Backdoor Roth IRA for Post-Tax Retirement Savings?

[QofQuimica]

Do those of you who are attendings put $5500 in an IRA each year and convert it to a Roth in order to have some post-tax retirement savings? Or do you think that's such a small amount that it's not worth doing?

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[Apramana]

Are you familiar with the White Coat Investor? Many of his topics seem like they might be worthwhile for you.

Here's a step-by-step on Backdoor Roths: http://whitecoatinvestor.com/backdoor-roth-ira-tutorial/

He seems to be a big fan:

"Most physicians should be using a personal and spousal Backdoor Roth IRA. Not only does this provide an additional $5,500 each ($6,500 each if you and your spouse are over 50) of tax-protected and (in most states) asset protected space, but it allows for more tax diversification in retirement. That allows you to determine your own tax rate as a retiree by deciding how much to take from tax-deferred accounts and how much from Roth accounts."

For all things financial, I also highly recommend the Bogleheads community. (The WCI is also a very active member of the Bogleheads forums.) I have learned a great deal from them, and I hope you find the resources at least as useful: http://www.bogleheads.org/

 

[cookymonster]

For the amount of time it takes, it's absolutely worth doing. At my age (30), at an 8% return that appreciates to nearly $55k by age 59.5 (I make the Roth the most aggressive part of my portfolio). But in reality, that $ is probably going to sit there a lot longer, perhaps even go to my heirs in 50+ years. That's a pretty enormous savings in capital gains and dividend taxes.

 

[Wealth Anatomy]

Yes! Put as much money into a Roth IRA as soon as possible for the same reasons cookymonster mentioned. I'm sure that you're above the income limits because you're talking about a back-door Roth but remember that if you make less than $114,000 (if single) and $181,000 (if married), you can contribute directly to a Roth IRA and don't need to utilize the back-door option.

 

[deleted480308]

yeah....read whitecoatinvestor

 

[QofQuimica]

Yes, I am familiar with the White Coat Investor; his site is where I first learned of this idea.

I suppose I should add some caveats to my question: I am ten years older than most new attendings (went to med school as a nontrad in my 30s), and I already have a Roth that I have been contributing to religiously for the past 18 years (I am now 39). It's nowhere near enough for me to retire on, but compared to the amount I already have in my Roth from the past two decades, $5500/yr is relatively small potatoes.

So what I would like to know is, do currently practicing attendings who earn well over the Roth contibution limit (because yes, starting in 2015 I will be unable to directly contribute to a Roth for the first time in my life), and who already have a substantial amount of money in their Roth account, still make use of this conversion? I would especially like to hear the experiences of other early middle-aged attendings who are actually doing this (or made a decision not to do this as the case may be). FWIW, my financial planner does not feel it is necessary for me to do this, although he's fine with it either way.

 

[cookymonster]

I just have a hard time seeing what the downsides of the Backdoor Roth are. If you read the tutorial it just takes a few minutes for a couple of days and you have to do a little extra paperwork at tax season. Are there other reasons people actually choose not to do this (besides the extreme early retirees)? I have to believe if they don't do it, it's almost always because they don't know about it or aren't financially savvy or disciplined enough to do it correctly. Were it not for WCI, I'd probably be in this same camp.

 

[The White Coat Investor]

It would have to be an awful lot of money already in the account to make this tiny effort not worth it to me.

Remember you're comparing Roth IRA money to taxable money.

Roth IRA money grows faster due to lower taxes, has better asset protection, and better estate planning features. What exactly is bad about having a larger Roth IRA? Even if you want to get to your money sooner than age 59 1/2, there are so many ways to do that without penalty that it seems silly to pass up a Backdoor Roth IRA and invest in a taxable account instead. Too much "hassle due to a large Roth account?" Seems unlikely for a guy who has never made enough to not be eligible to make direct Roth contributions. But hey, if it's too much work (and I kid you not, it doesn't take me 5 minutes a year all in), then just pay more in taxes and leave the money exposed to your creditors instead.

We came out of residency with Roth IRAs that were barely 5 figures. Thanks to continuing contributions through the backdoor (and investment gains), those same Roth IRAs are still a substantial, although decreasing, percentage of our net worth.

