Participate in a plan that allows you to delay RMDs. Instead of your kids having to take income from your tax-deferred accountslikely at their peak earning yearsgive them tax-free Roth money to enjoy. One reason is because it will be the lowest income I have most likely until things start to wind down. I dont contribute to it currently for several reasons: 1) I think its overkill given our current saving rate / trajectory I went to a trusted financial advisor (I usually do everything myself as does The White Coat Investor) (and enjoy doing that) but felt I needed some advice beyond my capability. 5) leave you less susceptible to the widow/widower tax penalty (lower tax brackets once your spouse dies). I am 33yo in my final year of residency. On your 4 additional benefits I mostly agree, except that I see item #3 as a wash to actually defeating the stated (or unstated) goal of this article, which is to solve the RMD problem by lowering the IRA balance. I will partially take his advice and do it over 6 years as I am trying to pay the tax with already tax-paid savings and thus keep the Keough money growing in the tax free account for the future. Your focus should be on what percentage of that $135K a year youre using to build wealth right now, not how many 0% credit card deals you can find. In the first example, starting retirement with $2 million in a tax deferred account does not at all mean that youll still have $2 million in that account by age 90. My wife and I are both independent contractors in CA. Certainly something for me to ponder. In fact I contend that selling down the taxable account actually does just the opposite, as you need to allow then for extra taxes and actually cut down the amount taken from the IRA. For the second half of 2015, I am quitting my full time job and will be working per diem on a 1099. Phaseout ranges where you can make a smaller Roth contribution (less than $6,500) start at $218,000 and $138,000 for couples who are married filing jointly and single filers, respectively. One of the most well-known ones is the Backdoor Roth IRA. Also, note the expected tax payments during the working years and then again when RMDs kick in. Im sure you are sick of all of these comments looking for some free and quick advice, but I might as well try and get mine as well. My employers 401k does not start till next January. I like the idea of tax diversification and Im leaning toward a 50/50 split of the 401K contributions, but our tax rate is pretty dang high and so of course the tax savings would also be really nice. I max out my 401k yearly. 3. Have you done Roth conversions other than an annual Backdoor Roth IRA? For many of us, the window to do various shenanigans like this is finite. If they can get a fraction more of it, they will. 1. I know you want to hear WCIs advice, but I would recommend maxing out your Roth IRA while youre in a relatively low tax bracket, but definitely not with credit cards. They spend a modest $150,000 a year and plan to continue spending that amount in retirement. 10 years from now when my wife is working half time, Im working 3/4 time and the 401k has >1M in it, I could see it being reasonable. However, if one actually does have an RMD problem, the solution is Roth conversions as discussed in this post. Saving 4% on tax rates but paying the taxes early may not be that advantageous. Not as bad as you think tax wise given all the contributions and deductions we have access to. May consider re-financing the student loan soon and hopefully add the back door Roth IRA for myself this year. RMD to QCD is an great idear if Charity is in your partners plans. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); The book summarizes the most important information on the blog and contains material not found on the site at all. Doing the math from the table above, the IRS will force you to take out and pay taxes on about $75,000 that first year. Even wrote a book about it as I recall. -maxing out our HSA I guess I phrased that incorrectly. 2023 - The White Coat Investor Investing & Personal Finance for Doctors. You now have Roth moneysome of the sweetest currency around. Agree with your strategy as laid out. You can run the numbers both ways, but probably not. Community property states do get a good break on assets such as investments and real estate, with a complete step-up of basis. Perfect for those who wear the white coat! Only an issue for a rare doc in most states. backdoor Roth). Since I already maxed out the traditional 401k with my previous employer, can I still open a Roth 401k and contribute to it from my new part time 1099 job? You can split the difference if you want, but what I would probably do is go tax-deferred with it. If youre going for PSLF, then dont pay extra on the loans. Using that money to fund Roth conversions decreases the amount subject to creditor risk. Lol 8606 is a real bastard alright, finally figured it out ! 