Split: My Investing Priorities

[nicktadros]

I was hoping to get some opinions on my "order of investment".  I am a new academic physician (just finished PGY-9!) with a pretty high salary (for academics) and what I believe are some good investment options.  I was hoping to get some guidance on which to load up first, second, etc... I will also be aggressively paying down my student loan debt so I might not be able to max out EVERY retirement account I have access to, at least in my first few years (but I'm going to try!).  I have also had some trouble getting info on what investments are made in each retirement account and the exact amount of employee matching (since I haven't had orientation yet), but will update this as soon as I do since I know this can change where I should put my money.

 

Here is what I have access to:

• 401(a) with $53K limit (there is a "one-time irrevocable election" of up to 25%,but not less than 10% of my compensation… I'm a little hesitant to earmark 25% of my income permanently which would more then max out the account, but I would at the expense of not funding other accounts if this was the best option).  There is an employee match that is decided every year.


• GOVERNMENTAL 457 (which also has a ROTH option) with $18K limit.  I have access to low cost funds such as the Vanguard Retirement funds and Vanguard Institutional Index 500 Trust for this account.  I was thinking about using this purely as a ROTH option…


• 403(b) with $18K limit (I think this limit is shared with the above 457?).  Also has a ROTH option.  There are many vendors that can be used, including TIAA-CREF.  Unsure of employee matching


• SURS (State University Retirement System) Pension: required 8% contribution, though I think I do not contribute to social security while I am contributing to this.


• My wife has a personal IRA with $42K that I would like to roll over into one of the above plans so I can take advantage of backdoor roths in the future.  Though this may not be as important with if I have access to Roth options in the 457 and 403b

 

I know I have a lot of questions, but any help/insight would be GREATLY appreciated!

[The White Coat Investor]

This question from another thread deserved its own thread.

 

I'd be pretty hesitant to dedicate any large segment of my income irrevocably. I guess if the minimum is 10%, that's what I'd do there. It might cost you some extra taxes, but think of all the what ifs. Be sure there aren't some exceptions of course.

I'd favor a 403b over a 457 as a general rule, but the devil is in the details.

You know you can't combine your wife's and your retirement accounts, right? They're always individual. You can do a backdoor Roth even if she has an IRA, but she can't roll her IRA into your 403b.

The Backdoor Roth IRA issue is totally separate from the question of whether to use the Roth options in your 457 or 403b. In the first, the choice is Roth or non-deductible IRA. Easy decision. In the second, it's Roth vs tax-deferred 457/403b, a much harder decision. The usual answer in your peak earnings years is tax-deferred by the way.

You're required to put 8% of income into the SURS and 10% of income into the 401(a), that's already 18% going toward retirement. If you are also doing backdoor Roths, maxing out 403b and 457, and considering even more going into the 401(a), you realize that you'll be financially independent relatively soon, right? Are you sure you don't want to spend more money? That's a pretty decent chunk of income going toward retirement. Be careful not to overcommit.

[jfoxcpacfp]

Does your wife work? If she wants to contribute to a backdoor Roth, she will need to either:

1. Roll her pre-tax TIRA into a Roth (and pay the taxes);


2. Roll it into her work 401k/403b (if allowed); or


3. Set up a SOLO-401k based upon self-employment income and roll the IRA into it.

nicktadros wrote:

403(b) with $18K limit (I think this limit is shared with the above 457?).

The 457b plan limits are independent of the 403b plan limits.

fyi for other readers, you can contribute $54k to a 401a in 2017. $53k was the 2016 limit and many SPDs are out of date.

[StarTrekDoc]

Also, you'll want to check with HR on the 401a + 403b both count toward that 54k limit or not under the 415 code limits.

We had concerns on both counting to the limits, but several on Boglehead have confirmed  combined yearly contributions beyond the reported limits and no overage warning from either HR or Fidelity. --- but watch that between your two accounts.

 

 

[PhysicianOnFIRE]

I would defer all the tax you possibly can, assuming you're in the 33% tax bracket or higher. If you have a state or city income tax, that only tilts the seesaw further in favor of tax-deferred investments over Roth.

Of course, you should do the backdoor Roth. That's in place of some taxable investing.

[Peds]

this is my understanding as well as order of my general plan:

1) URS (State University Retirement System) Pension: required 8% contribution: no choice so move on. you are probably correct no SS which might be why they offer you the rest of this retirement space.

