What do you see wrong with this?

[urologyisgreat]

Hi All,

I wanted your thoughts on my current financial landscape. Overall, I'm pretty happy, but not happy enough to stop looking for ways to improve.

A little about me: 27, male, unmarried, zero student / CC / other debt, current pgy1 resident physician in major US city and for the duration of my 5 year residency I will average 58k salary

For 2016, I've maxxed out Roth IRA. Will continue to do that until income excludes me from doing so

My institution has 403b, I am not enrolled, residents don't get matched (bullsh*t!!)

For pgy1 year, I've saved about 14k in cash - thoughts on what to do with this? currently thinking 10k emergency fund, remainder in taxable acct.

I don't have disability insurance, yet.

Thank you everyone!

[hightower]

Well, you should be very happy IMO  You have zero debt as a medical resident.  That's amazing and not the norm these days.  So, already your net worth is through the roof compared to most of your peers.  Anyway, yes a 10k emergency fund and the rest in a taxable seems quite reasonable.  I wouldn't bother with disability insurance until you have your first attending job.

As for what else to contribute to it comes down to the 403b vs a taxable brokerage.  My gut tells me taxable because at your current income level your tax burden is already quite low and a 403b isn't going to help you as much as someone making big bucks.  However, as soon as you get a "real" job you would then want to start contributing the max to a 401k.

I'm curious to hear what the others think because I honestly don't know what the right answer is in your situation.

[Lithium]

Congrats on being debt-free.  Disability insurance is a great idea.  Even though you aren't getting a match, you are generally better off maxing out your 403b before putting dollar #1 in a taxable account.

[urologyisgreat]

Thanks for the insights. The taxation issue brings up something I've been debating.

If I fund the 403b, I will pay taxes on it when I roll it over into a TIRA with the intent to backdoor afterwards. However, if the year I intend to convert, I make maximum 403b contributions (likely during my PGY5 transitioning into PGY6 year), my marginal tax bracket will drop, making my tax penalty as minimal as possible. My back up is that if maximal 403b contributions don't drop me into a lower bracket, I will open up an HSA to get it done. Thoughts?

The flip side is the tax benefit of being in a low bracket. Maybe investing now with the hopes of appreciation in a few years so I can withdraw while in a low tax bracket?? Too many options!

Thanks again for the input.

 

[abds]

I was under the impression that 403b could be rolled into 401k when the time comes. I could be mistaken as I don't have a 403b. If that is the case, I would put the extra money into the 403b and then roll it into whatever retirement plan your next (your "real") job offers.

[jfoxcpacfp]

• Emergency fund of $10k sounds appropriate for a pgy1


• Don't put the $4k in either 403b or taxable account unless you are sure you won't need it in the next 5 years


• If your plan allows you to invest the $4k, I would go for the taxable account at your presumed tax bracket (15% - 25%) as you will likely be drawing out your money at a higher tax bracket than your current marginal bracket...however


• I just responded to another thread you started which indicates you may be doing some Roth IRA conversions this year or in the future. That could easily change my response.

11 reasons you need a taxable investment account 

[urologyisgreat]

@jfoxcpacfp

I am not sure that I won't need it - savings account it is. Or, do you recommend a MMF? Are those accounts as flexible as a savings acct when it comes to withdrawl?

I am not going to be doing any conversions, yet. For the next 5 years, through 2021 atleast, I will be contributing max amount to Roth IRA. It is during that last year that I am a little hazy about. Can I contribute directly 5500 to Roth IRA, AND convert all of my 403b funds to a TIRA (which of course won't have any money in it whatsoever, so as to not worry about prorata rule) and backdoor them in the same year, since my tax bracket will still be low?

Lastly, in that last year (2021), if I start deducting maximally to fund the 403b while I am at my current institution so as to drop into the 20% bracket for tax year 2021, would I be able to convert later on in 2021 and pay just the 20% tax? It seems rather obvious that answer should be yes, but the timing of everything seems a little too good to be true to me. And of course, all of the TIRA money would be homogeneous so as not to implicate the prorata rule.

@abds - my institution uses Fidelity, and they will send the check wherever you indicate.

[Dreamgiver]

IMHO:

1. Get good disability insurance now

2. Will your 403b accept Roth contributions? (yes, you can do that in addition to the $5500 Roth IRA contributions). If so, go for it. You will never enjoy the super low tax bracket you are in now.

 

You are off to a great start!

[jfoxcpacfp]

urologyisgreat wrote:

@jfoxcpacfp I am not sure that I won’t need it – savings account it is. Or, do you recommend a MMF? Are those accounts as flexible as a savings acct when it comes to withdrawl?

Click to expand...

The 5-year rule is for investing money. If you need the money in the short term (aka the next 5 years), you are risking your principal if the market suffers an extended decline. If you're not sure, don't risk it. Just beef up your emergency fund using an MMA (money market account) which I prefer to MMF's (money market fund) because MMF's can drop in value, albeit rarely. A MMA is an  interest-bearing cash account so, yes, it's flexible.

urologyisgreat wrote:

Can I contribute directly 5500 to Roth IRA, AND convert all of my 403b funds to a TIRA (which of course won’t have any money in it whatsoever, so as to not worry about prorata rule) and backdoor them in the same year, since my tax bracket will still be low?

Click to expand...

Yes, the 2 transactions are independent of each other.

urologyisgreat wrote:

Lastly, in that last year (2021), if I start deducting maximally to fund the 403b while I am at my current institution so as to drop into the 20% bracket for tax year 2021, would I be able to convert later on in 2021 and pay just the 20% tax? It seems rather obvious that answer should be yes, but the timing of everything seems a little too good to be true to me.

