What affect would that have on current, future, and total tax rates? The real risk to your portfoliothe long term failure to meet your future consumption needs, comes from just four sourcesinflationdepressionconfiscationand devastation. I may take advantage of the DBP in the future if our income/lifestyle allows us. Does it make sense as I will hopefully never touch the principal. How to Do a Backdoor Roth IRA - The White Coat Investor If you only get a few thousand dollars as a match, then you need more pre-tax dollars. If I have a million in my taxable but it has tripled in appreciation, will the example fairly represent the tax burden as the taxable holdings are liquidated? The post today is about The RMD Problem, which is generally overblown. Individual 401(k) for second job with unrelated employer: $53K Then I will just pay the taxes, pay the increased medicare premiums, and increased part D. It is really hard to avoid this problem. Thats a BIG assumption, as most beneficiaries inheriting from their parents who are 75+, are themselves in their 50-60s and at their peak earning incomes. One other consideration is that in situations where you may regret not having done the Roth are ones in which you will be okay anyway (effectively having too much money in tax-deferred accounts, whereas ones in which you might regret contributing to a Roth are ones where things didnt go well (unexpected early end to working career due to disability, prolonged down market). 4. I see the SECURE act as definitely passing. Agree. From a pure tax differential (working tax paid (taxable) vs spending tax (IRA) the seemingly large differential after the working years and before RMDs seems to favor spending down the IRA. But I question the benefit over otherwise contributing money to a taxable account and buying muni bonds. Im a freelancer and intend to open an individual 401(k) this year. Which is contingent upon whether or not we buy a house in this HCOL area. Since youre on a W-2, thats probably only $18K a year plus some measly match. You used to be able to convert extra money and later undo or recharacterize the conversion if you put too much in, but this has been disallowed making partial Roth conversions a more arduous yearly math puzzle. Yes you are right that one would not spend down the brokerage account to zero. As an aside, QCDs also allow you to reduce the RMD problem if you plan on doing charitable contributions. what about starting to put money in Roth 401k instead? If youre age 70 or older and still working, you may be able to delay taking RMDs from the plan sponsored by the company for which youre still working. Instead of your kids having to take income from your tax-deferred accountslikely at their peak earning yearsgive them tax-free Roth money to enjoy. I dont contribute to it currently for several reasons: 1) I think its overkill given our current saving rate / trajectory Agree with your strategy as laid out. We max 401k, FSA, HSA (for stealth), Roth IRA, I-bonds and some taxable each year. Can you explain the math behind your first spreadsheet? Precisely. The brokerage allowed me to free up cash to live on while Roth converting. This is a very timely post. My wife and I contribute fully to backdoor roth IRA and we max out HSA, as well. That would probably have a rather significant effect on my 401(k) as well and seems at least as likely as all that happening. What do you think? But then the tricky question is If you could potentially deviate money from your income as an employee to fund a retirement plan through your business. You are right about in most of the states that only 50% of the capital-gains are considered for stepped-up cost-basis upon spouses death., except in not-so-many community property states (https://www.kiplinger.com/article/investing/T065-C001-S003-selling-jointly-owned-stock-death-of-a-spouse.html). Spend after-tax money, that is in fact very similar to spending down a Roth, that does not need to be spent down at all. Many physicians are thus excluded from making either deductible IRA contributions or direct Roth IRA contributions. Required Minimum Distributions (RMDs) start in the year you turn 70 and a half years old. Did you use any inflation for the tax brackets and standard deduction in your spreadsheet or assume they are going to be the same every year of the 19 years shown? Heck, 25% of docs in their 60s arent millionaires and another 25% has less than $2M. This results in a large addition to their tax-free (Roth) account balance and rapid depletion of their taxable account, which are both funding retirement and Roth conversions. Saving 4% on tax rates but paying the taxes early may not be that advantageous. However, it would be nice to control when you take income out of your deferred accounts, and retirement can be a window in time to take control of your future distributions rather than having the IRS force them out via RMDs. ), helping to boost my overall Roth amount.. Frankly I just dont understand why someone in a high tax bracket would ever want to contribute to a Roth other than a back door Roth. They go to heirs with a step-up in basis. Ive played those games before too. I dont see any way