Maxed out 403b and roth IRA, what now?

[DrHyde]

We have my medical school debt completely paid off, and I have maxed out my 401b contribution and roth contribution. I'm now looking for what the next step might be towards saving. Options that I have read about or considered include: Investing into a traditional roth, paying off my mortgage or starting a vanguard. I have listed some details below:

 

Combined salary (wife and myself) ~400K

Yearly expenses – minimal/standard (also continuing to live like a resident as long as possible)

Ages – in early 30’s

Family – married healthy couple with plan for children in near future

House – Remaining payment 130K at 2.875% interest rate.

Goals – a lot of people ask this but never quite sure how to answer it. To live comfortably in retirement, maybe in the late 50’s?

 

Thanks!

[ENT Doc]

Questions:

1. Do you mean 401k, or 403b?

2. When you say you "maxed out your roth contribution", do you mean you did after-tax additions to the max limit so that you can do a mega backdoor roth?  Or that you did a backdoor Roth?

3. When you say "traditional roth" do you mean an individual Roth IRA?  Just looking for how to differentiate between this and your roth contribution comment.

 

Advice:

1. Do an investor policy statement (IPS) with your wife.  WCI and PoF have good posts on this.

2. Make sure you're maximizing your pre-tax contributions (401k), HSA, and backdoor Roth

3. Invest per your IPS, with remaining in whatever you feel most comfortable with - real estate, taxable, etc.

4. Paying off house at 2.875% interest is not advised

5. Don't buy any new house until the family is more well developed and you're absolutely needing more space

 

Congrats on living below your means.  This the best thing you can do to achieve your financial goals.

[DrHyde]

ENT Doc wrote:

Questions:

1. Do you mean 401k, or 403b?

2. When you say you “maxed out your roth contribution”, do you mean you did after-tax additions to the max limit so that you can do a mega backdoor roth?  Or that you did a backdoor Roth?

3. When you say “traditional roth” do you mean an individual Roth IRA?  Just looking for how to differentiate between this and your roth contribution comment.

 

Advice:

1. Do an investor policy statement (IPS) with your wife.  WCI and PoF have good posts on this.

2. Make sure you’re maximizing your pre-tax contributions (401k), HSA, and backdoor Roth

3. Invest per your IPS, with remaining in whatever you feel most comfortable with – real estate, taxable, etc.

4. Paying off house at 2.875% interest is not advised

5. Don’t buy any new house until the family is more well developed and you’re absolutely needing more space

 

Congrats on living below your means.  This the best thing you can do to achieve your financial goals.

Click to expand...

Thanks for your answer:

1. Sorry yes, I meant 403b

2. I actually did a standard roth contribution when I was in residency in early 2016, so well below the income limit at the time. Next year I would plan on a back door

3. No I meant as in a tax deductible traditional IRA as opposed to the roth. I am somewhat new to all this, so I apologize if I am not giving the right terminology.

[ENT Doc]

DrHyde wrote:

ENT Doc wrote:

Questions:

1. Do you mean 401k, or 403b?

2. When you say you “maxed out your roth contribution”, do you mean you did after-tax additions to the max limit so that you can do a mega backdoor roth?  Or that you did a backdoor Roth?

3. When you say “traditional roth” do you mean an individual Roth IRA?  Just looking for how to differentiate between this and your roth contribution comment.

 

Advice:

1. Do an investor policy statement (IPS) with your wife.  WCI and PoF have good posts on this.

2. Make sure you’re maximizing your pre-tax contributions (401k), HSA, and backdoor Roth

3. Invest per your IPS, with remaining in whatever you feel most comfortable with – real estate, taxable, etc.

4. Paying off house at 2.875% interest is not advised

5. Don’t buy any new house until the family is more well developed and you’re absolutely needing more space

 

Congrats on living below your means.  This the best thing you can do to achieve your financial goals.

