Beginner's Jitters

[CPR]

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31yo resident physician here needing some advice. My father-in-law was a financial adviser for many years and is now retired, but is hesitant to give me too much advice. I've spoken with him many times, read my share of books and blogs post about the basics of financial planning, and feel like I'm pretty squared away with the foundation.
Married with 2 kids < 5 years old. Fortunately no debt from training and started residency 2 and a half years ago. Emergency fund is now well over 6-9 mos. of living expenses in savings and checking. Life insurance and (soon) disability insurance in place. Currently setting aside a small $ amount each pay check to my 403(b). No employer match. Currently in the lowest tax bracket I'll be in for a long time (if ever). Should I stop my contributions and start/contribute to a Roth before 2011 tax year ends? If so, with whom and what to invest in?
Simple questions I know, but any and all advice is appreciated. Hoping that anonymity will bring impartial and even brutally honest feedback.

 

[TexasPhysician]

I use Vanguard for my Roth account. I think that Roth accounts are an excellent idea as long as you qualify.

 

[Stroganoff]

Fortunately no debt from training and started residency 2 and a half years ago.

You're already ahead. 👍

Emergency fund is now well over 6-9 mos. of living expenses in savings and checking.

Nice!

Life insurance and (soon) disability insurance in place. Currently setting aside a small $ amount each pay check to my 403(b). No employer match. Currently in the lowest tax bracket I'll be in for a long time (if ever). Should I stop my contributions and start/contribute to a Roth before 2011 tax year ends?

Contribute as much as you can up to $5000 to your 2011 Roth IRA before April 17, 2012. If that means you have to temporarily stop your next 1-2 paycheck contributions to your 403(b) (if that's even possible), so be it.

After April 17, start maxing out your 2012 Roth as well. The fact that your 403(b) is non-matching makes it a lower priority than the Roth IRA, but it's still a good idea to attempt to contribute as much as you can towards that as well since it's still tax-deductible. I believe the contribution limit for 2012 is $17,000.

If so, with whom and what to invest in?
Simple questions I know, but any and all advice is appreciated. Hoping that anonymity will bring impartial and even brutally honest feedback.

I have my Roth IRA with Vanguard as well. I hold Vanguard and Fidelity in high esteem for their large offerings and low cost.

Many of Vanguard's regular funds have $3000 minimums to get in, so if you don't have a lump sum you want to contribute to meet that, their target-date funds (like Target Retirement 2045) have $1000 minimums.

 

[RabbMD]

If you have no other traditional iras currently after you finish residency ignore the post common advise to roll your current 401k into an ira. Instead either keep it at your old hospital or roll it into your new 401k. What you do with the rollover should be dictated by placing the money in which ever 401k plan has the best mix of lowest fees and access to asset catagories, with fees being the most important.

Then after residency max out your 401k, but also do both a self and a spousal back door roth every year. You can google backdoor roth, or just go to thefinancebuff.com for a great explanation. This will be for tax diversity purposes.

This year you also have until april 17th to contribute up to $5000 to a roth for both yourself and your wife if married.

 

[Dr Wario]

You may want to dump the kids as they suck the life out of your finances...haha I jest. You have done quite well and are in good position for success if you continue to save a significant portion of your income and avoid major financial mistakes.

 

[Stroganoff]

If you have no other traditional iras currently after you finish residency ignore the post common advise to roll your current 401k into an ira. Instead either keep it at your old hospital or roll it into your new 401k. What you do with the rollover should be dictated by placing the money in which ever 401k plan has the best mix of lowest fees and access to asset catagories, with fees being the most important.

Can you explain why you are against rolling an old 401(k) into a traditional IRA when one leaves a job? The "best mix of lowest fees and access to asset categories, with fees being the most important" can be best achieved in an IRA instead of a handicapped 401(k) plan. One can still do Roth conversions as needed from the traditional IRA.

