Roth IRA-Student w/ working spouse

[Ghostpepper]

Question about a couple details of a Roth that I was hoping you guys could clarify.

I'm an M3 and have a spouse earning money currently. We have recently opened our first Roth. It is in her name only at the moment with me being the beneficiary and we file taxes jointly. Still pretty new to all this stuff although I'm trying to get educated as much as possible.

I will have roughly 185k in loans by graduation and we have a pretty good emergency fund currently, just FYI.

1. I just want to make sure I understand correctly that since she makes over 11k, we could technically open up an account in my name as well (5500 in each) even though I don't make any money. And vice versa, if she stops working when I get to residency, that same concept applies. Right? Also, should we make it so that both our names are on this first account or does that not even matter since we file taxes jointly?

2. Is it a better idea to just stick with one account for the sake of getting a bit of saving started early, and apply any extra to begin paying off small chunks of loans every month instead of a second account? I'm having a difficult time weighing the benefits of what starting saving 2 years earlier would do down the road with compound interest vs. reducing total loan amount at 5.4-6.8% interest.

Hopefully that all makes sense. Thanks in advance.

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[Plastikos]

I'd only open another account if you can do more than the max in a single account, then by all means yes go for it. The 2 extra years compounding can be massive. Otoh, your loan, while you should do your best to pay it down and refinance eventually...has a fixed term and also fixed cost. Investing has as many decades as you live and there is no limit to your return like a loan. Food for thought.

 

[Stroganoff]

1. Yes, a working spouse can open a Roth IRA for the non-working spouse. Right now, your wife can contribute to a new Roth IRA in your name, and when you start residency you can also contribute to hers even if she stops working. Re: both names on one account -- not possible. The "I" in IRA is for Individual and it stays that way forever even for married couples. Same with 401k/403b accounts. You can always put each other as beneficiaries, however.

2. If your wife has already maxed out the $5500, it would only help to open one for you. Also, you have until tax day April 15, 2015 to contribute to the previous year's IRA, so you can max out 2014 for both of you if you can before starting on 2015 contributions. If she already contributed as 2015 contributions, go ahead and put any extra contributions classified as 2014 until April 15., 2015.

Saving, investing, and reducing debt is a balancing act. Most of us are in the same boat. I'd max out Roth IRAs while you still can before you become an attending. Who knows how long the "back door Roth IRA" will last. Spend the first years as an attending obliterating your student loan debt will full aggression and reach your financial freedom before you get tempted to increase your lifestyle, house, cars, etc. Good luck!

 

[Smart Money MD]

Maxing out both your and your spouse's Roth IRA contribution limit ($11k) would definitely help start the process of retirement savings. Time is on your side. The more and earlier you have money in the Roth, the more likelihood you will have time to allow the funds to grow.

 

[Ghostpepper]

You guys...are awesome. Appreciate you helping out a rookie with this stuff

Edit:

So I came across another question. We had already filed 2014 taxes (usually do it very early) when we opened up the account. I was unaware at the time that we could still contribute to the previous year even after filing. We will make contributions to that the next few weeks before the deadline.

From a previous job, my wife has a small amount in a traditional 401k (like 3 or 4k) that is obviously pre-tax money. We basically have just been letting it sit until we figured out the best thing to do with it. Well, could we transfer that pre-taxed amount into the 2014 Roth account that we have already paid taxes on? Or would it have to go into the 2015 Roth in order to be taxed? Seems kind of like it would be frowned upon to put it in the 2014 one, but I just wanted to know if anyone had insight on that.

 

[Smart Money MD]

If you take money out of a 401k (pre-tax), you will end up paying a penalty unless it is used for emergency purposes. Otherwise, you could end up cashing out the 401k, paying income taxes on it, and then using that money to contribute to your Roth IRA. Probably not a great idea.

 

[group_theory]

Your options for the 401k, if you want to move it, are to either move it to a traditional IRA or a Roth IRA. Moving it to a traditional IRA will not incur any tax penalty. Moving it to a Roth IRA will incur taxes on the earnings/distributions from that 401k. However it might make sense now to take the tax hit when you're in the lower tax bracket than in the future when you are (hopefully) in the higher tax bracket due to higher income.

One thing to keep in mind (in the distant future) is that you may want to continue to contribute to the Roth even if you make too much money. You can do this via backdoor Roth (contribute a non-deductible contribution to an IRA then convert it to Roth). However, if you have money in the traditional IRA, it complicates thing. If you have a traditional IRA, and you make a non-deductible contribution to it (with the plan on converting that to a Roth IRA via backdoor), you end up having to pay some taxes (pro rata rule) during the conversion.

Having a Roth IRA helps because when it comes time to retirement, having a mixture of retirement funds (401k, roth ira, traditional ira, social security) allows you the flexibility to determine your taxable income.

Of course this is complicated so I highly recommend you (and your spouse) take time to see a good financial advisor (one who will know how to advise physicians, not just the regular average joe)

 

[Stroganoff]

From a previous job, my wife has a small amount in a traditional 401k (like 3 or 4k) that is obviously pre-tax money. We basically have just been letting it sit until we figured out the best thing to do with it. Well, could we transfer that pre-taxed amount into the 2014 Roth account that we have already paid taxes on? Or would it have to go into the 2015 Roth in order to be taxed? Seems kind of like it would be frowned upon to put it in the 2014 one, but I just wanted to know if anyone had insight on that.

To answer this question directly, 401k transfers/rollovers into any kind of IRA (whether you transfer it to a traditional/rollover IRA or a Roth IRA) are treated differently than contributions.

Like:

--2014 Contributions: $5500 limit. Deadline is April 15, 2015.
--2015 Contributions: $5500 limit. Deadline is April 15, 2016.
--401k rollover doesn't count towards the $5500 limit. You can rollover $1 or $1 Million from a 401k and it wouldn't count towards the $5500 contribution limit. Contributions are really "new money you put in."
--So if you take your wife's $3-4k and transfer it into her Roth IRA (it'll be a combination transfer/conversion in one easy step), it'll just be considered a 2015 tax-year conversion, so you'll pay taxes on it when you file next year.