James
Firstly, I just want to thank you for the unbelievable job you have done with your book and how it is helping people like me who are completely clueless about finance and are interested in getting things right. I read your book and had a question pertaining a section on page 69 in Chapter 6 under Ordering your priorities. You mention as an example if you are making $250,000 after $50,000 in taxes, $17,500 in 401 K, $5,500 should be placed in a roth IRA and another $5,500 IRA. My question is there is an income limits for investing in Roth IRA and even taking into account limits for married couples it would still be too high to invest in a roth IRA. So when you mention roth IRA here did you mean contribute to it via “backdoor roth IRA” conversions.
Thank you so much for you time and thank you once again for the unbelievable work. You are a true inspiration.
Purav
The limit for IRA contributions per year is $5,500 if under 50 and $6,500 if 50+. If you are married, you can put another $5,500/$6,500 into a spousal IRA using your income.
If you make too much, you have to do a Roth IRA contribution through the backdoor. Contribution limits are the same though.
Hope that helps.
Hello! I’m an MS2 trying to learn about personal finance before I begin residency. Thank you for all the content you have produced — it has been an enormous help.
My question is about Roth IRAs. I understand the concept and the fact that I should open a Roth once I begin residency, but what should I do with that Roth upon finishing residency/fellowship? Will I be able to open a traditional IRA and then make backdoor contributions into that same Roth with my attending salary? Or will I need to open up a new Roth to start making backdoor contributions?
Thank you.
Yes.
No, you don’t need a new one.
Hi,
What do I do with a Roth IRA I already have on my last year of residency if I already contributed the max amount, and my new income starting July 2018 will put me above the income limit for a Roth IRA? Can I leave it and let it grow or do I have to convert to a traditional IRA and then do the back door Roth IRA?
Thank you so much for all you do!
There is no such thing as “converting to a traditional IRA.” Yes, you just let your Roth IRA grow, you open a traditional IRA, contribute to it for next year, and then convert it into the same Roth IRA.
Now, if you screwed up and contributed directly to a Roth IRA for 2018, but your income for 2018 is too high to allow a direct contribution, then you’re going to have to recharacterize that contribution to a traditional IRA, and then convert it to a Roth IRA.
https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions
First year in a 3 year EM residency, long time reader. I’ve been through most of the info on Roth IRAs on this site, as well as a few others. I will be starting to invest some portion of my salary into a Roth IRA ASAP (likely vanguard vs ameritrade).
What is your opinion on the best Roth IRA investment options for a first year intern? The freedom/options can be overwhelming, but I’d like to avoid a financial adviser where it is not needed. My financial knowledge doesn’t go much further than what I’ve learned from this site/your book, and I will likely be pretty hands off once the investment is made, and re-assess one time a year and after residency.
Contributing the max 3% of my salary with full match to 401k through my residency as well.
Thanks for all of the great info over the years!
Some more information, I do not plan on doing a fellowship, have significant (>300,000) debt, and plan to refinance and pay it off as quickly as i can after residency, while living like a resident. My partner is a first year resident as well, and we have no kids. I’d like to invest in something fairly hands off for now, before I do a deeper dive and read more regarding investments.
What does your written investment plan say? If you don’t have one, how do you plan to get one? You’ve got three choices:
1) Do what I did and read books/blogs/forums and figure out a good investment plan and write it down.
2) Take my “Fire Your Financial Advisor” course that will teach you how to make a written investment plan.
3) Hire a financial advisor to help you make a written investing plan
If you just want “something reasonable that I can do in 5 minutes and forget about this stuff for three years” then invest in a target retirement fund at Vanguard. Which one? Doesn’t matter. Your savings rate matters far more than your investment return/asset allocation for the next 5-10 years.