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!
Question for WCI- My husband and I are both 3rd year attendings (and late to the game getting our financial things in order). We currently have approximately $75K in rollover IRAs (money from residency 401Ks). Neither of us are eligible for solo 401K and we can’t roll it into our current 401K accounts. Is it worth it to go ahead and convert to a Roth IRA (for which we would have to pay a lot in taxes) to take advantage of yearly backdoor Roths? Or is there another avenue for this money that we have not considered?
I think so given how early you are in your careers. But better make sure you’ve got $30K sitting around to pay that tax bill.
i would like to use my Roth IRA funds for a *real estate investment, and upon its sale, place the principal(Roth funds)and profits back into the Roth IRA. Is this possible?
*I plan to use the funds(principal) to fund the earnest money for the lot, to then build a home on it, financing it with a bank loan, while using the Roth funds to pay the bank interest until its sold , thereafter paying off the loan and putting the profits or ROI into the Roth. These profits would then be tax free.
Thank you for your comments.
JJ Smith,MD
Yes. Beware UBIT.
Remember all income for the property and all expenses for the property must go into/come out of the Roth IRA and you can’t use it yourself.
Hi WCI,
Just curious, what are your current investments in your Roth IRA and their ticker symbols?
Thanks!
First I’ll answer the question you asked:
Vanguard REIT Index Fund (VGSLX) and Vanguard Small Value Index Fund (VSIAX).
Then I’ll answer the question you should have asked:
https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
https://www.whitecoatinvestor.com/asset-location/
https://www.whitecoatinvestor.com/the-new-wci-asset-allocation/
https://www.whitecoatinvestor.com/how-i-currently-implement-my-asset-allocation/
Thanks….I know, but I am still trying to catch up with all the reading.
Also what is your favorite total stock market fund?
Thanks!
I like Vanguard’s, but let’s be honest, there is little difference between Vanguard’s, Schwab’s, Fidelity’s, and the iShares ETF.
Would that be VTSAX? or VTI?
I am noticing that sometimes the admiral fund has a higher expense ratio than the regular analagous fund. In that case, what are other advantages of using an admiral fund?
Uhhh…those two tickers are the same fund, just in two different forms. A traditional mutual fund and an exchange traded fund. Same, same. And if you’re concerned about any expense ratio difference between the two you’re focusing on the wrong thing.
https://www.whitecoatinvestor.com/expense-ratios/
I guess I am wondering what else is the advantage of “admiral funds”
Lower ER than the old investor funds. If you prefer a traditional mutual fund structure, they’re great.
Hi,
I’d like to know if I can re-invest dividends earned in a Roth IRA back into the Roth IRA portfolio when I have maxed out the contribution limit for the year. Concerned that this would penalize me as having contributed over the limit.
I am using M1 Finance and it has an auto-invest feature which will automatically re-invest dividends into the portfolio.
No, it’s fine to reinvest dividends. They don’t count toward your contribution limit.
Love the Roth! The first account I opened when I started my financial education a few months ago was a Roth IRA. I took as much money as I knew I wouldn’t need for 20 years and opened a Vangaurd Roth IRA. Wish I had done it earlier but better late than never. All residents should be contributing to a Roth!
The Prudent Plastic Surgeon
TPPS-Make you you understand the contribution limits and the income limits.
Hi WCI,
1) What investments do you have in your backdoor Roth, and what are the tickers?
Thanks!
Building in ROTH IRA in retirement with conversions as a source for health care needs/assisted living if needed
500k is the goal
I agree.
I’m almost 100% post-tax everything. An early-career realization is that tax-deductible is better than taxable. A later realization is tax-free is better than tax-deferred.
“You generally can’t access the money before age 59 1/2”
I’m assuming you are talking about the gain or return ON the money, not return OFF the money?
The 5-Year rule is a bit tricky but if a resident added to a ROTH and 5 years later wanted to take that out, they could right?
100% tax-free is not the right choice for most docs. It’s okay to have some taxable income in retirement to fill up the lower brackets. Much better than doing Roth contributions/conversions on the top brackets during their career.
Roth IRA contributions come out of a Roth IRA any time tax and penalty free.
Earnings are subject to the 59 1/2 year rule AND the 5 year rule, but there are numerous exceptions.
I’ve been reading about Roth IRA conversions for years (mainly here on WCI) and I have still not made it happen. Here’s my current situation:
1) I have a 401K through work that I max out every year. I also utilize a safe harbor match since I am part of a physician-owned independent practice.