Click to expand…

Thanks for your answer:

1. Sorry yes, I meant 403b

2. I actually did a standard roth contribution when I was in residency in early 2016, so well below the income limit at the time. Next year I would plan on a back door

3. No I meant as in a tax deductible traditional IRA as opposed to the roth. I am somewhat new to all this, so I apologize if I am not giving the right terminology.

Click to expand...

Ok, so you can still do a backdoor Roth for 2017.  You won't be able to do a deductible IRA contribution, since your MAGI is above the limit.  You can, however, do a backdoor roth.  I suggest reading about it - WCI has several posts.  Essentially, make sure you don't have any other traditional IRA or SEP money sitting around.  If you do, roll it into your 403b (if the funds and fees are reasonable).  You then establish (if not already done) a traditional IRA, make a non-deductible contribution, and convert it to your Roth IRA later that day or the next.  This gets documented on Form 8606 when you file your taxes.  WCI has a post on this as well as to how to document on your 8606 to avoid any tax penalties.  It's a backdoor way of getting money into the Roth, rather than a direct contribution (which you would need to qualify for and don't now w/ MAGI criteria), hence the name.  Hope this helps.

[DrHyde]

ENT Doc wrote:

DrHyde wrote:

ENT Doc wrote:

Questions:

1. Do you mean 401k, or 403b?

2. When you say you “maxed out your roth contribution”, do you mean you did after-tax additions to the max limit so that you can do a mega backdoor roth?  Or that you did a backdoor Roth?

3. When you say “traditional roth” do you mean an individual Roth IRA?  Just looking for how to differentiate between this and your roth contribution comment.

 

Advice:

1. Do an investor policy statement (IPS) with your wife.  WCI and PoF have good posts on this.

2. Make sure you’re maximizing your pre-tax contributions (401k), HSA, and backdoor Roth

3. Invest per your IPS, with remaining in whatever you feel most comfortable with – real estate, taxable, etc.

4. Paying off house at 2.875% interest is not advised

5. Don’t buy any new house until the family is more well developed and you’re absolutely needing more space

 

Congrats on living below your means.  This the best thing you can do to achieve your financial goals.

Click to expand…

Thanks for your answer:

1. Sorry yes, I meant 403b

2. I actually did a standard roth contribution when I was in residency in early 2016, so well below the income limit at the time. Next year I would plan on a back door

3. No I meant as in a tax deductible traditional IRA as opposed to the roth. I am somewhat new to all this, so I apologize if I am not giving the right terminology.

Click to expand…

Ok, so you can still do a backdoor Roth for 2017.  You won’t be able to do a deductible IRA contribution, since your MAGI is above the limit.  You can, however, do a backdoor roth.  I suggest reading about it – WCI has several posts.  Essentially, make sure you don’t have any other traditional IRA or SEP money sitting around.  If you do, roll it into your 403b (if the funds and fees are reasonable).  You then establish (if not already done) a traditional IRA, make a non-deductible contribution, and convert it to your Roth IRA later that day or the next.  This gets documented on Form 8606 when you file your taxes.  WCI has a post on this as well as to how to document on your 8606 to avoid any tax penalties.  It’s a backdoor way of getting money into the Roth, rather than a direct contribution (which you would need to qualify for and don’t now w/ MAGI criteria), hence the name.  Hope this helps.

Click to expand...

So I just want to clarify. You CAN make a backdoor roth contribution up to $5500 if you have already made a normal direct contribution to the roth IRA of 5500 that same fiscal year (11000 total in one year)? Would my wife also be able to do this if she has already made a 5500 contribution in her own name?

 

[ENT Doc]

DrHyde wrote:

ENT Doc wrote:

DrHyde wrote:

ENT Doc wrote:

Questions:

1. Do you mean 401k, or 403b?

2. When you say you “maxed out your roth contribution”, do you mean you did after-tax additions to the max limit so that you can do a mega backdoor roth?  Or that you did a backdoor Roth?

