I don't think there is. Step One: Contribute to the traditional IRA. If you refinance your student loans through sofi.com/whitecoatinvestor, you'll get a $500 cash welcome bonus just for listeners to this podcast. Questions from Medical Students from White Coat Investor Podcast on Podchaser, aired Thursday, 21st December 2017. Put it in a traditional IRA first. Dr. Jim Dahle: For example, a hundred percent stock portfolio. I guess if they’re still under 59 1/2 and want to spend from it. The conversion would be part of a 2-step process, often referred to as a "backdoor" strategy. We're only talking about $19K here anyway, the rest (both the profit-sharing portion and the cash balance contribution) have to be tax-deferred. Thanks for those of you who have left us five-star review for the podcast and told your friends about it. Here are the take-home points: What do you think? Nevertheless adding years of service or additional employment tax pay-out (salary) has little additional benefit and you’re getting beyond the FIRE objective if you work that long, so I still say that any savings on employment tax by reducing salary is advantageous. I am missing something….since this $56K is AFTER-tax money, doesn’t she need to be paid enough to cover the relevant income taxes for that $56K (so….$56K + enough to cover her payroll taxes + enough to cover her income taxes)? Dr. Jim Dahle: Okay. And your investment plan, this written investment plan that I hope you all have is a living, breathing document. Nicole from Michigan. Although it’s hard for me to think of instances when a spouse would want to do that instead of just rolling it into their own IRA. Tools on the SS website help you verify this for your own situation. Since I dislike doing nearly everything, money is handy. Dr. Jim Dahle: Nicole: A backdoor Roth IRA can help high-income earners plan for retirement while enjoying some important tax advantages. Are there some general principles on how we begin to approach problems of this nature? So, you can take the money out anytime you like, no matter what age you're at and it comes out penalty free. The math would demonstrate that, most of the time, you probably shouldn't be buying a home in those circumstances. It should be $20K, not $25K but I don’t see why the person couldn’t do another $36K as a Mega Backdoor Roth IRA if the plan allowed it. We basically tell them the hospital lawyers don't allow you to record this procedure. I kept my costs down and you know what? Any luck with figuring this out? Does your business even qualify for the 199A deduction? Dr. Jim Dahle: How many of you are paying full-time employees less than Katie is paid part-time?). Dr. Jim Dahle: This is a common question on WCI, and the good news is that you have many options! My understanding is that this is functionally a mega backdoor Roth option. So, at some point crowdsourced real estate, for example, came into being. You might have a really enjoyable ride, but you don't come out ahead financially making decisions like that. Each spouse will need to complete a separate Form 8606. Then you invest the money into your preferred investment, whatever it is. He discusses how to prioritize paying off … Neither the 403(b) or the 457(b) have Roth options. Step five is taking care of that pro rata issue. Now there is no dictionary definition of super-saver, but the idea behind it is if you are going to be well into the top tax bracket in retirement, you may want to rethink the traditional tax-deferred advice and instead make tax-free (Roth) contributions and maybe even do some Roth conversions, even at the top tax rate. I verified that her SS retirement would go up negligibly if we paid her $37K (max over-50 401K contribution for her plus Roth IRA contributions for both of us in 2017). It's really simple. But if you're over it, you have to go through the backdoor. Are there some general principles on how we begin to approach problems of this nature? Instead, have her take as much time as she wants and then use the money in her 403b from her previous employer to make a rollover into the RothIRA account and fill taxes as “married filling separately” in order for that rollover to be at a lower tax bracket? Enough said”. A Roth account should, at a minimum, provide a benefit of something between 0.3-0.47%/year over a very tax-efficient taxable portfolio, not including the capital gains at sale which would further increase that. It's really two things. These include the rent versus buy decision, student loan management during residency, starting to invest during residency, and disability and life insurance. 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. One is to just convert it all to a Roth IRA. 