Click to expand...

As of today, there is no 20% bracket, except for LTCG, but I am not following your question. After you leave your current employer, you will be able to roll over your 403b to your new employer, if allowed, to a TIRA, to a Roth IRA, or to a SOLO-k that you have set up using profits from IC income.

urologyisgreat wrote:

And of course, all of the TIRA money would be homogeneous so as not to implicate the prorata rule.

Click to expand...

I apologize, not following you...

[urologyisgreat]

@jfoxcpacfp

I apologize for the confusing nature of my questions - my lack of knowledge certainly isn't helping with the clarity. The central issue I am asking about is this: you pay tax, usually your marginal federal income tax rate, when you convert pre-tax funds in a TIRA to a Roth IRA. I am trying to figure out a way to drop the marginal tax rate I am at when that conversion is happening.

One solution I came up with is this: I am thinking the conversion will happen in 2021 - this is when I finish residency. So, I need my marginal tax rate to be as low as possible in 2021. In order to accomplish that, I was thinking of funding my 403b very aggressively, and possibly an HSA that year, too, in order to bring me to 15% marginal tax rate (apologies for using 20%, I thought that bracket was immediately below the 25% bracket).

My employer has told me it will take about 1 month in order for Fidelity / my institution to disburse funds wherever I desire upon termination of employment.

So, the question is: would I be able to drop my marginal tax bracket via the strategy outlined above and have that marginal tax rate apply to pre-tax funds that I am seeking to put in a roth IRA in the same year? And, if I am able to do this, would I still be able to directly contribute 5500 to Roth IRA? (I think the answer to the latter is yes, since you said the 2 processes of contribution and conversion are independent of eachother).

I hope that makes sense!

[jfoxcpacfp]

urologyisgreat wrote:

I apologize for the confusing nature of my questions – my lack of knowledge certainly isn’t helping with the clarity.

Click to expand...

No apologies needed - you have to start somewhere and I'm here to meet you where you are. I'm curious, however, as to why you want to wait until 2021 to convert? You've got 5 low-bracket years. Why not convert some of your pre-tax TIRA every year? You'll be at your highest bracket in the year you complete residency (2021) with 1/2 year of attending salary. Plus, you can start the tax-free growth of the converted funds sooner.

iow, yes, you can drop your marginal bracket with other tax deductions (403b and HSA contributions) but I don't see how you're going to get down to 15% with 1/2 year as an attending. Much easier to do that with full years in residency. And, yes, you can continue contributing to an IRA independent of whether you are converting to a Roth IRA. But, again, I'd find a way to do it sooner rather than later.

As for the rollover at separation of service, it really shouldn't take that long - it's a simple procedure - but some custodians drag their feet responding to requests, delay sending paperwork, and so forth.

[urologyisgreat]

@jfoxcpacfp

I want (Need?) to wait until 2021 because I can't convert any 403b funds while I am employed at my institution. They won't let me. And, I obviously can't fund a Roth and TIRA due to a $5500 yearly limit on all IRA accounts, correct? Aside from an HSA, I don't have any other tax-sheltered vehicles left. Unless I am missing something...

As for my last year - I am likely doing a fellowship, which will mean another year of lower earnings. If I don't do fellowship, which is a slim possibility, then none of this matters anyway and I just take a little tax hit.

Wherever I end up doing fellowship, likely a large academic center, they will have a 401k/403b plan of their own. I will make sure to invest in that to ensure lower income tax bracket for the 2021 tax year.

[jfoxcpacfp]

I see. I thought you already had a pre-tax TIRA in your name that you wanted to convert. Makes sense.

[urologyisgreat]

Should have provided you with more context!

Nope, no pre-tax IRA. Matter of fact, my ONLY accounts are Roth IRA and regular checking/savings account. Trying to figure out the next steps.

[FIREshrink]

urologyisgreat wrote:

@jfoxcpacfp

I apologize for the confusing nature of my questions – my lack of knowledge certainly isn’t helping with the clarity. The central issue I am asking about is this: you pay tax, usually your marginal federal income tax rate, when you convert pre-tax funds in a TIRA to a Roth IRA. I am trying to figure out a way to drop the marginal tax rate I am at when that conversion is happening.

One solution I came up with is this: I am thinking the conversion will happen in 2021 – this is when I finish residency. So, I need my marginal tax rate to be as low as possible in 2021. In order to accomplish that, I was thinking of funding my 403b very aggressively, and possibly an HSA that year, too, in order to bring me to 15% marginal tax rate (apologies for using 20%, I thought that bracket was immediately below the 25% bracket).

My employer has told me it will take about 1 month in order for Fidelity / my institution to disburse funds wherever I desire upon termination of employment.

So, the question is: would I be able to drop my marginal tax bracket via the strategy outlined above and have that marginal tax rate apply to pre-tax funds that I am seeking to put in a roth IRA in the same year? And, if I am able to do this, would I still be able to directly contribute 5500 to Roth IRA? (I think the answer to the latter is yes, since you said the 2 processes of contribution and conversion are independent of eachother).

I hope that makes sense!

Click to expand...

You've got the idea right. However, your lowest tax bracket is likely to be in the year before you finish training, unless you don't work in July-December after you graduate. Those months of earning $10k-$25k or more will quickly bump up your brackets (barring a change in family status, major deductions, etc). Now most institutions don't allow in-service rollovers, but some do; if you can then you'd roll to an IRA then convert.

Otherwise you'll be stuck with your plan, and it's still not a bad one. Even if your bracket bumps up a little, having no pretax IRA permanently allows the backdoor Roth going forward, which means it's worth doing even in a higher tax bracket (in my opinion).