Lots of good questions in the thread. I suppose there is no such thing as a stupid question, but seeing ?s like these reaffirms my desire to do a blog to help docs out.
1) What happens to the account?
As mentioned above, it just sits there. Mine that just sat there after residency is now over 6 figures. But it has also grown for a couple of reasons:
First, you can always do Roth conversions later and add to the stash.
Second, you might have a job where you don't make more than the Roth IRA contribution limit (currently $169K adjusted gross income for married) and can still do Roth IRA contributions. Lots of docs make less than that. Probably half.
Third, you can do backdoor Roth IRAs each year, at least until the IRS closes the loophole.
http://whitecoatinvestor.com/retirement-accounts/backdoor-roth-ira/
2) Do you have to sell the mutual funds?
No. Since you don't have to close the account, you can continue to hold the same funds as when you were contributing.
3) Do you convert it to a traditional IRA?
There are circumstances where you may want to "recharacterize" a Roth IRA back to a traditional IRA. But you can only do that for the most recent contribution. You can't convert it back ten years from now. What's the IRS going to do, give you the taxes you paid 10 years ago back? Mostly, people only recharacterize if they made an illegal contribution accidentally (usually because they made more that year than they planned), if their investment within the account that year tanked, and for some other unusual reason.
4) On a recharacterization, who keeps track of the basis?
The custodian of the IRA keeps track of it and reports it to you and the IRS.
Now, a couple other points you don't mention.
First, you seem to be under the misunderstanding that you MUST commit to putting $100 a month into the account at Vanguard. As long as you open the account with $1000, you don't have to do that. Keep in mind, you really need to focus right now on your savings rate. $100 a month is only $1200 a year. You can put $5K into this account (plus another $5K for your spouse.) You may also have a 401K or 403B. You need to be thinking not "What's the minimum I can put into this thing each month" but rather "What's the maximum?" $333 a month will get you to the $5K contribution limit. That's not that hard on a resident salary. It should be less than 10% of your income. Get used to saving now and it'll be easy to carry the habit into your "attending-hood."
http://whitecoatinvestor.com/investing/the-savings-rate/
Second, thanks for the shout-out Igor.
Third, Dumb- there are several points. First, you don't pay taxes as the money grows. This helps money to grow at a higher rate. Second, you don't pay taxes when you pull the money out in 30 or 40 years. Third, you don't eat Alpo in retirement. The point is it is a retirement savings vehicle. Most docs will never have a pension. The only money they'll have to live on in retirement will come from their own savings.
Fourth, Shantster- many retirement plans use the end of the calendar year, not April 15th. You have to make your 401K contributions by Dec 31, for example. But for IRAs, you're correct, it's April 15th.
Last, for all the residents out there, be sure you look at the Retirement Savings Credit when you file your taxes. You can get up to $1000 just for saving your own money. More likely you'll only get $100, but it's better than a kick in the teeth.
Good luck investing. Just the fact that you're asking these questions puts you way ahead of the pack.
Regarding pension, can't I just work in a VA hospital toward the tail end of my career and get pension?
