Roth IRA

[Cabrinha_CO2]

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Hey,
I hope everyone is relaxing before starting their residency soon 😡) I just had a question. I was looking via some of the articles on EMRA pertaining to money matters. I am not an expert in this area by any means. It seems the general agreement is to open and try to fully fund a Roth IRA. I read up on it and the traditional IRA. It does seem like a really smart move to do during residency. My question is, is this something most do and what company do they go? Fidelity looks good to open via, any input would be great.

 

[southerndoc]

I use TDAmeritrade. I participate in my hospital's 403(b), which is a Fidelity NetBenefits retirement account. So all my mutual fund purchases are done through the 403(b), and all stock purchases are done through my TDAmeritrade account.

Personally, I think stocks are the way to go. I only invest in mutual funds because I'm required to in my 403(b).

This and various other related topics on IRA's have been discussed extensively in the Financial Aid forum. Take a peek.

 

[dlung]

I would weigh the option of starting a ROTH IRA vs your 401k/403b through your employer. Since I'm not planning to withdraw my paycheck contributions any time in the near future, and my employer matches my contributions to a certain percentage, it's a good fit.

I have a friend who helped me choose between Vanguard and Fidelity, here's what he told me:
"Vanguard is known as a passive money manager, meaning that they try to follow the market indices (i.e. S&P 500, etc.). Their expense ratios are very low since there is little buying and selling in these funds. Fidelity funds are more actively traded and they try to beat indices. But since they trade actively, they tend to have higher expense ratios.

Vanguard and Fidelity have very different philosophies on investing. Vanguard believes that the market is efficient, so the current stock prices reflect all public information, meaning that there is little opportunity to buy low and sell high. Since the stock market has historically achieved 8-11% return, it's probably reasonable to believe that Vanguard index funds can achieve this type of return in the long run.

Fidelity believes that the market at times mis-price stocks, so there are opportunities to make extra profit by actively monitoring stocks. Based on Fidelity's school of thought, the key is to find money managers who have demonstrated that they can consistently beat market performance."

You can research individual funds here:
http://moneycentral.msn.com/detail/stock_quote?Symbol=vfinx&Funds=1

 

[bartleby]

As a newly minted physician starting residency, the next few years are a golden period to for you to sock money away in a Roth IRA. What's so great about a Roth IRA? You put money in an account (has increased over the past couple years to $4k, roughly) and are able to withdraw it at retirement tax free. The catch for us is that you cannot contribute to an IRA once your income crosses a certain threshold (~$110k if you're single, ~$150k married filing jointly), i.e. once you've graduated and are working as an attending.

I am a believer in index funds. Much has been written about this, but even the best money managers rarely meet or beat the gains of the S&P 500 index long term. They might have five good years, but as an investor, you're in the game for the long term. These funds also tend to have much lower fees as they aren't actively managed...they just buy the stocks in the index.

 

[bla_3x]

Any differences between the above mentioned methods with regards to early withdrawl for a home??

 

[wook]

As a newly minted physician starting residency, the next few years are a golden period to for you to sock money away in a Roth IRA. What's so great about a Roth IRA? You put money in an account (has increased over the past couple years to $4k, roughly) and are able to withdraw it at retirement tax free. The catch for us is that you cannot contribute to an IRA once your income crosses a certain threshold (~$110k if you're single, ~$150k married filing jointly), i.e. once you've graduated and are working as an attending.

I am a believer in index funds. Much has been written about this, but even the best money managers rarely meet or beat the gains of the S&P 500 index long term. They might have five good years, but as an investor, you're in the game for the long term. These funds also tend to have much lower fees as they aren't actively managed...they just buy the stocks in the index.

👍

 

[Sol Rosenberg]

Any differences between the above mentioned methods with regards to early withdrawl for a home??

Because your contributions to a Roth IRA are post-tax, you may withdraw them at any time with no tax or penalty. Any earnings above those contributions are subject to taxes and/or penalties if withdrawn early.

 

[southerndoc]

Because your contributions to a Roth IRA are post-tax, you may withdraw them at any time with no tax or penalty. Any earnings above those contributions are subject to taxes and/or penalties if withdrawn early.

I was under the impression that any early withdrawal is subject to taxes and a 10% penalty. Qualified withdrawals are age greater than 59 1/2 and a FIRST home purchase, disability, etc.

 

[SexPanther]

I was under the impression that any early withdrawal is subject to taxes and a 10% penalty. Qualified withdrawals are age greater than 59 1/2 and a FIRST home purchase, disability, etc.

Jota is correct. Contributions can be withdrawn at any time without penalty, but if you withdraw profits you will be hammered. For example, if you invest 3,000 in your Roth and it becomes 5,000, you can withdraw your original 3K without penalty.

 

[southerndoc]

Jota is correct. Contributions can be withdrawn at any time without penalty, but if you withdraw profits you will be hammered. For example, if you invest 3,000 in your Roth and it becomes 5,000, you can withdraw your original 3K without penalty.

Alright, I just reviewed this on the IRS website.

