Question re: retirement savings

[DeLaughterDO]

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Hello all;

I've been reading/lurking in this forum for awhile, and trying to find the answer to my question, but have not had much luck.

I've been saving in a ROTH for the past 4 years during residency, my wife has been doing the same (ROTH x 4 years), as well as 403(b) and matched 401(k) during the last year. My wife is now in fellowship and has a nonmatched 403(b), and I am a newly minted attending.

Obviously, we no longer qualify for Roth contributions. She will continue to put money into her 403(b), but I do not have an offered retirement savings plan until next year.

What should I do this year? Open a traditional IRA and put post-tax dollars in (as I will not be eligible for deduction)? Any other great ideas?

I am an employed member of a group (not IC, so not eligible for SEP-IRA or other self-employed retirement plans). My group does not allow 401(k) contributions for the first year.

Thanks for all the help;

jd

 

[penguin24]

Why don't you pay your student loans? Then just start contributing to your 401k next year.

 

[Bobblehead]

The Roth conversion income limits were removed in 2010 so you both could contribute to a non-deductible IRA (and immediately convert to a Roth IRA if you so choose). Beware that rollover IRAs will affect your basis and need to pay income tax on the conversion. From your original posting it appears you have not converted your past 403b/401k accounts to a rollover IRA so this shouldn't be a problem for you. I would personally take advantage of the opportunity to contribute to the IRA as you won't get that chance back after tax returns are due.

A little off-topic, but why would they not permit 401k contributions in the first year? I would make some hard inquiries about that. Matching is a different story but the inability to contribute for the first year at all sees like an anomaly. Do they really have such high turnover in the group that it would be a hassle to process paperwork for the many people who only work for a year and then leave?

 

[UserNameNeeded]

The Roth conversion income limits were removed in 2010 so you both could contribute to a non-deductible IRA (and immediately convert to a Roth IRA if you so choose). Beware that rollover IRAs will affect your basis and need to pay income tax on the conversion.

If you immediately convert the non-deductible IRA into a Roth IRA, how would you owe income tax on it?

 

[southerndoc]

If you immediately convert the non-deductible IRA into a Roth IRA, how would you owe income tax on it?

The IRS considers all your tax-deferred IRA accounts as one (rollover, SEP, traditional) and taxes it on a pro-rata basis.

If you have $10,000 in a rollover IRA that you rolled over from your previous employer's 401(k) or 403(b), and $5000 in a non-deductible IRA, if you converted $5000 to a Roth, you would owe taxes on $3333 since the non-deductible contributions are only 30% of your total IRA funds. So you could only skip the taxes on 30% of your non-deductible contributions.

 

[MR Insurance]

Figuring that your student loans are probably costing you 6-7% interest, the comment suggesting to pay off student loans is a pretty smart one.

 

[DeLaughterDO]

Figuring that your student loans are probably costing you 6-7% interest, the comment suggesting to pay off student loans is a pretty smart one.

Sorry I've been absent from the thread a few days, I've been on a stretch of shifts and have anxiously been awaiting our first child. I've been keeping up with the thread on my phone, but the interface for posting to a thread is less than ideal.

Re: the above suggestion: My loans were consolidated at about 3%, IIRC, so if I can get my money into something with a better yield, would that not be a better option? I understand with those getting loans now, locked at something like 6.8% 😱 this might be a good idea, but for me, I'd just as soon make my money work a little harder for me in the long run.

The IRS considers all your tax-deferred IRA accounts as one (rollover, SEP, traditional) and taxes it on a pro-rata basis.

So, if I were to put 5000 dollars in a traditional IRA and convert it to a roth, because none of that money would be tax deductible (due to income limitations on deductions) would I then owe taxes on it again? That doesn't seem like too great a plan to me. Maybe I'm not understanding the process, which is likely the case.

The Roth conversion income limits were removed in 2010 so you both could contribute to a non-deductible IRA (and immediately convert to a Roth IRA if you so choose). Beware that rollover IRAs will affect your basis and need to pay income tax on the conversion. From your original posting it appears you have not converted your past 403b/401k accounts to a rollover IRA so this shouldn't be a problem for you. I would personally take advantage of the opportunity to contribute to the IRA as you won't get that chance back after tax returns are due.

A little off-topic, but why would they not permit 401k contributions in the first year? I would make some hard inquiries about that. Matching is a different story but the inability to contribute for the first year at all sees like an anomaly. Do they really have such high turnover in the group that it would be a hassle to process paperwork for the many people who only work for a year and then leave?

