UC retirement ideas

[standupguy]

Hi all,

I didn't want to create a new post as there is great advice above. I am a new physician intern starting this summer at the UC system making about 54k per year. Like above, the UC offers a mandatory 7.5% DCP pretax and optional 403b, 401a post-tax, and 457.

My situation: Married to higher income earner, married filing separately for loan repayment purposes. Do not qualify for ROTH IRA contributions.

I was just wondering what my general approach would be starting off. My original plan was to start a Traditional IRA, put post-tax contributions in and convert shortly thereafter to a ROTH IRA up to the $5500. My first question is, for CONVERSIONS to a ROTH IRA, is there a limit?

After my HR meeting yesterday, they proposed that I could and/or should go the 401a DCP route and roll it over into a ROTH and that the 403b pretax shelter may not be of much tax benefit given my lower tax bracket at this time. Realistically, I could put 6-7k in addition to the $5500 by December of this year and then contribute the 17500 and 5500 for next year. My question is, should I do the

Mandatory DCP+403b + Trad IRA ->Roth IRA conversion or
Mandatory DCP+Post tax DCP-> ROTH IRA conversion?

On another side note, what are some of the better funds in the fidelity options? Are most doing the Target date funds? I'm looking for more of a 80/20 Asset allocation. The UC balanced fund seems in that ballpark or the UC 2040 pathway,  both with ER of .15.

 

Thanks!

[jfoxcpacfp]

standupguy wrote:

My first question is, for CONVERSIONS to a ROTH IRA, is there a limit?

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No, there is not a limit on conversions. The $5,500 limit you refer to is the annual IRA contribution limit.

standupguy wrote:

My question is, should I do the Mandatory DCP+403b + Trad IRA ->Roth IRA conversion or Mandatory DCP+Post tax DCP-> ROTH IRA conversion?

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There is really no difference except for the timing.

• In the first scenario, you will get to deduct contributions to the 403b and pay tax on amounts converted to your Roth IRA in the year you choose to convert.


• In the second scenario, there will be no tax effect.

You would have more flexibility with the first scenario for tax-planning purposes.

In regard to your Roth conversions, make sure you are able to perform in-service (or "in-plan") Roth conversions. Sounds like you are if HR is recommending that, but plans are not required to allow current employees to do so.

[standupguy]

Correct, the UC retirement plan allows rollover.

jfoxcpacfp wrote:

In the first scenario, you will get to deduct contributions to the 403b and pay tax on amounts converted to your Roth IRA in the year you choose to convert.

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I was planning on putting post tax money in the trad IRA and converting to the ROTH at end of year. Would it make a difference tax wise to put pre-tax money and then convert?

 

I'm currently at the 25% tax bracket, if i do the full 18k (wont be able to this year) I may be in the 15% bracket. If I stay in the 25% would the 403b still be beneficial vs doing scenario 2?

[jfoxcpacfp]

standupguy wrote:

I was planning on putting post tax money in the trad IRA and converting to the ROTH at end of year. Would it make a difference tax wise to put pre-tax money and then convert?

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You cannot put pre-tax $ in the TIRA because you are MFS. Also, there is no reason to wait until the EOY to convert - it will only make the situation more complicated as the account balance will have more time to change with the market. If it grows, you will pay taxes on the growth and income. If it shrinks, you will have a nondeductible loss.

standupguy wrote:

I’m currently at the 25% tax bracket, if i do the full 18k (wont be able to this year) I may be in the 15% bracket. If I stay in the 25% would the 403b still be beneficial vs doing scenario 2?

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Maybe. Maybe not. I couldn't answer that with any certainty without access to your full financial profile.

[standupguy]

Thanks for your reply. So rolling in to the Roth monthly could be an option from the dcp. Can that be done monthly from a tira? I appreciate your help, I know some of these questions are simple.

As far as basic profile,
27 year old, married, dw makes about 110k a year, maxes out her 401k + ROTH IRA. We have an ample emergency fund. I have no retirement savings through college or medical school. We are able to live completely off of her salary, so my salary (54k)can go to my retirement, eventual down payment, and vacations. I am fairly new to the investing world and have tried to pick up as much as I can and get through the wikis. We will not be able to contribute to a ROTH this year as we are married filing separately due to loan repayment program for me

[jfoxcpacfp]

standupguy wrote:

We will not be able to contribute to a ROTH this year as we are married filing separately due to loan repayment program for me

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You can still contribute to a back-door Roth this year.

standupguy wrote:

So rolling in to the Roth monthly could be an option from the dcp. Can that be done monthly from a tira? I appreciate your help, I know some of these questions are simple.

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That's what I'm here for. You can set up automatic deposits to a TIRA through most any online brokerage. You'll have to check with your custodian on the ability to do the Roth conversion monthly, though. I realize now that's why you were planning to convert all at the EOY. You should be able to convert each TIRA contribution "manually" with a few mouse clicks, though.

[standupguy]

Ah gotcha, so I guess my only decision point would be to see if I really need that tax deferred space as a resident with the 403b vs just dumping/converting everything into the ROTH IRA

[jfoxcpacfp]

standupguy wrote:

Ah gotcha, so I guess my only decision point would be to see if I really need that tax deferred space as a resident with the 403b vs just dumping/converting everything into the ROTH IRA

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Exactly. Except, if you have any kind of match, contribute just enough to get the full match. Otherwise, this is likely the lowest tax bracket you will have one you are an attending and you should take advantage, i.e. fill out the after-tax space b/c deductions aren't nearly as valuable as they will be in the future PLUS you will start the tax-free growth and income that a Roth affords you - very early.