3. When you say “traditional roth” do you mean an individual Roth IRA?  Just looking for how to differentiate between this and your roth contribution comment.

 

Advice:

1. Do an investor policy statement (IPS) with your wife.  WCI and PoF have good posts on this.

2. Make sure you’re maximizing your pre-tax contributions (401k), HSA, and backdoor Roth

3. Invest per your IPS, with remaining in whatever you feel most comfortable with – real estate, taxable, etc.

4. Paying off house at 2.875% interest is not advised

5. Don’t buy any new house until the family is more well developed and you’re absolutely needing more space

 

Congrats on living below your means.  This the best thing you can do to achieve your financial goals.

Click to expand…

Thanks for your answer:

1. Sorry yes, I meant 403b

2. I actually did a standard roth contribution when I was in residency in early 2016, so well below the income limit at the time. Next year I would plan on a back door

3. No I meant as in a tax deductible traditional IRA as opposed to the roth. I am somewhat new to all this, so I apologize if I am not giving the right terminology.

Click to expand…

Ok, so you can still do a backdoor Roth for 2017.  You won’t be able to do a deductible IRA contribution, since your MAGI is above the limit.  You can, however, do a backdoor roth.  I suggest reading about it – WCI has several posts.  Essentially, make sure you don’t have any other traditional IRA or SEP money sitting around.  If you do, roll it into your 403b (if the funds and fees are reasonable).  You then establish (if not already done) a traditional IRA, make a non-deductible contribution, and convert it to your Roth IRA later that day or the next.  This gets documented on Form 8606 when you file your taxes.  WCI has a post on this as well as to how to document on your 8606 to avoid any tax penalties.  It’s a backdoor way of getting money into the Roth, rather than a direct contribution (which you would need to qualify for and don’t now w/ MAGI criteria), hence the name.  Hope this helps.

Click to expand…

So I just want to clarify. You CAN make a backdoor roth contribution up to $5500 if you have already made a normal direct contribution to the roth IRA of 5500 that same fiscal year (11000 total in one year)? Would my wife also be able to do this if she has already made a 5500 contribution in her own name?

 

Click to expand...

No - you can't do both a direct roth contribution AND a backdoor roth in the same year.  You stated that you did a direct Roth when you were in residency in early 2016.  You also said in your original post that you maxed your Roth contribution, and replied to my inquiry about this that it was your 2016 contribution you were referring to.  Did you contribute to a Roth in 2017?  If so, was it direct?  Is the combined salary you listed in the original post for 2017?

You can do a separate Roth contribution for both you and your wife - either direct for both if your MAGI is below the limit, or both backdoor - for each year, totaling $11,000 combined.

[TheCHFinancialAdvisor]

Once you've done the tax efficient pieces, it is still possible to start savings in a regular account.

Asset location will become an issue to help with tax efficiancy.  In other words, fixed income - which produces ordinary income every year will be heavily taxed given your income.  Good place for that is behind tax shield.  With equities you have more control over when you will realize your taxable gains.  Traditional location would say to keep equities in the taxable account.  This can all be taken to a higher level, and there are advantages to violating some of the common advice I just gave.

The big picture is that it sounds like you will soon be saving in the world of taxable accounts.  Most HNW folks have lots of assets in taxable accounts.  Unavoidable in the long run.  But still, follow the tax efficient advice first, then simply start a taxable account and learn about tax loss harvesting, asset location etc.  Just a few new concepts to mull over.

KJF

 

[DrHyde]

ENT Doc wrote:

DrHyde wrote:

ENT Doc wrote:

DrHyde wrote:

ENT Doc wrote:

Questions:

1. Do you mean 401k, or 403b?

2. When you say you “maxed out your roth contribution”, do you mean you did after-tax additions to the max limit so that you can do a mega backdoor roth?  Or that you did a backdoor Roth?

3. When you say “traditional roth” do you mean an individual Roth IRA?  Just looking for how to differentiate between this and your roth contribution comment.

