Which Tax Bracket

[DrDudeMD]

Hey all,

People say contribute as much as possible to a ROTH IRA while you are a resident because you are in a much lower bracket. What happens when you actually retire and start taking money out? Once you retire, aren't you in an even lower tax bracket than while you were a resident? So wouldn't it make more sense to do contribute PRE-TAX?

Just wondering.

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[dav86]

Hey all,

People say contribute as much as possible to a ROTH IRA while you are a resident because you are in a much lower bracket. What happens when you actually retire and start taking money out? Once you retire, aren't you in an even lower tax bracket than while you were a resident? So wouldn't it make more sense to do contribute PRE-TAX?

Just wondering.

You might be in a lower tax bracket when you retire and you might not. Depends how much you plan on living on per year when you retire. There are also some that believe our financial situation as a country is unsustainable and that taxes will inevitably increase in the future. If this were to occur than the rates would likely be higher. All speculation, but probable.

Once you are an attending you will likely make too much money to be able to max out your ROTH IRA. Now there is a backdoor ROTH you can contribute to, at least for now. Take a look at whitecoatinvestor.com to read up on the backdoor ROTH.

I personally like ROTH IRA because you don't have a certain age you HAVE to start taking your funds out. IRAs you can start taking money out at 59.5 years old and have to start taking funds out at 70. ROTH start at 59.5 but don't have any maximum age you have to start taking money out. It allows you a little more control when you withdraw the money.

 

[Plastikos]

You would hope to retire in a higher tax bracket than you're in during residency even if things were kept the same for simplicity. It should not be hard to have RMDs that easily push you out of a residents income level.

 

[James Martin]

The conventional approach is to compare your current tax bracket with what you think it will be in retirement, which would depend on your taxable income and the tax rates in place when you retire. If you expect it to be lower, go with pre-tax contributions. If you expect it to be higher, go with the Roth. If you’re not sure, go with both.

 

[The White Coat Investor]

Hey all,

People say contribute as much as possible to a ROTH IRA while you are a resident because you are in a much lower bracket. What happens when you actually retire and start taking money out? Once you retire, aren't you in an even lower tax bracket than while you were a resident? So wouldn't it make more sense to do contribute PRE-TAX?

Just wondering.

It would be very unusual, although not impossible, for a retired doc to be in the same bracket he was in as a resident. I hope I do a better job saving than that. Take a resident making $50K. If he's single, he's barely into the 25% bracket. If he's married, he's in the 15% tax bracket.

Assuming he ends up with Social Security of $30K a year or so in today's dollars, for him to still be in the same bracket would suggest he retired with a portfolio of well under a million, perhaps only half that. That's pretty pathetic after 30 years of making $200-400K a year. Seems unlikely for someone already saving for retirement as a resident.

At any rate, even if going Roth is the wrong move in residency, it's unlikely to be wrong by much.

 

[mk04447]

Does anyone who commented here have any idea what they are talking about? LOL.

 

[SClENCE]

You have to figure out how much you need to save in your 401k plus factor in your social security income in order to calculate your yearly income and therefore tax bracket in retirement. Not to mention that tax rates change. So the bottom line is that it's pretty much impossible to figure out exactly how much to have in a 401k before a Roth option becomes "better" but if at some point you believe that your 401k will become large enough to project you into a similar tax bracket then now is the time to contribute to the Roth because of the tax advantage with your lower income. Roth IRA/401k are great options to have have and add "tax diversification" but for most people with high incomes they should probably not be the majority of your retirement in my opinion.

 

[Merely]

Does anyone who commented here have any idea what they are talking about? LOL.

Considering whitecoatinvestor commented and he is a person who has written books on the subject as well as has formal education in the matter, I'm going to answer yes to your question.

 

[mk04447]

Considering whitecoatinvestor commented and he is a person who has written books on the subject as well as has formal education in the matter, I'm going to answer yes to your question.

That's funny. Your tax bracket is irrelevant to ROTH investments. In residency you probably won't have the financial resources to maximize contributions and your ultimate income is likely to reduce your participation. Regardless, since ROTH products are purchased in post-tax dollars, the OP should have asked... depending on my eventual specialty, what instruments can I invest in to minimize taxation and/or increase participation. In which case, conventional IRAs and your employers 401k programs are better instruments.

But... the posed question can be answered incredibly simply. Investing early and often is always the best retirement advice. No need to get hyper complicated here. So, in residency you won't have access to 401k programs which leaves you IRA products. I suggest ROTH products over conventional during those years since you aren't likely to impact your AGI significantly enough to matter, might as well keep the free money long term. As for after you're board certified, first, first, first, maximize your employers match in the 401k.

 

[Plastikos]

It can be answered simpler, in that if the choice to use a ROTH is available take it as tax free money is hard to come by any time. Why would a resident not have access to 401k programs? Makes no sense, it would be rare to not have access to such a program today, and this is what will limit ones ROTH contributions as this would get used first for most people due to the automatic nature of it.

As a resident you should have enough money to contribute to a roth/401/etc.. and it should be easy to do so without paying much taxes at all. Most residents should be able to get their taxable income down to where they dont pay much at all (thereby increasing the ROTHs value) or get a refund even.