2) 401(a) (“one-time irrevocable election” 10-25%): this is essentially profit sharing. I would set the max as you can never go back (much like a Keogh for some businesses), and if in the future you find yourself looking for more space, you wish you would had it. this is always pretax. the distribution rules are the same as a 401k for the most part. i believe the max for this year is actually 54k. 

3) backdoor rIRA: assuming you have no other IRAs (simple, sep, etc), 5500 limit.

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after this is kinda just gravy and you have lots of money.......

4) 403(b) : think of this just as a 401k. same limits, trad vs roth, etc. i would prioritize this before the 457. probably no match. depending on your bracket you need to decide roth or not.

5) GOVERNMENTAL 457: this is a separate limit so is not counted in the other 2. depending on your bracket you need to decide roth or not.

6)My wife has a personal IRA with $42K that I would like to roll over into one of the above plans so I can take advantage of backdoor roths in the future. Nope. you forget, personal. which means not yours. she needs her OWN retirement plan that will accept this as a rollover. but this also means it has nothing to do with your backdoor rIRA. you could also pay the massive tax and convert it. 

 

[adventure]

nicktadros wrote:

(just finished PGY-9!)

Click to expand...

Congrats on this, most of all.

[adventure]

nicktadros wrote:

SURS (State University Retirement System) Pension: required 8% contribution, though I think I do not contribute to social security while I am contributing to this.

Click to expand...

Also, about the pension. You might want to consider the state in which you live, and determine if you think the pension is viable. And maybe move.

We decided every penny put into our states' pension should be considered a total loss, and that we'd never recoup anything.

 

[nachos31]

PGY-9!? And at an academic institution? I pray you consolidated your loans on graduating med school and have ~1 year left to qualify for PSLF??

Congrats, by the way!

[nicktadros]

Thanks for all the help everyone!  WCI, PoF and everyone else here has always had great advice and discourse and I am fortunate to be the recipient of some of it!

To clarify a bit, half of my salary comes from the university ($200K) and the other half of my salary ($185K) comes from the physician practice plan.  ALL the above mentioned investment accounts are from the university so 25% of my "university salary" into the 401a is actually about 12.5% of my total income so it is not quite as much of my salary as WCI was worried about initially.  I think I tend to side with PoF about going with the max irrevocable 401a deduction and I can short change the 403b or 457 if I find out that I need more money, but my goal is to accept the PoF challenge and (try to) invest about 50% of my income.  It will be an exercise in self control but with my good salary and midwest location, I think it will be possible!

 

nachos31 wrote:

PGY-9!? And at an academic institution? I pray you consolidated your loans on graduating med school and have ~1 year left to qualify for PSLF??

Congrats, by the way!

Click to expand...

Thank you! Unfortunately, I did not have that foresight and did not make too many payments in residency so I would still have many years to go on PSLF.  I only have about $180K in student loans.  Half of which I refinanced with SoFi per WCI's recommendation at 3.1% and will have that paid off in 5 years.  The other half will be at 1.75% in 20 more months so I will probably take my time paying that off

The White Coat Investor wrote:

You know you can’t combine your wife’s and your retirement accounts, right? They’re always individual. You can do a backdoor Roth even if she has an IRA, but she can’t roll her IRA into your 403b.

Click to expand...

I knew that, but I think forgot that along the way!  I will likely continue to do the backdoor Roths and just let her money sit in the IRA for now.

 

The White Coat Investor wrote:

The Backdoor Roth IRA issue is totally separate from the question of whether to use the Roth options in your 457 or 403b. In the first, the choice is Roth or non-deductible IRA. Easy decision. In the second, it’s Roth vs tax-deferred 457/403b, a much harder decision. The usual answer in your peak earnings years is tax-deferred by the way.

Click to expand...

Agreed, I will be taking a hit if I do the roth 457/403b now.  I was trying to think long term about my draw down plan and thought it would be good to have a big chunk of roth money during retirement, but you are probably right, the hit I would take from not deferring my taxes now is not worth having some extra tax free money in retirement (which I will have with my wife and I's current roth IRAs and my contribution to backdoor Roths throughout my career)

 

jfoxcpacfp wrote:

Does your wife work?

Click to expand...

Not now, but she will likely be going back to work after our 7 month boy is a little older.  I like the idea of rolling her IRA into a 401K at that time depending on what her work has to offer

Peds wrote:

1) URS (State University Retirement System) Pension: required 8% contribution: no choice so move on. you are probably correct no SS which might be why they offer you the rest of this retirement space.