 

[RabbMD]

Google pro-rata rule. If you have any pretax ira monies then you must pay taxes on a pro-rata ratio if you do a roth conversion. An example works best. Say you have $10,000 in an ira that is pretax, and then do$5,000 in nondeductible ira contributions bc you now make over the max agi for direct roth contributions. When you do the ira to roth conversion you must either convert the $10,000 pretax amount, and likely pay a higher marginal tax rate now than you saved when you contributed it, or if you only convert $5,000, only 1/3 of that amount is tax free, and you have complicated your future ira basis as well. Unless your 401k sucks, then often it is better to keep it there, or roll it into your new 401k to avoid this issue.

Also, some 401ks have institutional funds that have lower ers than you could otherwise get in a ira.

 

[Stroganoff]

Gotcha, you're talking about as an attending making enough so that one's AGI is above the direct Roth contribution, so you don't want to mix tax-deductible IRA monies with nondeductible IRA contributions.

Wouldn't having two traditional IRA accounts solve this? One for pre-attending monies for pretax 401(k)s to be transferred to, and another traditional IRA as an attending for nondeductible contributions. I'd do that over letting my cash sit in a crappy 401(k) from a former company.

 

[Sol Rosenberg]

Google pro-rata rule. If you have any pretax ira monies then you must pay taxes on a pro-rata ratio if you do a roth conversion. An example works best. Say you have $10,000 in an ira that is pretax, and then do$5,000 in nondeductible ira contributions bc you now make over the max agi for direct roth contributions. When you do the ira to roth conversion you must either convert the $10,000 pretax amount, and likely pay a higher marginal tax rate now than you saved when you contributed it, or if you only convert $5,000, only 1/3 of that amount is tax free, and you have complicated your future ira basis as well. Unless your 401k sucks, then often it is better to keep it there, or roll it into your new 401k to avoid this issue.

Also, some 401ks have institutional funds that have lower ers than you could otherwise get in a ira.

Still not understanding what you mean here. First: We were talking about rolling into a traditional (technically a rollover) IRA, not a Roth. Second, the pro-rata rule applies to IRAs that have both deductible and non-deductible contributions. Why on Earth would you make non-deductible contributions to a traditional IRA? Just put that $$$ into a brokerage account.

 

[RabbMD]

Again google "pro-rata rule." The irs considers all your iras together. In their eyes even if you have iras with twenty brokers you still only have one ira in their eyes. Thus unless you roll a pretax ira into a 401k (or never rolled it out in the first place) you pay taxes or pretax iras if you ever do a roth conversion in the future.

 

[Sol Rosenberg]

Again google "pro-rata rule." The irs considers all your iras together. In their eyes even if you have iras with twenty brokers you still only have one ira in their eyes. Thus unless you roll a pretax ira into a 401k (or never rolled it out in the first place) you pay taxes or pretax iras if you ever do a roth conversion in the future.

Still not picking up what you're putting down. You must pay taxes on a Roth conversion, yes. Do you mean that for some reason you wouldn't convert all of your traditional IRAs to Roth at the same time? Why not?

EDIT: Ahhh, because you can convert to Roth piecemeal and spread the tax burden out if you leave some in 401ks, whereas you need to essentially convert all at once with traditional IRAs. Learned something today 🙂

 

[RabbMD]

Dear lord, the original poster is not the only beginner here. A person can under current laws contribute $5,000 a year to either a roth ira or a traditional ira per year if they have earned income. If you are married a spouses income can count towards a stay at home spouse as a spousal ira. After age 50 one can contribute another $1,000 per year as catch up for up to $6,000 single, $12,000 for a married couple both over 50.

A roth ira is post tax money, and is currently tax free plus earnings tax free on withdrawal. There however is an agi (adjusted gross income) limit on direct contributions. As of 2010 there no longer was an agi limit for roth conversions. Rhis gave rise to the "back-door roth ira." Basically on contributes to a nondeductible ira and then immediately converts it to a roth. This allows one to indirectly contribute to a roth ira every year the law has no agi limits for roth conversions. There is one catch however, the pro-rata ira rule.

Basically if you read the irs tax form used for roth conversion reporting, you must total all of your ira moneys as of dec 31st of the conversion year. This is because the irs considers all your iras as one. So the reason you might consider keeping old money in a 401k/403b is to avoid have the ira pretax money cause an otherwise tax-free nondeductible ira to roth conversion to become taxible. This goes against the commonly held idea to always roll 401k money into an ira asap, thus I point it out.