[standupguy]

No match, but from my little knowledge and research, a great selection of funds in the UC retirement plan. Appreciate the help.

[hrain]

So I'm in the UC system as well, and in a similar situation to you. I don't need to live off of my residency income at the moment, in large part because my fiancé and I are living carefully and trying to spend little, so I'm basically throwing all of it I can into retirement funds right now. Quite likely excessive, but I like the jump start considering how far behind I feel starting residency at almost 30.

For me, I max out my Roth IRA first and foremost (for you, this could be an after-tax TIRA-->backdoor rollover I suppose). This year, I will likely also max out the 403b and 457b as tax-deferred funds (hopefully). Then, with whatever is left, I fund the after-tax DCP and roll it over to my Roth every couple of months. This should hopefully end up being ~7-8k additional after-tax this year. Just so you know, you can't do inservice rollovers with any pre-tax funds (ie from the 403b/457/mandatory DCP), only with the after-tax. Also, you'll find when you try to roll it over via calling your Fidelity/UCNet rep, you'll occasionally have to convince them that it's allowed. Reference the DCP Prospectus pages 11-12 if they doubt you, regarding After-tax contributions and inservice withdrawals.

As for funds, I'm currently using one of the Target Date funds (I think I'm using 2060 or something because I'm fairly aggressive in my allocation), plus the Vanguard Small Cap fund (institutional shares so the EF is great)...ticker VSCPX and Vanguard REIT (I think it's VGSNX). I don't remember exactly what my allocation is within the accounts since it's aligned with my overall allocation. But I like a bit of a small cap tilt and wanted some extra diversification with the REIT fund, so not everyone would agree with that plan.

Anyway, that's how I'm incorporating UC's awesome retirement options during residency. I know how lucky I am to be able to put most of my salary towards this so early on, so I'm trying not to squander the option!

[standupguy]

That seems pretty similar to my situation! I think I'm just a little shy about putting a ton of my salary in.  with the 7.5% mandatory DCP, I probably plan on saving about 25% of my salary total. Most in retirement funds, another in a house down payment fund.

Would there be any disadvantages of just basically putting all my investments in residency into the post-tax DCP to a Roth IRA Rollover? ( Sorry if this sounds like a similar question to above) My tax benefits seem minimal with the other accounts in residency.  I'm meeting with a Fidelity/UC rep next month.

[hrain]

Nope, no disadvantages except for the tax benefits, EXCEPT if you're in a repayment plan for your loans. Federal loan repayment plans are based on AGI, so if you put most of your income into pre-tax retirement plans it DOESN'T count towards it and you can pay less each year. For instance, my fiancé (just starting intern year) and I can put most of our salaries into 403b/457/7.5%DCP and whatever's left into after tax/Roth and pay nothing really toward loans because most of our income goes into pre-tax retirement and therefore isn't counted in our AGI/repayment plans. So, on REPAYE, we'll pay ~$0 per month during residency and earn a 50% interest subsidy. Not a bad deal.

 

That said, are you sure your tax benefits are "minimal?" Maybe compared to your future as an attending, but if you have a high-earning wife you could have quite the tax benefits by using pre-tax...just depends on your marginal tax bracket.

[standupguy]

Yeah, REPAYE isn't a good fit for us. I will be doing PAYE (0 payments this year and pretty low payments the next 2 years). As far as tax benefits, making 54k per year, my marginal tax rate would be 25%. If I put >14k into tax deferred, my marginal tax rate would be 15%. This year, it would be tough given that there are only 5 months left in the year to contribute. Would being in the 15% marginal tax rate +tax deferred 403b earnings be *theoretically* better than a 25% marginal tax bracket and tax-free growth of the post-tax DCP/IRA rollover?

[hrain]

Are you doing taxes separately from your wife then?

 

And I'm not entirely sure...I went back and forth on that myself for a really long time, and honestly what made the switch for me was knowing that REPAYE would work better for us if we lowered our AGI as much as possible.

 

This year, if you're an intern without pay during past 6 months of course, your actual tax bracket will be lower since you're only making money in the second half of the year. I used just after-tax last year and don't regret it (with standard deductions, my tax rate was extremely low last year), but this year since it's a full year's pay I'm using the pre-tax.

 

EDIT: Just saw you are MFS. Yeah, I'm not entirely sure how the numbers would work out for you. Probably depends on how much your RMDs will be when you retire, how long you're planning to work, etc. I'm hoping to work until 50 or so and then retire (or at least cut back a lot), so I'm filling up my pre-tax options like crazy and then will do Roth IRA conversions for 20 years until RMDs kick in.

[standupguy]

We chose PAYE over REPAYE because the monthly payments were >$1000/month based on our incomes and we wouldn't get much of any interest subsidy with those payments.  We decided to just start paying aggressively after my 3 year residency.

 

hrain wrote:

This year, if you’re an intern without pay during past 6 months of course, your actual tax bracket will be lower since you’re only making money in the second half of the year. I used just after-tax last year and don’t regret it (with standard deductions, my tax rate was extremely low last year), but this year since it’s a full year’s pay I’m using the pre-tax.

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Oh yeah, duh, my tax bracket will definitely be lower! Definitely an oversight on my part, which puts me at the 15% marginal tax rate regardless of what I contribute to my tax deferred accounts. Sounds like a solid plan, I may just kick the pre-tax bucket down the road a little bit. Then when next year comes around, put just enough to give me some tax benefit pre-tax and then the rest into the post-tax dcp/ira rollover.

I plan on working until about 60 or so (hopefully).