If there's not, well, you got to think, is there some other way I can diversify it? If an investor has 10 years or more until they plan to withdraw funds, they may want to consider converting to a Roth IRA. Yes, you could do that. So, we took out 201, 202, 203, 204 and put them into a PDF. Reason I point this out is when I was first doing the calculations on this I made the mistake of comparing the marginal savings rate on deferral to the marginal rate on withdrawal and assumed if I saved 37% going in and paid that marginal rate in retirement then I was net neutral, but in fact the effective tax rate on withdrawal is lower. Yay me! Now I'd have to look up Michigan and make sure there's not an inheritance tax there. Once I got our 401(k) money over to Fidelity, I was disappointed to discover that I couldn't buy the 0% ER Index Funds after all. As these new asset classes come into being, you have to look at each one and say, “Does that have a place in my portfolio?” And really watch yourself, because what often happens is people get this fear of missing out and they start performance chasing. Lots of people are super interested in buying a home either when they get into residency or right when they come out of residency, often for a place they're only going to be in for two to four years. Not a big deal. Dr. Jim Dahle: If you would like to be the White Coat Investor Champion for your FIRST YEAR class, take charge of this book distribution, and get some free swag, you can sign up below. If you want to hedge your bets and put 5% of your portfolio into oil, gold, or Bitcoin, it's not crazy to do. Do you have any advice for me on advising her what to do? Now I am glad I procrastinated. Dr. Jim Dahle: Sorry. Dr. Jim Dahle: It's pretty easy to put it in their boxes or pass it out to them at class or whatever. Our most recent one came in from Jrober, who says “Jim Dahle has made me a money genius. If/when my wife (hopefully soon ) gets pregnant, would there be any financial logic in having her take off to enjoy being a new mother longer than the 6 weeks allowed by our employer? $32K tax-deferred employer contribution into my partnership 401(k)/PSP If you think your income might be anywhere near the income cutoff for a contribution, which is $137,000 if you're single and $193,000 if you're married, filing jointly, don't go directly into a Roth IRA. But let's talk about the backdoor Roth IRA for a minute. Good stuff, but how do you get around the ‘overall’ contribution limit?, e.g. If you follow the directions, you can still report it okay on your tax forms. We funded it adequately and stayed the course with it. A SEP-IRA does not. I want it to have less than a hundred percent correlation with something else in my portfolio. Straighten out your financial life today! Contracts and that sort of thing. That might involve paying some taxes. Below is a series of tasks to complete that will set you on a course for Financial Independence. What I did, work. But if you have that and if you're in that $600,000 IRA situation, it's pretty hard to fix. Let's get some of your questions. If you forget to do the conversion, you might end up with some huge gain. It's by far the best-looking book I've ever published. Maybe this is the event that triggers her to finally get a plan in place. You can also roll over more than the yearly contribution limit into a Roth IRA if the traditional IRA has more than $6000. How are you able to do Mega Backdoor Roth? These eligible designated beneficiaries may take their distributions over the beneficiary’s life expectancy. So, on one end of the spectrum, you've got equities, bonds and broadly diversified index funds. They had to go to either Schwab or Fidelity. Dr. Jim Dahle: Dr. Jim Dahle: And of course, you don't come out ahead financially doing that. This is a great question. And hopefully you view them more as a teacher than as someone who's just doing it for you. If you have not done your Roth IRA contribution yet this year, let this episode be the motivation to get it done. Dr. Jim Dahle: Go in there and ask them. Dr. Jim Dahle: Backdoor Roth IRAs are a frequently-discussed topic on physician blogs and social media sites. My thinking was that I was already receiving subsidized SE tax in the W-2 and save on the California taxes. So much for keeping it simple. Left unsaid (unless I missed it) is the point that a reduction in social security taxes may result in a reduction in social security payouts. There are a number of advantages for the very wealthy to having a larger portion of their portfolio in Roth accounts: Despite those advantages, it's still the right move for most docs to do tax-deferred contributions because of that arbitrage between tax rates. He’s not a licensed accountant, attorney or financial advisor. To understand how it works, let’s first take a quick look at traditional and Roth IRA rules. While this is perfectly acceptable, it has some added steps. Interesting post though and I appreciate you sharing your insights with us. I already had accounts at both (partnership 401(k) at Schwab and HSA/Credit Cards at