I agree with the other posters. Most docs don't do this because they (or their advisors) don't know about it. Although there are probably a few who are having to choose between tax-deferred and tax-free and reasonably choose the tax-deferred route. But I see little sense in choosing taxable over tax-free.

It might help if you explain why your adviser thinks this isn't important for you. Is it because he is giving bad advice because he doesn't get paid for that portion of your money? Is it because you are saving plenty in tax-deferred accounts and don't actually need to save that much money? Is it because he thinks it is a lot of work? Is it because he doesn't think you'll need that much tax diversification in retirement?

I'd have some serious concerns about an advisor recommending against (or even not strongly advocating for) a 40 year old physician doing this.

 

[krl7044]

I'd have to agree with White Coat Investor. The first thing I have all of my clients do is either open a Roth IRA and make a contribution or to do a backdoor contribution. This is as basic as having a savings/checking account in my opinion. Tax diversification is the primary reason for doing this, though there are other long term considerations (estate planning is one of them).

Even though this might be a tiny part of your overall allocation, and you might not accumulate that much money there, doing this continuously for yourself (and for your spouse if possible) gives you $11k a year in contributions (if you are married and your spouse does not work, you can contribute on their behalf). If you can contribute significantly more towards retirement than the Roth allows, and you've already maxed out your 401k, there are many after-tax options, from individual municipal bonds to a balanced tax-managed portfolio.

A good hourly or a flat fee financial planner (who doesn't sell insurance or charge asset-based fees) should be proactively doing the tax planning/diversification, and they should be lobbying you to make the Roth contributions every year.

 

[sazerac]

Yes, I am familiar with the White Coat Investor; his site is where I first learned of this idea.

I suppose I should add some caveats to my question: I am ten years older than most new attendings (went to med school as a nontrad in my 30s), and I already have a Roth that I have been contributing to religiously for the past 18 years (I am now 39). It's nowhere near enough for me to retire on, but compared to the amount I already have in my Roth from the past two decades, $5500/yr is relatively small potatoes.

So what I would like to know is, do currently practicing attendings who earn well over the Roth contibution limit (because yes, starting in 2015 I will be unable to directly contribute to a Roth for the first time in my life), and who already have a substantial amount of money in their Roth account, still make use of this conversion? I would especially like to hear the experiences of other early middle-aged attendings who are actually doing this (or made a decision not to do this as the case may be). FWIW, my financial planner does not feel it is necessary for me to do this, although he's fine with it either way.

I think I understand the crux of your question.

(1a) is the benefit of the back door Roth worth the effort?
(1b) amongst us middle aged professionals with six figure incomes, do we in fact expend this effort?

The answer to both questions is yes.

 

[QofQuimica]

It might help if you explain why your adviser thinks this isn't important for you. Is it because he is giving bad advice because he doesn't get paid for that portion of your money? Is it because you are saving plenty in tax-deferred accounts and don't actually need to save that much money? Is it because he thinks it is a lot of work? Is it because he doesn't think you'll need that much tax diversification in retirement?

It's definitely not the first option, as my doing the back door Roth would in fact entail me investing an extra $5500/yr of my money with him that I wouldn't have been otherwise. (I have my Roth IRA with him.) So one would expect that he would be strongly encouraging me to do it if this were just about what was best for his own bottom line. Among the others you listed, it seems that choice C is a major concern he has. He said he thought I should have a CPA oversee this if I did it. Having looked at your tutorial, I don't think that's necessary. I sent him the link to your tutorial earlier today, but I haven't heard back from him yet. However, it is also possible that he feels it isn't necessary to save that much money and/or that I should focus on my tax-deferred accounts, especially since I am starting out with 100% of my retirement funds in the Roth account and none tax-deferred. I should know more when I hear back from him on Monday.

I'd have some serious concerns about an advisor recommending against (or even not strongly advocating for) a 40 year old physician doing this.

Again, he's not recommending against it. He's just not strongly advocating for it.

I agree with the other posters. Most docs don't do this because they (or their advisors) don't know about it. Although there are probably a few who are having to choose between tax-deferred and tax-free and reasonably choose the tax-deferred route. But I see little sense in choosing taxable over tax-free.

