403b to ROTH IRA conversion at end of residency?

[neopsych12]

I will be completing my residency June 2016 and was wondering if I should:

a) convert to Roth IRA
b) convert to taxable investment account
c) leave in employer's 403b

My financial situation:
-single, 29-years-old
-total debt: $0
-403b: 65k (Fidelity target retirement fund)
-Roth IRA: 15k (Total market ETF)
-taxable vanguard investment account: 500k in mutual funds (from trust)

I was thinking that converting to a Roth IRA may be worthwhile in 2016 as I will be in a much lower tax bracket than for the rest of my career. From January 2016 - June 2016, my residency salary will be ~30k. For the remainder of 2016, I will likely generate another 80-150k depending on how many hours I choose to work. Upon graduation of residency, I plan to take over a family-owned private practice in my specialty.

My questions:
1. What should I do with my 403b through my current employer (residency program) and why?
2. Assuming that I will be maxing out a SEP-IRA yearly beginning in 2017, would I be eligible for the backdoor Roth IRA conversion in the future?

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[ThoracicGuy]

I will be completing my residency June 2016 and was wondering if I should:

a) convert to Roth IRA
b) convert to taxable investment account
c) leave in employer's 403b

My financial situation:
-single, 29-years-old
-total debt: $0
-403b: 65k (Fidelity target retirement fund)
-Roth IRA: 15k (Total market ETF)
-taxable vanguard investment account: 500k in mutual funds (from trust)

I was thinking that converting to a Roth IRA may be worthwhile in 2016 as I will be in a much lower tax bracket than for the rest of my career. From January 2016 - June 2016, my residency salary will be ~30k. For the remainder of 2016, I will likely generate another 80-150k depending on how many hours I choose to work. Upon graduation of residency, I plan to take over a family-owned private practice in my specialty.

My questions:
1. What should I do with my 403b through my current employer (residency program) and why?
2. Assuming that I will be maxing out a SEP-IRA yearly beginning in 2017, would I be eligible for the backdoor Roth IRA conversion in the future?

1. You can either leave the 403b where it is at as long as your employer allows you to do so or you can roll it over into a traditional IRA, 401k, or 403b. You could do a conversion to a Roth, but you'll have to pay taxes on this conversion. It's not a bad thing to have traditional IRA type money for retirement as you can take a mixture of tIRA and Roth IRA distributions to keep your taxes low in retirement.

If you convert even just part of the tIRA to a Roth, you'll pay taxes on that amount. Depending on what your tax bracket ends up being will help determine this for you.

2. Why are you choosing a SEP-IRA? If you will be working as an independent contractor (1099-R income), you can set up a solo 401k. You can then put up to $18,000 as an employee contribution and 20% of your profits as an employer contribution up to a ceiling of $53,000 each year. Those ceilings may change over time and likely will increase.

Your ability to do a backdoor Roth will be severely hindered by a SEP-IRA as well as any other traditional IRA money. 401k/403b money is not included in this determination. If you set up a solo 401k, you can hide your traditional/SEP IRA monies in there, as well as a direct transfer of your residency 403b as well. I set mine up at Fidelity which allows these transfers. Vanguard did not allow for IRA to solo 401k transfers. If you can't create your own solo 401k and your future job has a 401k/403b available, you might be able to transfer your current 403b and traditional/SEP IRAs into this vehicle.

If you have any traditional/SEP IRA money, any backdoor Roth conversions will be taxed pro-rata on the percentage being converted. People with large t/SEP IRAs will have large tax bills.

 

[dpmd]

Also with a solo 401k you can do your employee contributions as roth if the company you open it with has that option. And you can then roll your 403b into it if you want.

 

[ThoracicGuy]

Also with a solo 401k you can do your employee contributions as roth if the company you open it with has that option. And you can then roll your 403b into it if you want.

Vanguard has the Roth 401k option, but doesn't allow IRA transfers (but does allow 401k/403b transfers).