Fidelity), but decided to go Fidelity because I thought I might just use the 0% ER index funds there. You may have someone who wants to invest money and says, “Shoot, I have money I'm borrowing at 2% or 3%. It allows you to circumvent the Roth income restrictions and contribute to the retirement vehicle even if you’re earning more than $135,000 a year. Definitely applicable to me and something else to think about. And when you file the tax forms, that's important because you each have your own individual form, 8606 on your taxes that reports this. Neither the 403(b) or the 457(b) have Roth options. Dr. Jim Dahle: If you have student loans, SoFi practically invented student loan refinancing in 2011 and right now they have the lowest starting fixed interest rates they’ve had in years, which could help you save thousands of dollars on your student loans. Dr. Jim Dahle: Because as it is, it's almost twice as thick as the original White Coat Investor book. No need to ask the same question multiple times if you’re looking for my answer, I see all of the comments. Thanks So, there are all kinds of things that you can do with that hundred thousand dollars, it's almost surely tax-free to you. Maybe I am overthinking it…..That $56K is taxable money, so eventually when you do your tax return, the $56K gets lumped in with the rest of your taxable income, from which you determine “taxes due.” So I guess it doesn’t matter whether the money to cover those taxes was included in her W-2 income or instead came from one of your other buckets of income……is that right? One point I think might be good to clarify is that savings of every dollar in a tax deferred 401k is at the marginal rate, but withdrawals in retirement will fill the lower tax brackets first. Overall, the total salary paid by the company will be similar so the 199A deduction will be similar. Ideally, everything is completely uncorrelated, but that's not always the case. They're essentially choosing to consume a little bit more housing than they otherwise might need to, and thus choose to buy rather than rent. Let's take a question off the Speak Pipe. In this episode, we discuss what a backdoor Roth IRA is, steps for successfully contributing to a backdoor Roth IRA, and how to fix errors that occur in each step. I'm not sophisticated enough. No, you could put $56K into your i401(k) if you had enough income in the business t o justify it. This is Nicole from Michigan. In this episode we discuss how to fix all those errors, so you can easily make backdoor Roth IRA contributions every January. That's sofi.com/whitecoatinvestor. PGY4 trying to get finances in order finally and looking to open a new Roth IRA and max it out at $6000 for the 2020 tax year. Good luck with this moving forward! It is important to realize it's not just one thing. Not every time. Dr. Jim Dahle: Make sure you fill out the tax forms correctly. Some families are agreeable to stop and to delete the video recording, but other family members are not. But more importantly, consider doing it all ($56k) as after-tax for the mega-backdoor roth. All the usual caveats. With Traditional or Roth accounts, you pay taxes only once (#1 for Roth and #3 for traditional in the example above), so you should choose the account with the lower tax rate. But I was impressed with how much better the service was from both companies than what I've come to expect from Vanguard. But if you do it right away, especially during the same calendar year, a lot of times they'll go, “Oh, no problem. When it comes down to the pro rata rule, that'll be important. Nope. You want a good financial planner. That's not the case for Katie whose only job is with WCI. It seems to me that some of the financial decisions that we have to make in very different areas have similar math, especially for things like finding the break-even point. Awesome post! However, that's audio is where there's more laws and that's where it really comes in these one-party consent states and two-party consent states. And so that is just their preference. Go through the backdoor. Step 3: Report the transaction with IRS Form 8606. The careful reader will notice a few other changes in our retirement account line-up for 2019. This sort of thing comes up a lot in discussions of paying off debt versus investing, for example. However, that assumes that you stayed invested and continued to add new money to those accounts. But I would encourage you to give it a waiting period and make sure that you can invest in it in a diversified, relatively low-cost way, in a reasonably liquid way, in order to do those sorts of investments. Again, it's personal and finance. Dr. Jim Dahle: Speaking of the new book, I have a new book out. So maybe they won't be flexible at all, but at least you're learning your lesson for next year. But just looking at the tax-protected accounts, we've gone from sheltering $163K to sheltering $199.5K. Is $750 worth it? Two main steps, right? That Roth IRA can continue to build up untouched……. The backdoor Roth IRA contribution is a strategy and not a product or a type of IRA contribution. For