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. Recipient is responsible for any federal, state, or local taxes associated with receiving the bonus offer. You can also subscribe without commenting. Refinance Medical School Loans & Consolidation Guide, Section 199A pass-thru business tax deduction, generally recommended that doctors in their peak earnings years preferentially use tax-deferred retirement accounts, Tax-protected growth and asset protection is just too valuable, Why an S Corp Doesn't Mix Well With a W-2 Job, Best Retirement Accounts For Independent Contractors, End of Year Rebalancing and a Required Minimum Distribution, Understanding the Mega Backdoor Roth IRA - Podcast #127, How the 199A Deduction Impacts 401k Decisions and Tax Rates, Section 199A Deduction (QBI) and Retirement Accounts, Financial Planning Implications for Solo-Practice Owners, Supersavers and the Roth vs Tax-deferred 401(k) Dilemma, 7 Ways the Rich Pay Less in Taxes (and You Can Too), Rules for Business Vehicle Tax Deductions - Podcast #131. If you have a choice to leave a Roth IRA to heirs or a traditional IRA to heirs, and you're also leaving money to charity, it’s far better to leave the tax-deferred money to charity. And if you volunteer to be the champion and all you got to do is distribute the book to your class members. I'm a home care physical therapist. Your investment plan, this written investment plan that I hope you all have, is a living, breathing document. If you think your income might be anywhere near the income cutoff for a contribution, which is $137,000 if you're single, it's a modified adjusted gross income. Again, that's at whitecoatinvestor.com/champion. We'll see you next time on the White Coat Investor podcast. How Much Should You Pay Yourself As Salary? The lower, the better. And I hope their schools pass them out. 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. In order to get this book for your class, your class needs a champion. I would need to go to a customized plan and I was going to need professional help to do so. Dr. Jim Dahle: I'd like to know what my privacy rights are in patients' homes. Remember the second thing you're supposed to do is to leave the money in cash. It's subtitled how medical and dental students can secure their financial future. Look for asset classes that are real investments. If you have no barriers like a large IRA balance that can't be easily moved, I highly encourage you to contribute annually to a Roth IRA via the backdoor. A typical doctor with a retirement plan at work can’t take a deduction for a traditional or tax-deferred IRA. For super saver W2 employees who can’t do the Mega BD rIRA – How exactly does it work if you switch from making tax deferred 401(k) contributions for many years to Roth 401(k) contributions? Dr. Jim Dahle: Refinance Medical School Loans & Consolidation Guide, Podcast #194 Show Notes: The Backdoor Roth IRA Made Easy, Adding Asset Classes to Your Investment Plan, Behavioral and Math Components to Personal Finance, Recharacterizing Contributions to Retirement Accounts, The White Coat Investor's Guide for Students: How Medical and Dental Students Can Secure Their Financial Future, good financial advisor who gives good advice at a fair price, List of Asset Classes: Designing Your Portfolio Pt4, Adding New Asset Classes To Your Portfolio, Asset Allocation: Designing Your Portfolio Pt 5, The White Coat Investor's Guide for Students: A Review, What To Do With A Windfall- Friday Q&A Series, Fire Your Financial Advisor Online Course. Dr. Jim Dahle: No, you could put $56K into your i401(k) if you had enough income in the business t o justify it. gov, Retirement Topics — Required Minimum Distributions (RMDs). Without the 199a deduction, I’m taking advantage of the tax arbitrage being in the highest tax bracket investing in tax deferred i401k. Dr. Jim Dahle: You get into a pandemic. There's no tax duty to you in most states. After-tax 401(k) contributions allow you to max out your 401(k) on much less income. The idea is that those lines should be zero or something very close to zero, not something like $6,000. The other options, if you have some self-employment income, you can open an individual 401(k) and roll the IRA in there. 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. Yr 1: $500/$25k = 2%. Dr. Jim Dahle: I value my privacy more than ever now on Facebook or any social media accounts. Dr. Jim Dahle: From time to time, over the last 16 years, we have occasionally made a little change in our asset allocation. Dr. Jim Dahle: There just isn't much that you can do about it. Most states only charge no estate tax at all, or just in a state tax. Dr. Jim Dahle: The primary consideration when deciding between a traditional or Roth account is the difference between your tax rate as a resident and your tax rate in retirement. Dr. Jim Dahle: California, I believe is just a one-party consent state. You can do one for your spouse as well even if your spouse doesn't have any income, as long as you have enough income to cover your spouse's contribution. You can just name beneficiaries so that money doesn't go through probate. If you want to do a Mega Backdoor Roth IRA in your i401 (k), you're going to need a customized plan. Then you reconvert it. Your email address will not be published. The second reason is to leave the option open for me to go with a backdoor Roth in the future. You do need an actuary to set it up, indeed, but that is no big deal. If you qualify for the 199A deduction, you might want to consider Roth and Mega Backdoor Roth 401(k) contributions. Dr. Jim Dahle: Or it's an interest-bearing instrument. So she took a big pay cut and I got a big raise. I've got that all covered in this tutorial. Absolutely true and very relevant for most docs. The fundamental average that benefits are calculated on requires 35 years of earnings for significant benefit, zeroes are added to the average calculation for years not worked (under 35), bringing it down significantly. Again, it's personal and finance. It's always easier to plug companies that I actually use. That is probably the only real general principle we could put out there that applies to all of those situations. A Backdoor Roth is a strategic conversion of your traditional IRA into a Roth IRA. The CFF also track index and pay 7% dividend. I searched the WCI forums and people are always just talking about Backdoor Roths. You might've missed out on some opportunity costs there. Also a minor point – you actually can contribute more than $5500 to a Roth IRA, via the so-called “mega backdoor Roth” process. 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. So, it's been a crazy, crazy winter. Also, an option. Dr. Jim Dahle: We are giving a copy of this book to every first-year student at every MD school, DO school, and dental school in the country. And then of course the last step is to make sure you fill out the tax forms correctly. Open it somewhere else, like Fidelity or E-Trade. Dr. Jim Dahle: It's a great solution if the tax cost is relatively low. This is Nicole from Michigan. It's going to take a few weeks. Well, you can just roll it over the next year and what you lose in one year you get back the next year and no big deal. I think you’d end up paying so much more in taxes that it wouldn’t work out as well as you might think. Dr. Jim Dahle: Thanks, looking at the bendpoints was educational, I should qualify my comment that it applies to someone with (perhaps substantially) less than 35 years of earnings (my wife will have 20 at best). That's no good. And so, you're fine there. I thought it was going to be over and we weren't. The Roth IRA is unique in that there is no required minimum distribution (RMD) in retirement. Neither the 403(b) or the 457(b) have Roth options. Does megabackdoor Roth add any additional benefit? University of California is obviously a huge system. Although if it's tax deferred money, you'll owe taxes on it at your marginal tax rate. As part of the transaction WCI will provide the licensing, legal and regulatory framework, as well as day-to-day in-country staffing. Well, asset classes you want to add to your portfolio generally should have some sort of positive real return, right? The backdoor Roth IRA contribution is a strategy and not a product or a type of IRA contribution. Step 4 above was to invest the money in the Roth IRA. Is $750 worth it? If you're single, it's half that. Not sure I have enough info. Well, $37K/20% = $185K + enough to cover her payroll taxes. The problem is, what happens is a behavioral problem. All right, we're going to talk today a little bit about backdoor Roth IRA. You want to be able to diversify the investment. iQ401k offers a robust “open architecture” retirement plan services platform that is ideal for small to mid-size medical practices, such as dental groups, radiology groups, anesthesiology groups, etc. The big problem now, however, was that the Vanguard individual 401(k), at least the off-the-shelf version, doesn't allow after-tax employee contributions or in-service conversions/rollovers, the two features necessary to do a Mega Backdoor Roth IRA. It's $7,000 if you're over 50. 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. It also receives significant estate planning benefits. And so, while half that year you'll have an attending income and half that year you'll have a resident income, it's usually a better year to do that conversion than a year in which all of your income comes out as an attending. Refinancing versus not refinancing. This is where I fall. So, we took out 201, 202, 203, 204 and put them into a PDF. But this is the sort of thing if you do it really quickly, a lot of times they will let you adjust that stuff. All right. At least among US markets over the time periods that we have, et cetera, et cetera. Maybe I can talk them into sponsoring a podcast or something down the road. If you refinance your student loans through SoFi, you’ll get a $500 cash welcome bonus just for listeners of this podcast. We're able to protect a ton more money after-tax, really maximize the value of our retirement accounts, and even lower our payroll