 

[dpmd]

Mine is with etrade and you can roll rollover iras into it and do roth as long as you set it up too. I also have my spouses 401k with them (my understanding is that since california is a community property state i can assign part of the business income to him and then we both get to do the employee contribution, couldn't figure out the right way to split the income since most of it came in 1099s in my name so i filed a 1099 for him for the portion of income i thought we could justify-he is a nurse and i have asked him to do my case log with american college of surgeons which is part of the qi thing medicare wants you to participate in. Might be totally wrong about the validity of it but i figure self employed people hire their kids and such all the time to make things better financially so it should be defensible at audit so i shouldn't go to jail at least). All our accounts are joined to the same online sign in so i can manage them easily.

 

[Plastikos]

In your case where you dont necessarily need it to be tax deductible a Roth would be great, that would give you a good bit of freedom to do whatever you want with it if need be.
I'd be sure to look at each brokerage to know their specific rules on conversions, etc....vanguard has some funny ones. I think if you want to do conversions you should do a 401k as its simpler.

 

[James Martin]

If you make contributions to a SEP-IRA, that will prevent you from making tax-free backdoor Roth contributions. You would be better served with a 401k. This would also allow you roll over the 403b to that account to preserve back door contributions.

 

[QofQuimica]

That's what I did, but my contribution situation was opposite yours. I had ~$16,000 in the tax-deferred residency retirement account and all the rest of my retirement savings already in the Roth. I wound up having to pay ~$3000 in taxes to convert that $16,000 into my Roth. Am now looking at fellowship options and planning to convert some of my 403(b) savings from my current attending job to my Roth during fellowship just because I'm paid from more than one source and annoyingly have four different 403(b) accounts, two of which have relatively small amts of money in them (couple thousand each). But I will leave my main two 403(b)s and my taxable account alone because those amounts will be more substantial.

Likewise, in your case, having $65,000 tax-deferred to convert (let alone half a million taxable!) will make for a painful tax bill. You didn't mention what your investing options were, but if your Fidelity target fund is the index fund and not the actively managed fund, then it has a low ER, and I'd leave well enough alone vs. moving it to a traditional IRA since you know you'll want to back door Roth later. The taxable account can be invested in whatever low cost fund(s) you want and is a substantial amount of money, so I wouldn't mess with converting that.

Kudos to you btw for amassing such a war chest so early in your career. You're well on track to be an early millionaire if you so choose.

 

[The White Coat Investor]

If I had a 403B in residency (above and beyond a personal and spousal Roth IRA) and it didn't have a Roth option, I'd convert it to a Roth the year I left residency.

 

[DrDudeMD]

Similar situation as OP.

My 403b happens to be a split between Roth and traditional. They didn't offer Roth until some time down the line. Since then I've been putting 20% per paycheck into the Roth account. I also happen to have a Roth 457 (9% per paycheck) as well.

I made the mistake of starting the Roth 457 (my first job and I figured, what the heck, dump more money in to more accounts). Thinking about it now, should have just put 29% into the 403b as it is earning more, less fees, etc.

So my question... Where should I roll that 457 that is absolutely doing nothing for me? Any difference between rolling it into my existing Roth 403b or my Vanguard Roth IRA?

Thanks!

 

[bc65]

my residency salary will be ~30k. For the remainder of 2016, I will likely generate another 80-150k

So your salary will be as much as 180k. You will then be converting your 401k at the marginal rate ON TOP of 180k. In order for this conversion to make sense, you will need to estimate how much money you'll have in your 401k plus IRAs at age 71. You will have to withdraw approximately 3.8% of that amount the first year. ( I can tell you that if you had 4.5 million, 3.75% of that would be about 170k. So that is a rough target for you. Figure out if you will have more or less than that in your IRA at age 70.) Add your social security to that amount, and figure out what your tax rate will be. If the marginal tax rate in 2016 on your conversion ( i.e. the rate on income from 180 k to 245k ) will be higher that that, don't do the conversion. If it will be the same or less, then do it.