You can withdraw your contributions during a tax year, but once the tax deadline has passed, then you cannot withdraw your contributions. (i.e., you contribute $4000 in March 2006, then you can withdraw the $4000 up until April 15, 2007 (later if you file an extension of deadline), but you cannot withdraw the contributions after that without penalty unless it's a qualified distribution).

http://www.irs.gov/publications/p590/ch01.html#d0e5122

 

[SexPanther]

👍

Alright, I just reviewed this on the IRS website.

You can withdraw your contributions during a tax year, but once the tax deadline has passed, then you cannot withdraw your contributions. (i.e., you contribute $4000 in March 2006, then you can withdraw the $4000 up until April 15, 2007 (later if you file an extension of deadline), but you cannot withdraw the contributions after that without penalty unless it's a qualified distribution).

http://www.irs.gov/publications/p590/ch01.html#d0e5122

Thanks for the clarification. Suze Orman never specified that in her books!

 

[Sol Rosenberg]

Alright, I just reviewed this on the IRS website.

You can withdraw your contributions during a tax year, but once the tax deadline has passed, then you cannot withdraw your contributions. (i.e., you contribute $4000 in March 2006, then you can withdraw the $4000 up until April 15, 2007 (later if you file an extension of deadline), but you cannot withdraw the contributions after that without penalty unless it's a qualified distribution).

http://www.irs.gov/publications/p590/ch01.html#d0e5122

The link you posted refers to traditional IRAs. I read through the Roth IRA section of pub. 590 (the pub, that you posted a link to) and the distribution rules for Roth IRAs are EXTREMELY confusing. However, here is a link to a Motley Fool page that attempts to explain them. On this page, it states that Roth IRA contributions are not subject to penalties or taxes:

http://www.fool.com/money/allaboutiras/allaboutiras06.htm

.....it is about 1/3 of the way down on the page and in bold.

I will try to find some the same info in pub. 590, but, like I said, the rules for Roth IRA distributions are REALLY CONFUSING.

Jota

 

[Sol Rosenberg]

OK, on the worksheet, on p. 62 of pub. 590, lines 12-15, see how you subtract your contributions from what is considered a taxable distribution? So, just because the distribution is not a qualified distribution does not mean that you have to pay tax on it. Particularly, if the distribution is <= to the total amount of contributions that you have made, you do not have to pay tax/penalties on that distribution. Sorry, but I couldn't find it specified in a less confusing manner than that.

As a side note and possibly dumb question, SouthernDoc, how did you make a link to the part of the document with the relevant info? That would save me from having to type p xx, line yy, etc.

 

[DrRobert]

With most of us making $40-50K/year during residency, we can only afford to put away maybe $4-5K/year.

I am a firm believer in maxing out the Roth IRA for residency. 99% of us will lose the benefit of contributing to a Roth when we become attendings. Therefore, you have 4 years to max it out and reap the benefits.

Obviously if you have a spouse that works or have an additional source of income, you can look at additional avenues such as stocks, mutual funds, etc.

In the end, it's a matter of personal preference. But in my opinion, a Roth IRA is great investment tool that we can only take advantage of for a short period of time.

 

[Hercules]

Just as a piece of advice that hasn't been mentioned yet, you should always max out your 401K/403b up to the point that your employer matches. If you contribute $2,000 and they match it with $2000 then you've already made a 100% return on your investment the day it goes in. You can't beat that. After you've maxed the amount they contribute towards, then start contributing to a Roth in my opinion.

 

[Sol Rosenberg]

I agree. Max. matched 401k contributions, then contribute to Roth, then max. 401k (unmatched) contributions. Roth IRA contributions have the potential to payoff much better than unmatched 401k contributions, because the Roth earnings are not taxed when withdrawn at the appropriate age. If you sit down and do the math, it is unlikely that we will be in that much lower of a tax bracket when we retire (assuming maxing everything out,) so the tax-free earnings of the Roth IRA are much more valuable than the tax-deferred earnings of a 401k (or traditional IRA.)

 

[DrRobert]

Just as a piece of advice that hasn't been mentioned yet, you should always max out your 401K/403b up to the point that your employer matches. If you contribute $2,000 and they match it with $2000 then you've already made a 100% return on your investment the day it goes in. You can't beat that. After you've maxed the amount they contribute towards, then start contributing to a Roth in my opinion.

Very good point. Unfortunately not all residency programs have 401K/403b programs, making a Roth IRA a no-brainer decision.

If you only had enough money to max out either your 401K/403b vs. a Roth IRA, then you would have to crunch the numbers to see which one would yield a better return. I would guess that a Roth would win, but only by a very narrow margin.

 

[southerndoc]

All the confusion and debate over the specifics of Roth IRA contribution withdrawals just highlights one point: consult with a CPA before doing this.

 

[Hercules]

If you only had enough money to max out either your 401K/403b vs. a Roth IRA, then you would have to crunch the numbers to see which one would yield a better return. I would guess that a Roth would win, but only by a very narrow margin.

I assume you mean a Roth would win against an unmatched 401K/403B. If so I agree. I'd say the matched 401K/403B wins out against a Roth, though.