instance, if you expect your income level to be lower in a particular year but increase again in later years, you can initiate a Roth conversion to capitalize on the lower income tax year and then let that money grow tax-free in your Roth IRA account. You can use it for a house down payment. The increased benefit over a low wage earner could be substantial for a long term high income professional since “best 35” years of income are taken for the calculation. PGY4 trying to get finances in order finally and looking to open a new Roth IRA and max it out at $6000 for the 2020 tax year. And so, all the rules about contributions apply to the first step and all the rules about conversions apply to the second step. I took it from the total international stock allocation, carved it out of that and put it into this small international index fund. Surely, I can out invest that.” The math would agree with you that if you take on a reasonable amount of extra risk, maybe you're likely to beat that return. In my case I have military W-2 in an income tax-free state with both W-2 and 1099 California earned income (urgent care as a GMO). “I'm a home care physical therapist in California. Let me know if you find someone specializing in combating cheapness to interview. You basically just end up being prorated and you end up paying a bunch of taxes early, and you have to keep track of that basis for the next 20 or 30 years until you pull the money out. … Dr. Jim Dahle: California, I believe is just a one-party consent state. And then of course, this book published in 2021, The White Coat Investor’s Guide for Students it's aimed at students, but honestly the financial literacy section probably makes it worth buying for anybody. If there is a great index fund out there for this asset class that makes it really easy to diversify that particular asset class, use that. ($132,900-$64,00) * 12.4% = $8,544. It leaves me to E-trade and Fidelity. If you're not interested in learning how to do this stuff yourself, then it's time to go get good advice. Dr. Jim Dahle: Remember the second thing you're supposed to do is to leave the money in cash. Welcome WCI Readers! Now you will have $15k/year for backdoor Roth and $5k for ESPP continuously. Notify me of followup comments via e-mail. You get into a pandemic. You're doing a great job saving. That would be not reasonable. This allows them to get a tax deduction now, enjoy tax-protected and asset-protected growth, and most importantly, score some extra money from the arbitrage available between their high marginal tax rate now and their usually lower tax rates later. See SoFi for more information. Within minutes I had the head of the company, Mark Nolan JD, on the phone answering my questions. But the idea of more Roth money certainly is appealing, just hard to predict 5 years from now both good and bad. As part of the transaction WCI will provide the licensing, legal and regulatory framework, as well as day-to-day in-country staffing. Well, $56K plus enough to cover her payroll taxes.”. I thought inherited IRAs from spouses are not subject to the new 10 year rule. The Bogleheads® emphasize starting early, living below one's means, regular saving, broad diversification, simplicity, and sticking to one's investment plan regardless of market conditions. So if you thought you were getting a 32% deduction on that $25k pre-tax employer contribution, you’re only getting a 25.6% deduction. You've got this and we can help. We are going to give a copy of this book to every first year MD student, DO student and dental student in the United States. So basically a hundred thousand dollars for most people comes to you totally tax-free. Rearranging our financial lives in order to maximize it is well worth our time and effort. I designed it to be short, it's only 161 pages so that you could get through it. Dr. Jim Dahle: Dr. Jim Dahle: I don't think there is. On the other end of the spectrum, you've got Bitcoin and Tulips. Dr. Jim Dahle: The second book came out in 2018. I suspect it is not worth it, but I am curious nonetheless. Now, the bigger the system, the less likely they are to be flexible. Or it's an interest-bearing instrument. Dr. Jim Dahle: Our partnership's new 401(k)/PSP actually allows employee contributions now, so I will just do that. What you're left with in the end is just like you contributed directly to a Roth IRA. But it's easier to just leave your money in cash while it's in the traditional IRA. It's pretty obvious to see the advantages of these changes for us. Thanks for securing us with a discount rate . Don't put 50% of your portfolio into it. An eligible designated beneficiary includes a surviving spouse, a disabled individual, a chronically ill individual, a minor child, or an individual who is not more than 10 years younger than the account owner. It can be amended. Speaker: I have all the money I'm ever going to need. And this is one of the rules that has to do with Roth conversions. Roth is great for most military docs. In 2010, Congress changed the rules and allowed high earners to do Roth conversions. And hopefully