The traditional ira contribution itself has no agi limits. Whether you are eligible for a tax deduction or not with these ira contributions does have age limits, thus the nondeductible ira terminology. One might contribute to a nondeuctible ira to hold something tax inefficient such as bonds or reits if they had not enough ither tax deffered room instead of an annuity, but this is relatively uncommon, and a taxible account usually beats a nondectible ira through tax loss harvesting. However, the ability to immediately convert the nondeductible ira to a roth is much better in most cases than a taxible account.

 

[Stroganoff]

A person can under current laws contribute $5,000 a year to either a roth ira or a traditional ira per year if they have earned income.

Or any combination of IRAs up to the limit. Not necessarily either/or.

A roth ira is post tax money, and is currently tax free plus earnings tax free on withdrawal. There however is an agi (adjusted gross income) limit on direct contributions. As of 2010 there no longer was an agi limit for roth conversions. Rhis gave rise to the "back-door roth ira." Basically on contributes to a nondeductible ira and then immediately converts it to a roth. This allows one to indirectly contribute to a roth ira every year the law has no agi limits for roth conversions. There is one catch however, the pro-rata ira rule.

Basically if you read the irs tax form used for roth conversion reporting, you must total all of your ira moneys as of dec 31st of the conversion year. This is because the irs considers all your iras as one. So the reason you might consider keeping old money in a 401k/403b is to avoid have the ira pretax money cause an otherwise tax-free nondeductible ira to roth conversion to become taxible. This goes against the commonly held idea to always roll 401k money into an ira asap, thus I point it out.

The traditional ira contribution itself has no agi limits. Whether you are eligible for a tax deduction or not with these ira contributions does have age limits, thus the nondeductible ira terminology. One might contribute to a nondeuctible ira to hold something tax inefficient such as bonds or reits if they had not enough ither tax deffered room instead of an annuity, but this is relatively uncommon, and a taxible account usually beats a nondectible ira through tax loss harvesting. However, the ability to immediately convert the nondeductible ira to a roth is much better in most cases than a taxible account.

So I read up a little on this on CreditBoards: What to do with old 401k? Seabee states "When you take a distribution from either, the basis and value of ALL IRAs will be used to compute the taxable portion of that distribution. The end result will be no different from having just one IRA." so it's not necessarily all-or-nothing with regard to tax basis. It's a weighted sum of what is taxable and what is non-taxable.

 

[RabbMD]

yes, it is only partly taxable, according to the pro-rata ratio of pretax to post tax monnies.

 

[The White Coat Investor]

31yo resident physician here needing some advice. My father-in-law was a financial adviser for many years and is now retired, but is hesitant to give me too much advice. I've spoken with him many times, read my share of books and blogs post about the basics of financial planning, and feel like I'm pretty squared away with the foundation.
Married with 2 kids < 5 years old. Fortunately no debt from training and started residency 2 and a half years ago. Emergency fund is now well over 6-9 mos. of living expenses in savings and checking. Life insurance and (soon) disability insurance in place. Currently setting aside a small $ amount each pay check to my 403(b). No employer match. Currently in the lowest tax bracket I'll be in for a long time (if ever). Should I stop my contributions and start/contribute to a Roth before 2011 tax year ends? If so, with whom and what to invest in?
Simple questions I know, but any and all advice is appreciated. Hoping that anonymity will bring impartial and even brutally honest feedback.

Stop the 403B contributions.

1) No match
2) I assume it isn't a Roth 403B. Why not pay (the minimal) taxes now, while you're in a low bracket.
3) Roth IRAs offer better investment choices than almost every 403B I've ever seen. They're usually stuffed with particularly expensive funds.

The suggestion above about Vanguard is good. In fact, I'd fund 2011 and 2012 Roth IRAs with some of that e-fund. 9 months for a resident. Seems a little excessive, but if you feel you need an e-fund that big, go ahead.

Go to Vanguard, open Roth IRAs. Stick them in a fund that starts with target retirement. When you figure out a little more, then you can adjust. You may find this series helpful:

http://whitecoatinvestor.com/designing-your-portfolio-part-1-goal-setting/