to get to $130k of tax unless you are considering the income is self-employment or there is a large State tax. I know the buckets retirement strategy discusses this some, and although I wouldnt plan to that indefinitely, maybe doing it for a few years with some of a cash position while I do Roth conversions would be acceptable. Very impressive post. Delayed gratification is tough but we see the light at the end of the tunnel! Im in the 35% tax bracket currently (probably wont ever be higher while Im working, until tax laws change) so not sure that Roth 403 is the right choice, but one could certainly make an argument that tax rates are likely to go higher, so even though I may be in one of the higher tax brackets now theres no guarantee it wont be higher in retirement even with lower income. Tax bracket arbitrage makes a lot of sense (defer income when we are in high brackets until later when hopefully we are in lower tax brackets) but there are some important considerations. This plan limited my end tax burden by not having a huge TIRA or 401K and allowed me to convert at the 250K level avoiding the extra surcharges and tax bumps associated with converting to the top of the 24%, again a tax optimization. Still not clear that this works for that many people. #1 Roth IRA investment questions - beginner 09-03-2022, 09:01 AM Hi everyone, I recently joined the WCI community and am planning on opening a roth IRA this weekend. The issue with the multiple recharacterization strategy is that it is a fairly large hassle for a fairly small benefit. But what to do with the $18K of your $28K that you can put into Roth each year, much harder decision. Also seems like you inflated the working year expenses but not the income?? The Tax Planning Window and Partial Roth - White Coat Investor Our savings so far: Mine: Roth IRA $27k Once any of these events happens, ill re-evaluate our tax situation and likely start contributing the 17.5k to the Roth. I max out a 403(b) and 457 as a W-2 employee with low limits, and then max out Roth IRA for me and spouse, HSA, and then everything else goes into taxable. Ive had two emails this week from docs who truly do have an RMD problem- $2-5M in tax-deferred accounts in their 40s who plan to work another couple of decades. Maybe a future post could tackle this, or maybe you know of a definitive treatment? Currently its Roth, mainly because the match is traditional, and my profit sharing contributing for my solo 401K is traditional; I do a backdoor Roth IRA too, or course. But yes, I agree that doing Roth conversions when feasible is a very good strategy. For example, an investor with a 40% marginal tax rate could either put $17.5K into a Roth 401(k), or put $17 . 33 years old with a relatively small portfolio (presumably) and in your peak earnings years? You have to watch your long term capital gains in your brokerage account when you sell assets. Ive gone back and forth on whether to do a traditional vs Roth in my TSP. I have to get rid of tIRAs and maybe my old jobs ROTH401k, but am reluctant to get a solo 401k which is less protected I gather. I read the finance buff articles and now wonder if I shouldnt split. The big picture is that doctors need to be maxing out all options. I would count that of course, as it is really part of your salary. This is commonly known as the still working exception. Second, my household income was $40K, not $135K. My other savings go into taxable accounts and non-deductible IRAs (e.g. Also, note the expected tax payments during the working years and then again when RMDs kick in. Bumping up the RMD age to 72 has also passed thru half of the Congress, which is also a good thing to help with this problem. This window between accumulation and distributionbetween income and RMDsmight be the time to consider Capital Gain Harvesting, but in this example, lets look at the implications of partial Roth conversions. I currently max out my 403B and will be maxing out my 457B plan also. A taxable account, while inferior to a Roth or tax-deferred account, isnt THAT bad. In 1.5 years, our income should increase to $350,000. The first is a conversion to a higher tax rate on 401k withdrawals over a certain amount. Im 100% TIRA now, trying to figure out smartest way to start shifting that. If you are interested, here is part II, where I examine using the taxable account as a Roth substitute: https://seekingalpha.com/article/4265876-taxable-account-roth-substitute. Your question implies that youre looking for something other than a taxable account, and I assume that where your extra savings goes now. Also available on Audible! Since Uncle Sam probably owns a quarter or more of the pre-tax employer contribution, these amounts are roughly equivalent, ~50% in each type of account. How about ISIS sets off Iranian nuclear bombs in Washington, NYC, LA, and SF? Yes, Not so much as hold cash for decades, but maybe as I get close to retirement (last 2-4 years) divert more of my investments towards cash or MMF type funds. I would think the best way to know when to contribute to roth 401k would be to see at what point the loss of the pre-tax contributions would bump you into a higher bracket. Would