 

Advice:

1. Do an investor policy statement (IPS) with your wife.  WCI and PoF have good posts on this.

2. Make sure you’re maximizing your pre-tax contributions (401k), HSA, and backdoor Roth

3. Invest per your IPS, with remaining in whatever you feel most comfortable with – real estate, taxable, etc.

4. Paying off house at 2.875% interest is not advised

5. Don’t buy any new house until the family is more well developed and you’re absolutely needing more space

 

Congrats on living below your means.  This the best thing you can do to achieve your financial goals.

Click to expand…

Thanks for your answer:

1. Sorry yes, I meant 403b

2. I actually did a standard roth contribution when I was in residency in early 2016, so well below the income limit at the time. Next year I would plan on a back door

3. No I meant as in a tax deductible traditional IRA as opposed to the roth. I am somewhat new to all this, so I apologize if I am not giving the right terminology.

Click to expand…

Ok, so you can still do a backdoor Roth for 2017.  You won’t be able to do a deductible IRA contribution, since your MAGI is above the limit.  You can, however, do a backdoor roth.  I suggest reading about it – WCI has several posts.  Essentially, make sure you don’t have any other traditional IRA or SEP money sitting around.  If you do, roll it into your 403b (if the funds and fees are reasonable).  You then establish (if not already done) a traditional IRA, make a non-deductible contribution, and convert it to your Roth IRA later that day or the next.  This gets documented on Form 8606 when you file your taxes.  WCI has a post on this as well as to how to document on your 8606 to avoid any tax penalties.  It’s a backdoor way of getting money into the Roth, rather than a direct contribution (which you would need to qualify for and don’t now w/ MAGI criteria), hence the name.  Hope this helps.

Click to expand…

So I just want to clarify. You CAN make a backdoor roth contribution up to $5500 if you have already made a normal direct contribution to the roth IRA of 5500 that same fiscal year (11000 total in one year)? Would my wife also be able to do this if she has already made a 5500 contribution in her own name?

 

Click to expand…

No – you can’t do both a direct roth contribution AND a backdoor roth in the same year.  You stated that you did a direct Roth when you were in residency in early 2016.  You also said in your original post that you maxed your Roth contribution, and replied to my inquiry about this that it was your 2016 contribution you were referring to.  Did you contribute to a Roth in 2017?  If so, was it direct?  Is the combined salary you listed in the original post for 2017?

You can do a separate Roth contribution for both you and your wife – either direct for both if your MAGI is below the limit, or both backdoor – for each year, totaling $11,000 combined.

Click to expand...

Yes, I meant early 2017, and the combined salary began this year, so the net income for the total year 2017 will be a bit more than half that.

[ENT Doc]

DrHyde wrote:

ENT Doc wrote:

DrHyde wrote:

ENT Doc wrote:

DrHyde wrote:

ENT Doc wrote:

Questions:

1. Do you mean 401k, or 403b?

2. When you say you “maxed out your roth contribution”, do you mean you did after-tax additions to the max limit so that you can do a mega backdoor roth?  Or that you did a backdoor Roth?

3. When you say “traditional roth” do you mean an individual Roth IRA?  Just looking for how to differentiate between this and your roth contribution comment.

 

Advice:

1. Do an investor policy statement (IPS) with your wife.  WCI and PoF have good posts on this.

2. Make sure you’re maximizing your pre-tax contributions (401k), HSA, and backdoor Roth

3. Invest per your IPS, with remaining in whatever you feel most comfortable with – real estate, taxable, etc.

4. Paying off house at 2.875% interest is not advised

5. Don’t buy any new house until the family is more well developed and you’re absolutely needing more space

 

Congrats on living below your means.  This the best thing you can do to achieve your financial goals.

Click to expand…

Thanks for your answer:

1. Sorry yes, I meant 403b

2. I actually did a standard roth contribution when I was in residency in early 2016, so well below the income limit at the time. Next year I would plan on a back door

3. No I meant as in a tax deductible traditional IRA as opposed to the roth. I am somewhat new to all this, so I apologize if I am not giving the right terminology.