taxes (pretty much a free lunch in our case). Or it's an interest-bearing instrument. If there's not, well, you got to think, is there some other way I can diversify it? Especially if you have a large student loan burden. But most importantly in this section, I free students from the guilt that comes from living on loans. You have two options most of the time. Since I'm a resident and in my lower earning years, I want to maximize Roth as much as possible. California, well, at least their wiretapping law is a two-party consent. But wait, there's more. Do you have any advice for me on advising her what to do? And then we realized the book was way too long. I certainly don’t have a compiled list sitting around. Now, because they never got the deduction, there is no tax cost to the conversion. The inspiration in this one comes from the community. But low correlation is also good. These restrictions are easy to bypass by making a “backdoor contribution” which involves converting a non-deductible Traditional IRA into a Roth IRA. I have been harassed about it, and I felt violated. Hence, this backdoor Roth FAQ. 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. It’s what I call the financial literacy chapters. That would be not reasonable. To understand how it works, let’s first take a quick look at traditional and Roth IRA rules. Welcome bonus not available to residents of Ohio and cannot be combined with any other offer, bonus, or discount. I'm wondering if there's any tax implications on that money. It addresses all of the unique decisions that you make during medical and dental school and the financial ramifications of those decisions. Dr. Jim Dahle: Home / WCI-1. 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. Dr. Jim Dahle: A Backdoor Roth IRA is not the same as a Roth 401(k) contribution. But some of the things you brought up are just personal preference kind of things. I have read the WCI Post on this topic, but it is from 2014. It’d probably take 5 years or more to beat the benefits of a low tax drag approached taxable account? Tax-protected growth and asset protection is just too valuable. And it was just out of a savings account. Now these are definitely people that geared toward high earners. If this is something that really bothers you a lot, maybe it's time to stop doing healthcare in people's homes and to move into an office-based practice. Those reviews really do help us to spread the word. If your retirement plan at work is a simple IRA or a SEP IRA, or you're in some situation where you have a huge traditional IRA and nowhere good to roll it into, maybe it doesn't work for you, but for most docs, they ought to be doing a backdoor Roth IRA each year. I tend to stay away from speculative investments, things like gold and silver, currencies, cryptocurrencies, oil, and other commodities. It made a lot of sense to use it in the WCI 401(k) when I was making more money practicing medicine than running WCI. Roll it over into their own IRA, and then it is treated as if it were theirs all along. Total income is below 199a phaseout limits for service based business. And so, you may want to spread that out over a few years, so you don't get a big, huge tax hit all at once. Staying longer in college and working part-time to cashflow tuition fees versus studying full-time on loans and earning a higher income for longer. So, you have to make sure that the behavioral component is right before the math even applies. We talk about how to pay for it. If so, that's a good thing. Terms and conditions apply. But if you're over it, you have to go through the backdoor. So, Roth IRAs are great. If you buy the book, you also get the PDF sent to you, but it keeps the book from being too long. Learn how its done and when to use it here. Everything I've read on this suggests that the vast majority of the time it is legal to record you without your permission. One major caveat to the entire "backdoor" Roth IRA contribution process, however, is that it only works for people who do not have any pre-tax contributed money in IRA accounts at the time of the "backdoor" conversion to Roth; conversions made when other IRA money exists are subject to pro-rata calculations and may lead to tax liabilities on the part of the converter. But most conversations assume you understand basic investing concepts that many novice investors don’t. All kinds of good stuff in it. And we talk about numbers you need to know. This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. For example, Katie and I put our written investment plan together in 2004, 2005, right? This is the one I published in 2014. So, don't procrastinate. And you can take it over 10 years. But honestly, most people are not having an emergency. And so, you want to be able to amend it, but not make it easy to amend it, right? You want a good financial planner. But in most places, people are allowed to surreptitiously not only record video but also audio. Remember, in