be nice. Many WCI and POF followers who like you mention are exceptional savers and spend their money prudently will find themselves in the position of being in high tax brackets shortly after a retirement due to RMD. I have built a spreadsheet that models cashflows, including federal taxes, for the next 50+ years based on the current 2017 tax reforms but would like to speak with tax specialist/strategist to run different scenarios. You can take that concept for your situation and try to fill the 15% (or 25%, 28%, etc.) Its only $18k one way or the other in the end. You can have several 401k plans right- one SD, VG, Fido? Read recently elsewhere that jointly held account inherited by surviving spouse receives step up cost basis on half of each holding. Only an issue for a rare doc in most states. If you cant max out both your wifes and your Roth IRA each year on your current salary, then you are only compounding the problem by using credit cards to do so (even at 0-2% interest). Too late for 2015 tax yr extension to start a solo401, sep or any shelter? My wife and I are both independent contractors in CA. only half gets a step up cost basis. I would 100% Roth 401(k) contributions, personal Roth IRA, spousal Roth IRA, and anything I was allowed to convert to Roth IRA, I would do so. Combining that with $11K ($12K in 2015) in personal and spousal backdoor Roth IRAs, you get a total of $28.5K. They have this terrible image of a taxable account and so end up in some crappy life insurance policy or annuity. My Mega Roth Conversion: A $212,000 Mistake? But any gains after your death are fully taxable, unlike a stretch Roth IRA. So, you have to ask yourself, which makes more sense in your 60s-70s: 1. I am looking to take advantage of the tax planning window to do Roth conversions. 2022 Backdoor Roth - The White Coat Investor Forum I now have no doubt Mary will Rothifiy it all and not look back. Probably too complicated though since Im having a hard time even explaining it. As I've written before, you don't want to have too large of a tax-deferred account, at least if a larger Roth account is an option. https://www.whitecoatinvestor.com/multiple-401k-rules/. I had forgotten about RMDs when I was anticipating my withdrawals and tax rates in retirement. Youll have your mortgage paid off by residency graduation? Sure, the recharacterization strategy works, but I cant get people through the 8606 for a backdoor Roth effectively. He is 71. And yes the goal is to pay the least in taxes over your whole lifetime. To answer your question Im all about converting to Roth, some of that is lifestyle choice. Is that your feeling too? #1 Mega Backdoor Roth 03-31-2022, 11:43 AM We currently max 401k + employer match for me HSA Backdoor Roth for my wife and myself 403b for my wife - no employer match. If you're shopping for a home mortgage, know the latest financing options for doctors, dentists, and other healthcare professionals. One reason is because it will be the lowest income I have most likely until things start to wind down. Click to learn more! =FV (8%,45,0,-3000) = $95,761. Look up your states rules. Sure, thats what the article is about. Thoughts? Mega Backdoor Roth - The White Coat Investor Forum - Investing You take the previous years December 31st IRA balance (assuming you roll over all of your deferred accounts into one IRA) and divide it by a denominator that can be found on the IRS Uniform Life Table. I never really thought much about this, but you DO get the step-up in basis for at least the deceased spouses portion and in some states (community property states), the entire thing! If he contributed $3,000 to a Roth IRA and it grew at 8%/year for 45 years, it would be worth. I have heard people mention that current 24% tax bracket is where they would max out as and try to have conversions and income fall under that amount. -maxing out my profit sharing plan Step 4 - Invest in your preferred investment (typically a stock, bond, or balanced index mutual fund. Seriously, predicting what Congress will do in the future is at least as difficult as predicting future interest rates, future currency rates, and future stock market movement. -maxing out our HSA I know you want to hear WCIs advice, but I would recommend maxing out your Roth IRA while youre in a relatively low tax bracket, but definitely not with credit cards. Sometimes the world is gray. Also available on Audible! https://www.irahelp.com/slottreport/still-working-and-past-age-70-12-answers-7-frequently-asked-questions. For the younger docs (> 15 years out from retirement still), is there anything different to do that would make this process, assuming the laws dont change enough to make this moot, easier or better? Thanks for the info! I will be using both accounts maximally myself this year for the first time which feels great! The main reason to do partial Roth conversions: you get to keep more of the money you made. We max out his 401k and an HSA. What can he do or could have done in past to help. Other than that, the only thing I can think of is the whole start a side business, get second job as independent contractor for the main goal of getting more tax-free/deferred options.