Based on him suggesting that I involve a CPA, I'm guessing you are correct that he doesn't know much about it. And again, I am *not* choosing between tax-deferred and tax-free. This would be an additional $5500/yr that I would invest *on top of* maxing out my tax-deferred accounts and contributing to my taxable accounts

Also, while my posts apparently exude raw masculinity, I am in fact a gal, not a guy.

I think I understand the crux of your question.

(1a) is the benefit of the back door Roth worth the effort?
(1b) amongst us middle aged professionals with six figure incomes, do we in fact expend this effort?

The answer to both questions is yes.

Yes, this is exactly what I was trying to get at. Thank you.

Thanks to both of you and @krl7044 also. You three have convinced me that I should start doing the back door Roth next year.

 

[The White Coat Investor]

Why start next year? You can do this year for the next 10 months.

 

[QofQuimica]

Why start next year? You can do this year for the next 10 months.

Because I am already maxing my Roth out for this year via direct contributions.

 

[Rowdy Burns]

Why don't physicians use a Roth 401k in addition to the Roth IRA so they can contribute more to the Roth 401k then roll it over near retirement if they want to avoid the RMD? Is owning a Roth 401k and Roth IRA common?

 

[QofQuimica]

Why don't physicians use a Roth 401k in addition to the Roth IRA so they can contribute more to the Roth 401k then roll it over near retirement if they want to avoid the RMD? Is owning a Roth 401k and Roth IRA common?

I have the option of opening a 403(b) Roth, but the thing is, as an attending, I have a high enough salary that I want to take advantage of the ability to defer taxes. Also, I don't get matching funds for the 403(b) Roth like I do for the pre-tax 403(b).

 

[southerndoc]

I considered the backdoor Roth for both me and my spouse, but I would need to open up an individual 401(k) and move my SEP into it. Pro-rata rules would put me paying some taxes with a conversion. I haven't set up a spousal IRA because it would be putting after tax money in there with me being unable to convert it to a Roth without paying taxes on a portion of the conversion (again, pro-rata rules since my wife and I file jointly). I've thought of doing this in anticipation of one day moving my SEP to an individual 401(k). Perhaps I should rethink that.

Besides, my state doesn't offer any asset protection for Roth IRA's.

 

[krl7044]

I considered the backdoor Roth for both me and my spouse, but I would need to open up an individual 401(k) and move my SEP into it. Pro-rata rules would put me paying some taxes with a conversion. I haven't set up a spousal IRA because it would be putting after tax money in there with me being unable to convert it to a Roth without paying taxes on a portion of the conversion (again, pro-rata rules since my wife and I file jointly). I've thought of doing this in anticipation of one day moving my SEP to an individual 401(k). Perhaps I should rethink that.

Besides, my state doesn't offer any asset protection for Roth IRA's.

I believe that a Fidelity solo 401k can take incoming IRAs such as SEP. Vanguard's unfortunately can not. However, you can always open a Fidelity 401k, take the incoming rollover and then move the whole account to Vanguard ;-)

 

[ThoracicGuy]

I considered the backdoor Roth for both me and my spouse, but I would need to open up an individual 401(k) and move my SEP into it. Pro-rata rules would put me paying some taxes with a conversion. I haven't set up a spousal IRA because it would be putting after tax money in there with me being unable to convert it to a Roth without paying taxes on a portion of the conversion (again, pro-rata rules since my wife and I file jointly). I've thought of doing this in anticipation of one day moving my SEP to an individual 401(k). Perhaps I should rethink that.

Besides, my state doesn't offer any asset protection for Roth IRA's.

It would be worth it to open the 401k. Hide that traditional IRA/SEP IRA monies in the 401k and you're good to go. As far as spousal IRAs go, if your wife doesn't have traditional IRA/SEP IRA money anywhere and you do, she can still backdoor roth the money without a pro-rata conversion.

As @krl7044 said, a Fidelity 401k is ideal for this. I moved a Vanguard tIRA to mine along with my 1099 contribution. I did the backdoor Roth this year without problem.