Click to expand...

To complicate matters, you can "self manage" the pension plan which essentially turns it into a 401a.  If you do that, the university will contribute an additional 7.2% match.  I going to help to take some time (I have 6 months to make a decision) to try to figure out the health of this pension plan to see if I can get a handle on whether it will be around in the next 20-30 years.  I am normally quite untrusting of pension plans, but the benefits of this one are pretty good...

Thanks again everyone for your help!

[Zaphod]

nicktadros wrote:

Thanks for all the help everyone!  WCI, PoF and everyone else here has always had great advice and discourse and I am fortunate to be the recipient of some of it!

To clarify a bit, half of my salary comes from the university ($200K) and the other half of my salary ($185K) comes from the physician practice plan.  ALL the above mentioned investment accounts are from the university so 25% of my “university salary” into the 401a is actually about 12.5% of my total income so it is not quite as much of my salary as WCI was worried about initially.  I think I tend to side with PoF about going with the max irrevocable 401a deduction and I can short change the 403b or 457 if I find out that I need more money, but my goal is to accept the PoF challenge and (try to) invest about 50% of my income.  It will be an exercise in self control but with my good salary and midwest location, I think it will be possible!

 

nachos31 wrote:

PGY-9!? And at an academic institution? I pray you consolidated your loans on graduating med school and have ~1 year left to qualify for PSLF??

Congrats, by the way!

Click to expand…

Thank you! Unfortunately, I did not have that foresight and did not make too many payments in residency so I would still have many years to go on PSLF.  I only have about $180K in student loans.  Half of which I refinanced with SoFi per WCI’s recommendation at 3.1% and will have that paid off in 5 years.  The other half will be at 1.75% in 20 more months so I will probably take my time paying that off

The White Coat Investor wrote:

You know you can’t combine your wife’s and your retirement accounts, right? They’re always individual. You can do a backdoor Roth even if she has an IRA, but she can’t roll her IRA into your 403b. 

Click to expand…

I knew that, but I think forgot that along the way!  I will likely continue to do the backdoor Roths and just let her money sit in the IRA for now.

 

The White Coat Investor wrote:

The Backdoor Roth IRA issue is totally separate from the question of whether to use the Roth options in your 457 or 403b. In the first, the choice is Roth or non-deductible IRA. Easy decision. In the second, it’s Roth vs tax-deferred 457/403b, a much harder decision. The usual answer in your peak earnings years is tax-deferred by the way. 

Click to expand…

Agreed, I will be taking a hit if I do the roth 457/403b now.  I was trying to think long term about my draw down plan and thought it would be good to have a big chunk of roth money during retirement, but you are probably right, the hit I would take from not deferring my taxes now is not worth having some extra tax free money in retirement (which I will have with my wife and I’s current roth IRAs and my contribution to backdoor Roths throughout my career)

 

jfoxcpacfp wrote:

Does your wife work? 

Click to expand…

Not now, but she will likely be going back to work after our 7 month boy is a little older.  I like the idea of rolling her IRA into a 401K at that time depending on what her work has to offer

Peds wrote:

1) URS (State University Retirement System) Pension: required 8% contribution: no choice so move on. you are probably correct no SS which might be why they offer you the rest of this retirement space. 

Click to expand…

To complicate matters, you can “self manage” the pension plan which essentially turns it into a 401a.  If you do that, the university will contribute an additional 7.2% match.  I going to help to take some time (I have 6 months to make a decision) to try to figure out the health of this pension plan to see if I can get a handle on whether it will be around in the next 20-30 years.  I am normally quite untrusting of pension plans, but the benefits of this one are pretty good…

Thanks again everyone for your help!

Click to expand...

385 is your total salary?

[nicktadros]

Yeah, 385k is my total salary

[Zaphod]

nicktadros wrote:

Yeah, 385k is my total salary

Click to expand...

For tax purposes it may be higher as they will include all the benefits, so make sure to prep for that as I've had friends just 'surprise' tax bills due to this.

[nicktadros]

That is a good point. All the more reason to make all the pre tax investments I can make I guess.
I’ll just have to remember that I’m paying high taxes because I’m making more money
But coming from an effective tax rate of 3-8% during all of my training to 30-40% will be painful!