we'll soon have these available for people to purchase along with a bunch of other cool stuff in a WCI swag store that we're going to have. You see, mysolo401k.net isn't going to function as the custodian of the funds. Not sure what else a blog post would say other than give you a list of people you can call to help you with it. I have been harassed about it and I felt violated. There just isn't much that you can do about it. These contributions can be immediately converted to a Roth account. Again, you need to run the numbers for your own situation, I just think it a rare case where you want to pay more employment tax to get increased down-the-road social security benefit. This will be straight forward for you, because you will already have a Roth IRA by this point. Of course, you don't come out ahead financially doing that. Step five is taking care of that pro rata issue. I think you’d end up paying so much more in taxes that it wouldn’t work out as well as you might think. What does it take to get a constitutional amendment? They don't have to let you do it, but it's not up to IRS rulings. And so, hopefully we can see the light at the end of the tunnel. You will have to perform a Backdoor Roth IRA. This makes the Roth IRA more flexible during your lifetime and a better vehicle to pass on wealth to heirs. So, what criteria should you use there? But Michigan doesn't have an inheritance or an estate tax according to Google. So are we just going to invest in taxable? Also, remember that you need one from each spouse if you’re married. One cool thing we're doing with this book is we are literally giving away over a million dollars of it this spring. Are we sexist? I think you should read Mike Piper’s book on Social Security or at least Google “Social Security Break Points”. So why did I get the raise instead of her? And then of course the last step is to make sure you fill out the tax forms correctly. This is the one aspect of the SECURE Act that made it a little less painful (IMO), as at least the combined IRAs of both spouses get stretched over the lifetime of the one that lives longest. It seems to me the highly compensated doctor maxing out the after taxed option would make the 401k fail testing? Dr. Jim Dahle: Maybe some of us will be out of that tunnel soon and we can wrap up this pandemic in a few months, it’s my hope. You can call it stupid tax, but just get the money invested is the way you fix it. Dr. Jim Dahle: I generally think it’s not a great idea to pick stocks, with or without The Motley Fool’s help. How does it feel knowing you’ll likely be in the 37% (eq) tax bracket in retirement knowing that there was no Roth TSP option during your active duty time? All right. The new one admittedly has a better design, but its structure has a nasty side effect for young super-savers. Dr. Jim Dahle: Definitely getting into the weeds for sure on this one but an excellent post when you take the time to go through it. I'm sorry to hear your loss. You will notice Katie's employee contribution is also tax-deferred. Step two. Remember I have that other job down at the hospital. A solo-401K still allows you to participate in a backdoor Roth IRA. I have read this post over 3 times. It really depends on your income, what your income is going to be in 10 years, how big the account is, and how much has to come out. Less and less relevant for me each year. A stock mutual fund, a bond mutual fund, whatever. I turn 44 in 2019, so it'll still be a couple of years before this change works out better for me. I’m assuming this wouldn’t affect or be an option for those of us who can’t have more than one 401k currently due to a “controlled group” situation. Hard to know for sure, but yes, I think the latter. The customer service isn't awesome, they don't allow IRA rollovers, and until recently, they didn't let you buy the lower cost admiral shares funds. The good news is I already have a decent amount of Roth money due to annual contributions during residency (+ spousal contributions) and rolled over 401k money to Roth in the half year after graduating residency. The house just doesn't appreciate enough to make up for the pretty significant transaction cost of getting into and out of a house. However, minor children must still take remaining distributions within 10 years of reaching age 18. I searched the WCI forums and people are always just talking about Backdoor Roths. There's no tax duty to you in most states. Dr. Jim Dahle: Now, Roth IRAs are awesome because the earnings on that money is never taxed again. It’s not that complicated. Roth is better than taxable. Dr. Jim Dahle: The Backdoor Roth IRA is made possible by a tax loophole that gives high income earners the ability to take advantage of the tax-advantages offered through the Roth IRA. There were a lot of things that were not available, didn't exist in 2004, 2005. But if you have a 401(k) or 403(b) at work, they almost surely accept IRA rollovers. We generally don't put those into our portfolio. I thought it was going to be over and we weren't. 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