1. The other half of each holding retains original cost basis. Another wild card which has not been discussed, is what if the government changes the rules on retirement accounts, whether Roth or Traditional?? Has made me max out any tax bracket Im in below our max expected [under current laws] future brackets, at least for now while our ROTH accounts are well under 50% of our retirement funds. My physician wife, 49, continues to work with high income and has no plans to retire anytime soon . Financial Planning Software can pinpoint the sweet spot of Roth conversions the next figure demonstrates. Early Retirees Should Max Out Retirement Accounts. Now thats a cool trick. I would 100% Roth 401(k) contributions, personal Roth IRA, spousal Roth IRA, and anything I was allowed to convert to Roth IRA, I would do so. Posts: 1 #1 Backdoor ROTH IRA 07-11-2023, 12:13 PM Last year in 2022, I executed a backdoor Roth IRA conversion through Fidelity. Our 401k does have a Roth option. You should still be able to do a SEP, but not a 401(k). Any ideas or suggestions? The government realizes all the trillions locked up in these account. When you turn 90, that same $2 million will bleed out $175,000 of income for the IRS to tax. Given the current fiscal and macroeconomics in this country I expect future tax rates to be higher than the present ones so paying a smaller percentage tax on a smaller amount may make some sense. Thanks again for the visuals it really drove home the point. Great post! However, like most peoples lives, our income and taxes are messier than what is conveyed in blog posts. As I said in the other thread, that isnt true. I recently retired at age 52. If he contributed $3,000 to a Roth IRA and it grew at 8%/year for 45 years, it would be worth. Im in derm so expect salary to be much higher when I get out. In choosing this option, you pay zero capital gains taxes on the Taxable account gains anyway. As this doctor retires at age 60, the light blue shows her income dropping down from above the 24% tax bracket (which becomes the 28% tax bracket in this example when the Tax Cut and Jobs Act of 2017 expires) into the 10% tax bracket. Im a freelancer and intend to open an individual 401(k) this year. If she gets a second job, it could be even more. A Roth conversion happens when you pay taxes on your tax-deferred account (IRA), and convert the money into a Roth IRA. They would offer us more flexibility and only minimal tax drag. Thanks again for the thoughts. I would say to that just label 80% of your taxable account as a Roth and see if you would still say the same, because that is probably about what your taxable account is 80% tax-free or more correctly tax paid. The total sum of these accounts on December 31st of the year in which you do Step 3 must be zero to avoid a "pro-rata" calculation that can eliminate most of the benefit of a Backdoor Roth IRA. The Tax Planning Window and Partial Roth Conversions for 401k Millionaires, The Proper Ratio for Retirement Tax Diversification. , From an older Derm and also HPSP Navy, I agree 100% with WCI You will likely have many years of high-earning (unless youre going part-time?) Upon retirement and beginning conversion unlike the example my brokerage never ran out of money despite a net conversion of 700K into cash for living, in fact at the end of conversion it will be about 2.5M. Why or why not? There are lots of exceptions to this general rule, of course. You dont mention how much Roth you have, nor your expected income in retirement etc, so hard to give you the answer youre looking for. The post today is about The RMD Problem, which is generally overblown. Answer: Maybe. Hasnt happened obviously. Progressiveness is only for us pretty rich dweebs. Many other ideas come up but what do you all think? Partial Roth conversions decrease the size of your taxable estate at death, potentially decreasing the tax burden at that time. Once your income/tax bracket goes up, I would then shift your payments to your student loans until they are paid off and then start doing the back-door Roth (assuming your are maxing out your pre-tax contributions at that time). I used it to convert and the difference was minimal with 100k conversions and a large IRA of 4.15m. Since I have half in a 457(b) [before tax] account and half in a Roth 401 (k) with employer matching I guess Im in the split the difference camp. Required Minimum Distributions (RMDs) start in the year you turn 70 and a half years old. You can just wait until your career is over and your risk goes down, then rollover to a Roth IRA before age 72. The figure above shows what this couples expected cash inflows and outflows should be over time. Sure, the recharacterization strategy works, but I cant get people through the 8606 for a backdoor Roth effectively. All of which will help you build wealth. So this is really interesting. Am I missing something? 