Retirement Savings Question

[hk4113]

Hi,

This is my first post here, sorry if this is not in the right section. A little background about my situation before I ask my question. I am a full-time dual masters student MBA/BME set to graduate this year and have worked full time in a well-known level 1 trauma ED for 6 years. My father is a general surgeon, and my fiance (wife in 25 days) is a 4th year medical student who will be matching into gen surg on March 18th. I would say that although I am not a medical professional, I fully understand the process/lifestyle of physicians fairly well. I am 30, my soon to be wife is 28. Neither of us have a large chunk of retirement saved up worth mentioning. She has 280K in medical school debt. I have 35K in MBA/BME student loan debt. We have no other debt. For this post I would like just to focus on my fiance's debt.

Due to the large amount of debt, and long residency (5-7 years for gen surg depending on where she matches, then 2 years for vascular fellowship) I have advised her to sign up for the PAYE payment plan and sign up for PSLF which she is eligible for with her loans. By the time she is done with fellowship, she should be between 7-9 years into repayment.

My question is regarding IRA/401k contributions. From all of the paperwork I have gathered from her interviews, she will be making ~50k her intern year with small increases every year after. I understand the benefits of contributing into a ROTH IRA/401k due to payment of taxes upfront. However, if I have my fiancé max out her contributions to a traditional IRA/401k/HSA, I can reduce her AGI to the point where her required med school loan payments will be $0 for the first 2-3 years. In addition, she will not have to pay income tax on this money either.

So my question is this. Is the benefit of her not having to pay any tax, and the ability to decrease her loan payments to 0 equal or greater than the benefit lost of not contributing to a ROTH account?

Jonathan

 

[jfoxcpacfp]

I don't think we have the full picture here. You're soon to be married, already working full time and you will graduate with, hopefully, a significant bump in your income. I don't believe your wife will qualify to contribute to a deductible IRA once you are married. Have you considered that? If not, you'll have to contribute to a Roth or a back-door Roth.

[hk4113]

Hi Ms. Turner,

Thanks for getting back to me. Yes I do believe I will get a bump in my income, but I do not know how large of one until I land a job. Assuming that your post above was referring to the IRA deduction limits from the link below

https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

We would have to make more than a combined AGI of $98,000 before we could not take full deductions from an traditional IRA. If both my fiance and I contribute 18k to each of our 401k's, that means we can make a total of 134k before we would not be able to take the full deduction for traditional roth contributions. Am I correct in this thinking?

If this is the case, I don't believe that I will be making enough on my own my first year out of school to bump our combined salary above 134k resulting in us not being allowed to take full IRA deductions.

Please let me know if my thinking/calculations are incorrect. If they are not, my first question still stands. Is it beneficial to forgo contributions to a roth, for the lowered AGI a traditional IRA allows in order for a non existent loan payment?

Jonathan

[jfoxcpacfp]

Hi, Jonathan - in that case, your calculations are correct. If contributing $11k to a deductible over Roths will really make a big difference, then do so. But you would be losing a prime opportunity to get money into Roth IRAs when you are in a low tax bracket. Next year, you'll have a full year of stepped-up income. However, while your wife is in residency, I would still recommend you seriously consider the Roth option. In 2017 and beyond, you may be out of range for a deductible, anyway.

Of course, you can divide your contribution between Roth and TIRA. Run the numbers and see how much deduction you need to get the benefits you are seeking and put the rest in your Roths. You can also contribute to a Roth and then change to a TIRA before next April 15 when you know what your tax situation will be.

[hk4113]

Ms. Turner,

Thank you for getting back to me. Two more questions for you.

1. I understand that Roth IRA's are only available to those in a lower tax bracket, but I was reading about backdoor roths, and thought that this basically allowed roth contributions at any income level. If this is the case, then contributions to a roth now is not as essential as I would be able to contribute at any time. Is this correct?

2. What would be the implications of contributing to a TIRA for tax/loan repayment purposes, then on April 18th of every year converting to a Roth? Rinse and repeat every year. Would I be able to get the lower AGI for the present tax year, and then convert the following year while contributing to a new TIRA?

Thank you so much!

 

Jonathan

[jfoxcpacfp]

You're welcome.

1. You can fully contribute to a Roth IRA until your AGI hits $184k, so the limits are not quite as low as for TIRAs. The reason I emphasize Roth contributions for the years that you are in a lower income tax bracket is not because you'll lose the ability (but you might - see my last point). It's because a deductible TIRA won't be nearly as valuable today in lower brackets as it will when you are in the 33%+ tax brackets (+ state and local, if applicable)


2. The first year is the only year that would work. In the future, you would be offsetting your TIRA contribution with your conversion income.

As I mentioned in my initial response, you'll be able to contribute to a back-door Roth when you move out of the lower tax brackets. However, if you have pre-tax TIRAs, such as you are contemplating, you will be taxed on at least a part of the back-door Roth conversion. This defeats the benefit. Also, if either you or your wife roll a 401k out to a TIRA due to a job change, you'll be taxed on back-door Roth conversions. This is a different topic, but a good argument for starting a solo 401k if you ever have any self-employment income. Hope this helps.

[hk4113]

Thank you for the information! Helps a lot!

 

Jonathan