 

[mk04447]

It can be answered simpler, in that if the choice to use a ROTH is available take it as tax free money is hard to come by any time. Why would a resident not have access to 401k programs? Makes no sense, it would be rare to not have access to such a program today, and this is what will limit ones ROTH contributions as this would get used first for most people due to the automatic nature of it.

As a resident you should have enough money to contribute to a roth/401/etc.. and it should be easy to do so without paying much taxes at all. Most residents should be able to get their taxable income down to where they dont pay much at all (thereby increasing the ROTHs value) or get a refund even.

Most residency programs offer a 403b which is similar to a 401k, but there are important differences.

 

[Plastikos]

Most of the important differences are for the institution not the investor, and that doesnt matter too much since you can only do whats offered and after residency you can roll it into the plan that best fits your long term goals. You have to take what you can get, but after residency you can take control and free yourself from these issues. If you go employed you will face the same issues of course at the new institution, but this is an issue for all workers.

Like healthcare, people would be better served if retirement wasnt tied to the place of employment (as far as options, types, etc...)...but the reality is a lot of people would not ever save a dime otherwise. We need some serious financial education from an early age in the US.

 

[68PGunner]

Honestly, it depends on my current income and my current tax bracket which will calculate my opportunity cost. Here's how I look at things:

1) If you are paying less than 10% fed tax rate, it's a no brainer to elect the Roth option.
2) if you are paying more than 10% but less than 20% fed tax rate, it depends on your current financial situation and current needs. In this bracket, I find the loss of financial flexibility to minimal tax benefit neutral.
3) If you paying more than 25% fed tax rate, you should elect the traditional ira bc any tax saving for the curreng yr is your investment return. Currently . I doubt that you can get a 25%+ return on any investment vehicle.

 

[ChiDO]

If your residency offers a match for your 403b, then contribute to that until the match then do Roth IRA. Unfortunately, residents don't "qualify" for 403b match at my hospital...lame..

 

[Mman]

If your residency offers a match for your 403b, then contribute to that until the match then do Roth IRA. Unfortunately, residents don't "qualify" for 403b match at my hospital...lame..

At many residencies that offer a match, you don't get vested unless you stay on as faculty for a few years. In my 4 year residency it was a 7 year vesting that was barely anything for the first 4 years.

 

[Stroganoff]

At many residencies that offer a match, you don't get vested unless you stay on as faculty for a few years. In my 4 year residency it was a 7 year vesting that was barely anything for the first 4 years.

Vesting schedules are annoying. A hot trend in the private sector is immediate 100% vesting of employer match. Hope it catches on.

 

[bc65]

Your money would go in at 25% now if you're single. I anticipate that my money will be coming out in the marginal 28% bracket, married. So, there would be a small benefit there.

Also, the Roth grows tax free, so while I paid tax on the money I put in, I won't pay tax on the growth. The money you put in as a resident will have 30 years to grow before you retire, and 4o years before you have to take RMDs at age 70 1/2. By then, the money you put in as a resident will have multiplied to many times what you put in as a resident , but all of the growth will be tax free. Plus, you get flexibility because that money is not subject to Required Mandatory Distributions (RMD) withdrawals when you turn 70 1/2. It can be inherited by heirs income tax free ( but not estate tax free).

For most retired physicians, you will want to have both traditional and Roth IRAs. As a resident, you will be in a 25% bracket if single, so you pay the tax, and put the money in a Roth. You would benefit from contributing to a Roth for any bracket below your marginal tax rate, and it would be a wash for the same bracket. For example, my top bracket while working was 35%, and that money went into a traditional IRA. When I take it out, some of that money that I didn't pay 35% tax on, will be coming out of my IRA and filling up the lower tax brackets, so some of that money will pay 15% ( social security will fill the 10% bracket), some will pay 25%, and some 28%. So, it went in at a 35% savings, but now is being taxed at a lower rate.

Meanwhile, if I had no Roth, but more money in my traditional IRA, I would be forced to take out more money ( due to mandatory required minimum distributions RMD) and thus pay more at a higher bracket, and I might even hit the 35% bracket. However, by having money in the Roth, I decrease my RMDs, plus, if I need more money than the RMD requires, I can take it out from the Roth tax free, instead of taking it out of the traditional IRA at a higher tax rate.

 

[ferning]

IBR payments are based off AGI, so maxing a traditional IRA rather than roth may make more sense now. Its saving me at least $50 a month plus the income tax. Save on taxes, money and securities are going to turn to garbage. Take a guaranteed interest rate or tax free municipal bonds instead.

You can take money out of a traditional IRA to for <60 days and for certain expenses, mortgage downpayment, prevent u from being foreclosed on or evicted, dependent higher education and excessive medical expenses. You avoid the 10% penalty and then pay the same tax you would had u done a ROTH

when u retire and live off IRA for income, some of the tax is income and some is capital gains.

 

[Plastikos]

when u retire and live off IRA for income, some of the tax is income and some is capital gains.

What IRA are you referring to here? For a standard Roth, if taken after 59.5/5 years (or meet other conditions) withdrawals are tax free. For converted Roths if theyve been there for 5 years they are also tax free, and they dont count against your AGI.

A traditional IRA is simply taxed as income.