 

[NICUfello]

I have a 401 A at ex employer, that I am keeping put, at fidelity

For 2014 I have half year fellow salary half year attending salary, so I can contribute to the ROth Ira at vanguard.

For 2015 January 1, can I open a IRA at Vanguard..put the $5000 in there, and keep it a few months, and to avoid step transaction, and say in March 2015, convert the whole amount to Vanguard ROth IRA?

ANy issues with this?

 

[ThoracicGuy]

I have a 401 A at ex employer, that I am keeping put, at fidelity

For 2014 I have half year fellow salary half year attending salary, so I can contribute to the ROth Ira at vanguard.

For 2015 January 1, can I open a IRA at Vanguard..put the $5000 in there, and keep it a few months, and to avoid step transaction, and say in March 2015, convert the whole amount to Vanguard ROth IRA?

ANy issues with this?

Transfer it from the traditional to the roth in a day or two after it clears into your account. Keep it in a money market account if you have it at vanguard so it's not likely to make any significant gains (you'll pay taxes on those) and you're good. You don't have to worry about step transactions.

 

[NICUfello]

Transfer it from the traditional to the roth in a day or two after it clears into your account. Keep it in a money market account if you have it at vanguard so it's not likely to make any significant gains (you'll pay taxes on those) and you're good. You don't have to worry about step transactions.

Sorry for the silly question (first time), if I do IRA $5000 January 1, 2015, and use your advise and switch to ROTH IRA on January 3rd, where does the money market aspect come in?

 

[ThoracicGuy]

Sorry for the silly question (first time), if I do IRA $5000 January 1, 2015, and use your advise and switch to ROTH IRA on January 3rd, where does the money market aspect come in?

When you put money into the traditional IRA, at least at Vanguard where my IRA is at, you have to put it into a fund. Using VMMXX, their money market fund, it will minimize any gains over the couple of days that it's in there. Then you convert it to the Roth into whichever fund you like. Just make sure that if you put money in on Jan 1, 2015, that you have NO money in any type of traditional IRA account (tIRA, SEP, SIMPLE, etc) by December 31, 2015 or you'll get charged the pro-rata conversion.

 

[NICUfello]

^^^ THank you.

I will put the money Jan 1 and transfer by Jan 3 as you guys recommended.

I have a ROTH IRA there now, so on Jan 1, I will convert that to that ROth IRA account.

APpreciate the help.

 

[styphon]

I also started doing this, because of White Coat Investor (I also bought his book among others).

I thought of 5.5k x 30 years with 9.5% compounding interest -> 858k, which is tax free when you withdraw. Using this to supplement your 401k (which the majority of your money is in) will help reduce your taxes during retirment.

 

[NICUfello]

Another dumb question

$5500 is the most I can backdoor to a Roth IRA per year?

 

[krl7044]

Another dumb question

$5500 is the most I can backdoor to a Roth IRA per year?

Don't forget your spouse. You can have two such IRAs, one for you and one for your spouse.

 

[QofQuimica]

Right. $5500 is the limit for a single person.

 

[Gastrapathy]

9.5% huh. Good luck with that. I'm still worried about step transaction rules. I do this but it could be undone by the irs pretty easily.


Sent from my iPhone 6 using Tapatalk

 

[Silent Cool]

Another dumb question

$5500 is the most I can backdoor to a Roth IRA per year?

actually, let me check.

 

[QofQuimica]

actually, let me check.

He's right. $5500 is the most he can do for himself. Then he can do up to another $5500 for his wife as well, like krl said.

 

[Silent Cool]

He's right. $5500 is the most he can do for himself. Then he can do up to another $5500 for his wife as well, like krl said.

Alright, so I asked my cousin, who is a CFP, if you can convert a crapload of money into a roth every year. Here's what he said:

"YES. But $30k extra income is a lot of taxes if you're getting bumped up from one tax bracket to another, so often times people spread it out. There is another conversion method which could actually be TAX FREE. If the individual earns too much to make a tax deductible IRA contribution...they can make a non-deductible IRA contribution and then convert to ROTH in the same year and pay NO TAX. HOwever, this only works if they don't have ANY other IRA money. Obviously this second method is limited to 5500/6500 per year. But getting back to your first question, if you had a million in an IRA you could convert it all to a ROTH if you wanted, but of c ourse wouldn't want to pay all that tax."