I'd planned on putting money into a Traditional IRA for this year, but the limit for that is 5000 dollars, correct? I'd like to put a bit more away than that for retirement, as I don't think that is nearly enough to fund retirement. I was asking for ideas/advice on where else to put money. Also, do you know the answer to my question about double taxation above?

Re: why they do not allow 401(k) contributions the first year - I don't know, that is just how they have it set up for whatever reason. Maybe they have a lot of people not last a whole year or longer, I'm not sure.

Thanks for the advice and help everyone! Keep the ideas coming.

 

[penguin24]

Yeah, 3% isn't much interest. However, if you open up another retirement account, it's going to be another account, another password, then when you start your 401k next year, another hassle to convert the money you put in this year into the next account.

Plus, right now interest rates are next to nothing and ROI for people's money isn't too spectacular, thus getting a guaranteed 3% ROI by paying your loans may not be that bad.

Essentially, you have a 1 year period of limbo where you don't know where to put your money. You can view this as an opportunity to pay your loans and simplify your life as opposed to opening up some 1 year account and complicating it. In the long run, 30 years from now when you retire I doubt it will matter to you.

 

[DeLaughterDO]

Yeah, 3% isn't much interest. However, if you open up another retirement account, it's going to be another account, another password, then when you start your 401k next year, another hassle to convert the money you put in this year into the next account.

Plus, right now interest rates are next to nothing and ROI for people's money isn't too spectacular, thus getting a guaranteed 3% ROI by paying your loans may not be that bad.

Essentially, you have a 1 year period of limbo where you don't know where to put your money. You can view this as an opportunity to pay your loans and simplify your life as opposed to opening up some 1 year account and complicating it. In the long run, 30 years from now when you retire I doubt it will matter to you.

It actually wouldn't be another password/etc. I would open the tIRA at the same place I already have my have my roth, so another account, but same company. I like the idea of rolling over a tIRA into a roth, but don't know if I would essentially be double taxed on the money.

 

[MR Insurance]

To assist the decision making, in converting a Traditional IRA to a Roth IRA, your money is only taxed once, not twice.

A traditional IRA is Qualified (non-taxed contributions). By converting to a Roth IRA, you are transforming the Qualified assets into Non-Qualified assets. The money is taxed during this transfer, only once. The benefit is that you will not pay taxes on those assets later in life, when taxes are likely to be much higher.

Being that you are fairly uncertain about this, consider two options: Pay of your loans or open a regular brokerage account. A regular brokerage account still allows you to invest your money in equities, but gives you more freedom. Since it is not designated as a retirement account, you can move those assets anywhere without penalty. Once tax season comes around and your accountant recommends a Qualified contribution for tax reduction, you can always move the money at that time.



May be a good time to evaluate your insurance portfolio too. (I'm not saying that because I work with insurance, either) I say this because you indicated you are awaiting a new born. Make sure you have your Life and Disability insurance set up - protection is the foundation to a solid financial plan, especially one year out of training.

 

[DeLaughterDO]

To assist the decision making, in converting a Traditional IRA to a Roth IRA, your money is only taxed once, not twice.

A traditional IRA is Qualified (non-taxed contributions). By converting to a Roth IRA, you are transforming the Qualified assets into Non-Qualified assets. The money is taxed during this transfer, only once. The benefit is that you will not pay taxes on those assets later in life, when taxes are likely to be much higher.

Being that you are fairly uncertain about this, consider two options: Pay of your loans or open a regular brokerage account. A regular brokerage account still allows you to invest your money in equities, but gives you more freedom. Since it is not designated as a retirement account, you can move those assets anywhere without penalty. Once tax season comes around and your accountant recommends a Qualified contribution for tax reduction, you can always move the money at that time.



May be a good time to evaluate your insurance portfolio too. (I'm not saying that because I work with insurance, either) I say this because you indicated you are awaiting a new born. Make sure you have your Life and Disability insurance set up - protection is the foundation to a solid financial plan, especially one year out of training.

Ok, I get that for most people, a trad IRA would be nontaxed (or tax deductible contributions), however for me, because of my income level, the contributions will not be deductible, so I willl be contributing post tax dollars to a trad IRA, then if I roll it into a roth, will it be taxed again? Essentially double taxation on the same money? That is what I am having trouble understanding..

I have insurance out the wazoo - disability, life, home, auto, etc...