4) Invest in 403b (tax deferred). Then pay them off like Dave Ramseys infamous gazelle. Nice strategy and demonstration of how to keep some money from Uncle Sam. Get rid of any SEP-IRA , SIMPLE IRA , traditional IRA, or rollover IRA money. It also drove home the point that when it comes to taxes, timing and expertise do matter. I dont think answers to Roth vs Traditional 401K or IRA are as cut and dry as some would make it out to seem. 2023 - The White Coat Investor Investing & Personal Finance for Doctors. The issue with the multiple recharacterization strategy is that it is a fairly large hassle for a fairly small benefit. Then they can consider conversions for estate planning and asset protection. Also seems like you inflated the working year expenses but not the income?? In 1.5 years, our income should increase to $350,000. Military? Note these are net negative until age 70. Thanks for the great article. Straighten out your financial life today! At that time I can evaluate the current tax structure and make Roth conversions at a much lower tax bracket if it still appears to be a wise decision. What if the taxable account which was used to pay off conversions and to live on from 60-67, has embedded gains?. The brokerage allowed me to free up cash to live on while Roth converting. Our take home is about 450k pretax, may increase 50-100k in 3 or so years. Anything else? Question: If I am still working past age 70 , can I delay required minimum distributions (RMDs) for my IRAs? If thats the case Id say sure go Roth. You can have several 401k plans right- one SD, VG, Fido? Very impressive post. A taxable account, while inferior to a Roth or tax-deferred account, isnt THAT bad. My guess is it will be on the backs of the top 10% of earners and not those with Obama Phones. Those have to be opened by the end of the calendar year as I told you in the last thread you posted these questions in 5 minutes ago. Not so much as hold cash for decades, but maybe as I get close to retirement (last 2-4 years) divert more of my investments towards cash or MMF type funds. Another potential complication would be a move to a consumption tax, which would eliminate a great deal the utility of a ROTH IRA. We all want to keep uncle IRS our of our bank accounts. If you start both RMDs AND Social Security at age 70, lower earning eg part time or lower paid specialty docs may well jump brackets as we were projected to do from one of my sabbatical years with no doctor pay. Roth dollars are worth more than non-Roth dollars. If you expect to have an RMD problem, then yes, start doing Roth contributions now. My other savings go into taxable accounts and non-deductible IRAs (e.g. Should You Make Roth or Traditional 401(k) Contributions? The ratio of changes that actually occur to the changes that could occur is quite small. Other details of note: 1. What do you think? only half gets a step up cost basis. If you want to contribute to charity what better way/time to do that: doing an QCD to reduce the impact of RMDs thus reducing taxes on the QCD amounts, while hopefully enjoying lower tax bracketed (or close to zero in some cases) CapitalGains tax-rates on brokerage amounts ! It wasnt my intention to be nosy, just informed. 4. Im guessing I should hold some money in cash to use for expenses and to keep my income low so that I can do Roth conversions. If youre a supersaver, consider Roth contributions. You can take that concept for your situation and try to fill the 15% (or 25%, 28%, etc.) I never really thought much about this, but you DO get the step-up in basis for at least the deceased spouses portion and in some states (community property states), the entire thing! Being an engineer, its frustrating to see a spreadsheet and not be able to see the math that created it. It is hard to predict where any of us will be 30 years from now from an Estate tax standpoint.. John / WCI, I plan to Roth convert and QCD. I can toss the Roth 401k money into my Roth IRA account at Vanguard (right? If its jointly owned, theres no step up in basis I believe. Employed physicians and other high-income folks are frequently 401k Millionaires. We earn good money and during our peak income years, when we are in high-income tax brackets, it makes sense to defer income into 401k, 403b, or 457 plans. Based on the last 19 years of inflation, that would actually be a smaller withdrawal than their first at age 70.5. Once they retire their RMD, SS and taxable investment income may still have them in lower brackets than while working. Can I become a polygamist and increase the amount of deferred contributions I make in a year (this would be the least favorable option for my wife(s) and myself, of course)? Would add that there are additional benefits that you did not mention. This is also a major benefit for those who want to retire early (which I do) as the window for these partial conversions is longer and thus you can have more money in the lower income tax brackets taken out. Thanks. As far as James Lange goes, he has been wrong for about 10 years that tax rates were going up as far back as the Bush tax cuts. These partial conversions fill up your previously empty, lower tax brackets with income, so be careful not to overdo it, as you dont want to pay more in taxes now than you would have otherwise done in a future without these conversions. We arent contributing anything via wifes employer retirement since she wont be vested for any match before we move again, so anything else is going to her loans. Many docs certainly do get $53K or more into tax-deferred accounts. Luckily I did convert IRA to Roth IRA years ago when they offered