2) I have a traditional IRA in my name that I contribute to every year (currently 114K)
3) my wife has a traditional IRA in her name that we contribute to every year (currently 353K – she rolled her 401K into this IRA when we started having kids and she retired)
4) we also have a taxable JTTEN trading account (currently 210K)
A few questions:
1) in order to make a backdoor Roth IRA conversion, I’ve been told that if I converted my current traditional IRA, I would have to pay taxes on the 114K – that doesn’t sound very appealing as that could be a pretty hefty tax bill. And with my wife’s IRA being so large, I don’t even think that’s worth considering. Is that true?
2) can I just leave my traditional IRA alone and open up a NEW IRA, fund it with $6,000 in after tax dollars and then immediately convert it to a backdoor Roth IRA? That seems far less painful. I’m 43 now, so if I put $6,000/year into that Roth IRA for the next 17-20 years, it should grow into a tidy little tax free account.
I welcome any thoughts and feedback.
@undercovermd
1) It depends on you, and how many more years you have earned income, and what marginal tax bracket you are in now, but in broad brushstrokes – if you are in the lower marginal tax brackets now, then it may make sense to do a conversion irrespective of the account sizes as long as you can pay the tax bill with money you won’t need for other purposes, and as long as you plan to be in a higher tax bracket later. Otherwise, this is NOT a “must do” thing to worry about – just keep saving and you will be great.
2) NOPE. Your other IRA’s absolutely DO count towards the “pro rata” rule on any conversion, making it a pain in the butt and a taxable (mostly) event. The fancy pro way to get around this is to roll your other pre-tax IRA into a 401k or TSP or 403b account at work or one you establish making money on the side as a sole proprietor or independent contractor. THEN do the backdoor IRA. Also if you wife could earn some sole proprietor or independent contractor income and start a solo 401k, you could move her traditional IRA into it. Then she could play the same game also.
1. Agreed. Why not roll it into your 401K? I agree I wouldn’t pay taxes on $353K to do a $6K Backdoor Roth IRA. If she had an opportunity or expected an opportunity to roll it into a 401(k) in a few years then maybe.
2. No.
Sorry if pointed out already. What do you think abt the fact that if say we are starting with 50k, and you are confident in getting good returns, wouldn’t it be better to pay taxes now and let the growth happen tax free. So what I’m considering is every year transfer my 401k money to IRA and then convert to Roth (pay taxes) and hopefully it will grow (tax free if it doesl
It’s all about the rates, not the absolute amount paid in tax. Seems silly to do Roth conversions during your career in a high bracket and then have zero taxable income in retirement to fill the lower brackets with.
WCI,
Sometimes I just wish you would improve the language in these 7 & 8-year-old posts. People less knowledgeable on this subject construe statements like this:
“I already mentioned that you get to save a lot of taxes since, after the initial contributions, it is never taxed again.”
and this:
“This allows you to invest in tax-inefficient investments, like REITs, TIPS, taxable bonds, and peer to peer lending. ”
To mean something that I don’t think is intended.
1. When some read the first statement they take this to mean that just because they only paid $7500 on the money going in the Roth and avoided ten times that from doing the same thing in an IRA that this is a major advantage to the Roth over the IRA. We both know the mathematical advantage to when you pay the taxes is an illusion unless you make some assumption on a tax difference in vs out.
2. I think we also know by now that where you put your bonds, REITS, or TSM funds makes no difference as well if you are just considering Roth over traditional IRA, unless you assume there is some tax advantage between In and out which makes the Roth more or less desireable and of course that your investments will perform in the manner expected (one has more growth than the other.)
If people are confused by what I write, they should ask for clarification. 🙂
I am attempting to improve the precision of my writing as the years go by.
Hello, can you please clarify the following point you wrote in your article “However, there is no income limit to Roth IRA conversions, so that leaves the option for a Backdoor Roth IRA” I was under the impression you were only allowed to invest a maximum of $7,000 for the year. I am a high-income earner. Can you please clarify your point. thank you in advance.
Yes, there is a limit to the amount you can contribute to an IRA (traditional or Roth) each year. There is also an income limit that prevents high-income earners from contributing directly to Roth IRAs. But there is no income limit preventing conversions from regular to Roth IRAs. No matter how much money you make, you are not prevented from doing that type of conversion.
$6,000 if under 50, $7,000 if over 50. That’s a contribution limit, not an income limit. An income limit is when you can’t contribute directly to a Roth IRA because you make too much.
I want to open a roth ira but which company, bank, or person should I open a roth ira with?
Mine is at Vanguard. Other reasonable choices are Fidelity, Schwab, eTrade, and TDAmeritrade.