Click to expand…

Ok, so you can still do a backdoor Roth for 2017.  You won’t be able to do a deductible IRA contribution, since your MAGI is above the limit.  You can, however, do a backdoor roth.  I suggest reading about it – WCI has several posts.  Essentially, make sure you don’t have any other traditional IRA or SEP money sitting around.  If you do, roll it into your 403b (if the funds and fees are reasonable).  You then establish (if not already done) a traditional IRA, make a non-deductible contribution, and convert it to your Roth IRA later that day or the next.  This gets documented on Form 8606 when you file your taxes.  WCI has a post on this as well as to how to document on your 8606 to avoid any tax penalties.  It’s a backdoor way of getting money into the Roth, rather than a direct contribution (which you would need to qualify for and don’t now w/ MAGI criteria), hence the name.  Hope this helps.

Click to expand…

So I just want to clarify. You CAN make a backdoor roth contribution up to $5500 if you have already made a normal direct contribution to the roth IRA of 5500 that same fiscal year (11000 total in one year)? Would my wife also be able to do this if she has already made a 5500 contribution in her own name?

 

Click to expand…

No – you can’t do both a direct roth contribution AND a backdoor roth in the same year.  You stated that you did a direct Roth when you were in residency in early 2016.  You also said in your original post that you maxed your Roth contribution, and replied to my inquiry about this that it was your 2016 contribution you were referring to.  Did you contribute to a Roth in 2017?  If so, was it direct?  Is the combined salary you listed in the original post for 2017?

You can do a separate Roth contribution for both you and your wife – either direct for both if your MAGI is below the limit, or both backdoor – for each year, totaling $11,000 combined.

Click to expand…

Yes, I meant early 2017, and the combined salary began this year, so the net income for the total year 2017 will be a bit more than half that.

Click to expand...

Ok, so you put $5500 in a Roth directly in early this year?  If your MAGI for 2017 was above $186k then you can't contribute $5,500, and if you had a MAGI over $196k you can't contribute ANY to a Roth directly.  Regardless of your MAGI, you can make a non-deductible traditional IRA contribution of $5,500 for EACH you and your wife and do a backdoor Roth to accomplish the Roth in that tax year.

The bigger issue you have now is that you probably contributed to your Roth in 2017 when you shouldn't have, and it likely grew.  You need to look into how to recharacterize the Roth if your MAGI is as I expect it will be.  You might still be able to do a backdoor Roth (you have until April 17, 2018) to do it for 2017 tax year, but you need to clear up the 2017 Roth contribution issue first.

[DMFA]

Have you made any IRA contributions *for* 2017 for both you and your spouse?  This does *not* include a contribution that you might have made *in* 2017 but did *for* the prior tax year.  Contributions are *for* a year, but not necessarily *in* a year.  For example, a 2016 contribution could have been made from 1/1/2016 until 4/18/2017.

So at that income level, retirement account options for employed persons include:

• Employer accounts (403b, 401k, 457), $36,000 total ($18,000 x2) - would do these first, tax-deferred since you're in a high bracket


• Backdoor Roth IRA, $11,000 total ($5,500 x2) - since you're above the limit to deduct Traditional IRA and to contribute directly to Roth IRA


• Health Savings Account, $6,750 total - if you have an eligible high-deductible health plan for one of you and another family member


• Standard "taxable" brokerage account - no limit, put the remainder of your annual savings goal here that you couldn't put in a tax-advantaged account

Self-employed have slightly different limits including employer contributions.

Do you have an annual savings goal amount?  The rule-of-thumb is 20% of pretax income, but like all rules-of-thumb it has many limitations.  For you, this would be saving about $80,000/year *specifically* for retirement.  For 2018 (401k/403b limit to $18,500, HSA limit to $6,900) this would be maxing two employer accounts, two IRAs, an HSA if you're eligible for it (total $54,900) and an additional $25,100 in taxable.  Again, this is a rule of thumb which may not completely apply to you, but that's the benchmark you'd shoot for.