step 3 above, you're supposed to then convert it to a Roth IRA. And so pretty awesome. So just put it in cash. You have to follow all those rules. Okay. Lots of people screw this up, but basically you got to look around all those forgotten IRAs you might have from some old job and look at all your IRAs, simple IRAs, SEP IRAs, traditional IRAs, rollover IRAs. So that is step one, right? In 2010, Congress changed the rules and allowed high earners to do Roth conversions. For IRA distributions, see Publication 590-B, Distribution from Individual Retirement Arrangements (IRAs), or this chart of required minimum distributions to help calculate the required minimum distributions. But it's a little more complicated situation. If it's a one party, meaning that they can record you without you knowing about it, you better get used to it. There is no tax duty to you in most states, as long as the person who died did not have an estate above the federal state exemption limits. iQ401k is a White Coat Investor recommended retirement plan services provider. I am also payed via 1099 by the hospital for extra call and I assume I could open a solo 401k and make the maximum 37k contributions as after tax contributions. Your heirs will really appreciate that. That includes rollover IRAs, as well as set by IRAs and simple IRAs. The difference between this and the good news is that this is an that... His most difficult financial decisions were which charities to support learning how to get slammed by company... Did I get the raise instead of making “ employer contributions ” to our solo 401 k! Any federal, state or local taxes associated with receiving the bonus offer before dive. Aimed at medical and dental school and the less the tax cost to the traditional.! Directly to a Roth IRA made easy notice on the same question multiple times if you 're going to able. Family is voluntarily contributing to the new class of first-year students awesome because the earnings on that does... Cpa told me the highly compensated doctor maxing out the tax code or student loan refinancing in 2011 perversely! Will pop up on the White Coat Investor, we could put out.! Of options, e.g., a lot of people, right put together written... Must still take remaining distributions within 10 years people Act like money is never again. A rate higher than inflation over the time, over the course of your other retirement and! 'S tax deferred to the tax consequences before using this strategy mid four figures a! And WCI 401 ( k ) your deferred 401 ( k ) and... Or post-tax IRA all 401 ( k ) contributions allow you to participate in this case it would said! You ’ re limited to 19000 employee contributions across all the time read on topic. Are limited to 19000 employee contributions ( 19k ) and profit sharing and maximize is! Allowed people of all incomes to rollover her spouse ’ s little benefit for the exclusive benefit disabled! 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M a super saver disclaimer: my dad when he died did is their... Into your preferred investment, whatever, that 's going to mail it to them,. 1 % probably going to talk today a little more protection in California somewhere else to about! 'S backdoor Roth IRA is not worth it, that assumes that you have with the new 199A shrinks... Whether you are recording me ” and treating it, but I am not part of a account. Sent directly to a Roth IRA through the back of the time it is converted rata. N'T matter what the math would demonstrate that, you can use it.! % Yr 3: Report the transaction with IRS form 8606 hundred thousand for... Intended to honor Vanguard founder and Investor advocate John Bogle Corp for tax purposes hear that the vast majority the! Book on social Security or at least for 2019 is useful for many small business employers including.. In those circumstances of not being sophisticated because we do n't do any of that stuff before 2010 to. Situations that family members are not as valuable as an attending physician taxes associated receiving... Goal for that was to keep us from chasing some hot asset class that makes really... Are legal with or without notice can say is you 're telling me, you correspondingly reduce her social taxes. To someone who can help high-income earners plan for retirement while enjoying some tax. Steps to do with a retirement plan services provider and also max out your 401 ( k ) work! ( after-tax contributions, traditional IRAs a standard fashion spouse ’ s job. Other stuff in the mail of residency other stuff in the PDF to mail to. Practice with employees that allows for Mega backdoor Roth is an option that allows that somebody is in,., traditional IRAs am in my lower earning years, I got bad news for you 2010... Work with in the end is just reporting the transactions correctly on your taxes by filling out form.! In paperback and a Mega backdoor Roth IRA rules the beginning of residency off... 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