 

[MR Insurance]

Ok, I get that for most people, a trad IRA would be nontaxed (or tax deductible contributions), however for me, because of my income level, the contributions will not be deductible, so I willl be contributing post tax dollars to a trad IRA, then if I roll it into a roth, will it be taxed again? Essentially double taxation on the same money? That is what I am having trouble understanding..

I have insurance out the wazoo - disability, life, home, auto, etc...

Fairly certain that converting means double taxation, at the least on interest earned.

I do not believe that there is an income limitation for anyone (at any income level) when contributing to a Traditional IRA, in terms of deduction, IF you do not have access to a retirement plan at work, which technically you do not. The problem with this may be that your wife is still contributing to a 403b plan, which may impact this.

Best bet is to speak with your accountant - he/she should know best.

Wish I could help more.

 

[southerndoc]

Ok, I get that for most people, a trad IRA would be nontaxed (or tax deductible contributions), however for me, because of my income level, the contributions will not be deductible, so I willl be contributing post tax dollars to a trad IRA, then if I roll it into a roth, will it be taxed again? Essentially double taxation on the same money? That is what I am having trouble understanding..

I have insurance out the wazoo - disability, life, home, auto, etc...

No, you won't be taxed twice.

If you make a non-deductible contribution and convert it over to a Roth IRA, then it's not taxed.

If you have deductible contributions (before tax) in an IRA (but not a 401k/403b), and also have non-deductible (after tax) contributions, you can't just convert the non-deductible contributions to a Roth and leave the deductible contributions. The IRS will use a pro-rata formula as I mentioned in a previous post to figure out your tax due.

 

[DeLaughterDO]

No, you won't be taxed twice.

If you make a non-deductible contribution and convert it over to a Roth IRA, then it's not taxed.

If you have deductible contributions (before tax) in an IRA (but not a 401k/403b), and also have non-deductible (after tax) contributions, you can't just convert the non-deductible contributions to a Roth and leave the deductible contributions. The IRS will use a pro-rata formula as I mentioned in a previous post to figure out your tax due.

Thanks for clarifying that for me.

Sadly, I don't have any 401k/403b contributions 🙁 (yet), only Roth and cash savings (not buried in mayo jars under the tree in the back, though - hasn't been enough time since we moved to bury them yet - 🙂) So I'm pretty open for any opportunities/recommendations.

Since my tax-advantaged options seem pretty limited right now, I've been looking at mutual funds/ETFs for non-tax advantaged long-term investments, as I'd like to give my money a chance to grow and hopefully outpace inflation over the next 20-30 years. Are there funds/ETFs people like more? There is a lot of talk about the whole market index or S&P 500 index fund over at vanguard - I would think this would be an easy way to quickly "diversify" your portfolio, and your fortunes would pretty much lie in the state of the market over time, which everyone hopes gets better.

Any other ideas/recommendations from the peanut gallery out there?

Thanks!

jd

 

[MR Insurance]

Thanks for clarifying that for me.

Sadly, I don't have any 401k/403b contributions 🙁 (yet), only Roth and cash savings (not buried in mayo jars under the tree in the back, though - hasn't been enough time since we moved to bury them yet - 🙂) So I'm pretty open for any opportunities/recommendations.

Since my tax-advantaged options seem pretty limited right now, I've been looking at mutual funds/ETFs for non-tax advantaged long-term investments, as I'd like to give my money a chance to grow and hopefully outpace inflation over the next 20-30 years. Are there funds/ETFs people like more? There is a lot of talk about the whole market index or S&P 500 index fund over at vanguard - I would think this would be an easy way to quickly "diversify" your portfolio, and your fortunes would pretty much lie in the state of the market over time, which everyone hopes gets better.

Any other ideas/recommendations from the peanut gallery out there?

Thanks!

jd

I would still suggest speaking with an accountant. There are no income limitations for contributing to Traditional IRA and taking the deduction, if you do not have access to a retirement account at work. The only part I do not know about is the impact your wife's 403b contribution has on this.

 

[loveboatdoc]

We have worked with a financial planner (Ameriprise) for many years, and it doesn't cost much. They probably do a free initial consult. Make sure they have CFP after their name, and special training in retirement planning.

Don't let anyone sell you an annuity within an IRA, by the way. The fees are unreasonable, and the advantages just aren't there.

Having a trust can also be a good idea...ours covers every possible scenario you can imagine. It even controls assets after one spouse dies, if the other gets remarried.

One advantage to decreasing outstanding student loan debt is it will help when the time comes to get a mortgage...you may qualify for a lower rate. Also, larger down payments also help eliminate PMI costs upfront.