As for your mortgage...I generally don't support early elimination of a debt which is secured by an insured, appreciating asset whose real interest rate approximates inflation, like a mortgage, especially if you move.  Depending on whether you have to pay Alternative Minimum Tax (AMT) or not, your interest rate is essentially reduced by 25-33% from the tax deduction you get on mortgage interest, rendering your "real" interest rate 1.9-2.2%, which roughly approximates historical inflation levels.  When the interest rate of a debt is less than inflation, then the future amounts saved on finance charges by paying early paid would be worth less.  Now, that is an inherent risk, and you still owe the money, and you can pay your mortgage if you really, really want to (it's never wrong to pay a debt)...but simple financial math does not support that being the best use of your current dollars.

You didn't say anything about liquid cash savings or insurance against lost income (disability, life).  Those are also important pillars of your future financial security.

[ENT Doc]

DMFA wrote:

Have you made any IRA contributions *for* 2017 for both you and your spouse?  This does *not* include a contribution that you might have made *in* 2017 but did *for* the prior tax year.  Contributions are *for* a year, but not necessarily *in* a year.  For example, a 2016 contribution could have been made from 1/1/2016 until 4/18/2017.

So at that income level, retirement account options for employed persons include:

• Employer accounts (403b, 401k, 457), $36,000 total ($18,000 x2) – would do these first, tax-deferred since you’re in a high bracket


• Backdoor Roth IRA, $11,000 total ($5,500 x2) – since you’re above the limit to deduct Traditional IRA and to contribute directly to Roth IRA


• Health Savings Account, $6,750 total – if you have an eligible high-deductible health plan for one of you and another family member


• Standard “taxable” brokerage account – no limit, put the remainder of your annual savings goal here that you couldn’t put in a tax-advantaged account

Self-employed have slightly different limits including employer contributions.

Do you have an annual savings goal amount?  The rule-of-thumb is 20% of pretax income, but like all rules-of-thumb it has many limitations.  For you, this would be saving about $80,000/year *specifically* for retirement.  For 2018 (401k/403b limit to $18,500, HSA limit to $6,900) this would be maxing two employer accounts, two IRAs, an HSA if you’re eligible for it (total $54,900) and an additional $25,100 in taxable.  Again, this is a rule of thumb which may not completely apply to you, but that’s the benchmark you’d shoot for.

As for your mortgage…I generally don’t support early elimination of a debt which is secured by an insured, appreciating asset whose real interest rate approximates inflation, like a mortgage, especially if you move.  Depending on whether you have to pay Alternative Minimum Tax (AMT) or not, your interest rate is essentially reduced by 25-33% from the tax deduction you get on mortgage interest, rendering your “real” interest rate 1.9-2.2%, which roughly approximates historical inflation levels.  When the interest rate of a debt is less than inflation, then the future amounts saved on finance charges by paying early paid would be worth less.  Now, that is an inherent risk, and you still owe the money, and you can pay your mortgage if you really, really want to (it’s never wrong to pay a debt)…but simple financial math does not support that being the best use of your current dollars.

You didn’t say anything about liquid cash savings or insurance against lost income (disability, life).  Those are also important pillars of your future financial security.

Click to expand...

Great point.  If your early 2017 Roth contribution was *FOR* 2016's tax year then you should be able to backdoor Roth without any issue and don't have to worry about the MAGI limits.

[DrHyde]

ENT Doc wrote:

you

Click to expand...

I think we should be ok, since I only started in September and there was a period of no income after residency, but I will crunch the numbers to make sure. Definitely good to know, though. Again, thank you!

[ENT Doc]

No worries, but look at DMFA's point above.  Was your contribution for the 2017 tax year or 2016 tax year?