 

[QofQuimica]

What you're describing *is* the backdoor Roth IRA we've been talking about. As attendings, nearly all of us, if not all of us, earn too much to directly contribute to a Roth (except perhaps during the year of graduation from residency, since you were still being paid a resident's salary for the first half of the year). So what you do is contribute your post-tax $5500 (or $11,000 if married) to a regular IRA, then convert it to a Roth. You do not owe taxes on this because it's already post-tax dollars. The net effect is as if you contributed directly to a Roth IRA, which is why it's called a back-door Roth.

As for paying all that tax if you have other traditional IRA dollars that you want to convert to a Roth, the best time to do that for most of us is in that first year when one is graduating from residency. The reason why is because your income is lower during that year than it is for the rest of your career, since you're being paid as a resident for the first half of that year. Plus, as your cousin pointed out, if you don't convert that money before starting to backdoor Roth, you will get caught up the following year by the pro rata rule because you will have other money in the traditional IRA.

Here's how my timeline looks:

2014: Graduated from residency. In process of rolling pre-tax pension plan into traditional IRA. Will convert it and add it to my Roth. Also made direct contribution to Roth for $5500 since my 2014 income is still going to be below the annual Roth contribution limits.

2015: Will put $5500 in post-tax dollars into regular IRA and move it into my Roth. Will also pay taxes on the pension funds I converted into the Roth in 2014 when I file my 2014 taxes.

2016 and beyond: Will continue to backdoor Roth as in 2015. No more taxes owed.

 

[NICUfello]

Don't forget your spouse. You can have two such IRAs, one for you and one for your spouse.

Thank you.

So we each need a IRA account, and then each of us can put in the backdoor to the Roth?

Or since my spouse is at $50k salary, contribute directly to Roth IRA?

 

[NICUfello]

2014: Graduated from residency. In process of rolling pre-tax pension plan into traditional IRA. Will convert it and add it to my Roth. Also made direct contribution to Roth for $5500 since my 2014 income is still going to be below the annual Roth contribution limits.

2015: Will put $5500 in post-tax dollars into regular IRA and move it into my Roth. Will also pay taxes on the pension funds I converted into the Roth in 2014 when I file my 2014 taxes.

2016 and beyond: Will continue to backdoor Roth as in 2015. No more taxes owed.

Your timeline is exactly as mine, except I graduated from fellowship in 2014 instead of residency.

I am choosing to leave my $$ from fellowship (401a) in the plan as is. SHould there be any problem with backdoor Roth?

Also I can't contribute to my practices retirement plan till 2015 summer, so saving in the meantime.

 

[QofQuimica]

Your timeline is exactly as mine, except I graduated from fellowship in 2014 instead of residency.

I am choosing to leave my $$ from fellowship (401a) in the plan as is. SHould there be any problem with backdoor Roth?

Also I can't contribute to my practices retirement plan till 2015 summer, so saving in the meantime.

I don't know; I've never had a 401a, so I'm not sure how that money is categorized. You might want to talk to an accountant. The important thing is not to leave that money in a traditional IRA account (or its equivalent). I would have had the option of rolling the pension money into my new 403(b) account if I had wanted to, which would have left it as pre-tax money with no taxes owed and would not run me afoul of pro-rata. But I'm fine with going the Roth conversion route. I'll be able to afford to pay the taxes on the pension funds in 2015, and obviously from now on my pre-tax accounts will be growing much faster than my Roth anyway.

 

[krl7044]

Thank you.

So we each need a IRA account, and then each of us can put in the backdoor to the Roth?

Or since my spouse is at $50k salary, contribute directly to Roth IRA?

Yes, both of you need the backdoor strategy. If filing taxes jointly, both have to do it because your spouse in your tax bracket.

 

[NICUfello]

Yes, both of you need the backdoor strategy. If filing taxes jointly, both have to do it because your spouse in your tax bracket.

Yes we both file taxes jointly.

THank you