the option to spread out the tax burden, so now I can at least do Back-Door still only 20% of my total retirement dollars are Roth, the remaining will all be taxable. Keep em coming. Yeah mostly this. And although an employer match is nice, I would prefer to have employer put in 53k over my 17.5k max (now 18) plus 3 percent of salary. I worry about this also. For those of you interested in the 4% safe withdrawal rate rule of thumb, the withdrawal rate from this fictional portfolio is demonstrated below. Not enough has been written about maximizing the value of IRA recharacterization. Personally, Id wait for legislation to make serious progress before doing any planning based on potential tax hikes. If you have a typical 401(k)/Profit-sharing plan ($52K limit in 2014 increasing to $53K in 2015) you still have a $34,500 tax-deferred contribution, even if you put the entire $17.5K employee contribution into a Roth account. If you're shopping for a home mortgage, know the latest financing options for doctors, dentists, and other healthcare professionals. Which is contingent upon whether or not we buy a house in this HCOL area. I agree that tax diversification is useful. They have this terrible image of a taxable account and so end up in some crappy life insurance policy or annuity. Thoughts? https://www.whitecoatinvestor.com/qualified-charitable-distributions/, Schwab has a roth ira conversion calaculator The individual investor should act consistently as an investor and not as a speculator. If you are interested, here is part II, where I examine using the taxable account as a Roth substitute: https://seekingalpha.com/article/4265876-taxable-account-roth-substitute. As an interesting twist, also note that between 67 and 70 our couple runs out of brokerage funds and is forced to start using tax-deferred money to fund their retirement. brackets before the RMD to see which works out best. It most certainly involves projecting what your future tax liability is likely to be, but there is a lot more to it than that (and even more for FIRE than fatFIRE). When you're not sure what to do in a financial situation without a clear answer, it can be a good idea to hedge your bets by splitting the difference. I had a question about having a traditional employer 401k and a roth solo 401k in the same financial year. We can see these numbers below. Most? Financial Wellness and Burnout Prevention for Medical Professionals, 7 Financial Planning Issues New Physicians Must Grapple With. Your email address will not be published. If I put my wife on the WCI payroll, itll be even more. My plan will eventually be to retire early. Note the partial Roth conversions between the ages of 60 and 66. large cap, small cap, bonds) prior to recharacterization can offer a benefit. I think it is far wiser to take the laws currently on the books, project them forward to make your plan, and when and if they change, adjust your plan accordingly. In addition to a lower cumulative tax rate during your retirement, lowering your RMDs may also: 1) decrease the amount of taxes you pay on your social security earnings; 2) decrease the risk of higher Medicare premiums; 3) decrease the risk youll get stuck paying IRMAA for Medicare part B and D; 4) decrease your capital gains rate; and. If youre age 70 or older and still working, you may be able to delay taking RMDs from the plan sponsored by the company for which youre still working. In the article you state that you are deferring 6 figures this year. We currently have income from interest, dividends, inherited IRAs, and rental properties. 1) Invest in Roth IRA #2 12-08-2020, 05:46 AM For 2021, 2020 and 2019, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than: $6,000 ($7,000 if you're age 50 or older), or If less, your taxable compensation for the year That's from the IRS website. Around, the same time, we will finish paying off our 15 year mortgage, further improving cash flow. If I had to make the contribution in a lump sumI might choose differently. Some authors have also pointed out that splitting your IRA into components (e.g. Im in the same boat. I did some analysis on this in my 50s and decided to quit contributing to my Pretax accounts and to contribute heavily to brokerage and aggressively tax loss harvest. You take the previous years December 31st IRA balance (assuming you roll over all of your deferred accounts into one IRA) and divide it by a denominator that can be found on the IRS Uniform Life Table. We otherwise max out our retirement accounts and invest the rest in a taxable account as of now. Easy one for now. I find the $2M in assets at retirement to be too conservative. How to Achieve the Zero Tax Bracket in Retirement? Thanks for this. Funding the conversion with non Roth dollars effectively results in a contribution to the Roth account. Can you explain the math behind your first spreadsheet? But thats what Id do. It actually gets less complicated as you get richer, doesnt it? We think of this money as our nest egg for retirement, but the IRS calls it IRD (income in respect to the decedent) and wants to crack that egg open to suck out taxes on the deferred income inside.