Roth or Traditional IRA - As a resident

[Chuck1]

Hello all! I am currently in a tuition based (brutal I know) dental residency. Unlike medical residencies, many dental residencies are not paid and actually require you to pay tuition. However, I am moonlighting this year and expect to make between $50-80k (wide estimates based on asking the older residents).

To be honest, I have tried understanding the intricacies of the taxes and what I am able to deduct but it just does not quite click for me.  I am open to any advice or recommendations on how to best handle my situation.

My questions is whether I should use a Roth or Traditional IRA for my savings (or another avenue). In my moonlighting, I am working as an independent contractor and was told my tax rate will be extremely high because I will have to pay 100% of the FICA taxes.  I was wondering if because of that it would make more sense to use a traditional IRA.

I also know it should not be in this thread but if anyone has advice on how to reduce my taxable income for this upcoming year I am all ears.  Saving 40% of my paycheck to go towards taxes is pretty frustrating.  I am open to any tips that you may have and honestly am not aware if I am missing out on an avenue to save some money.

 

Thank you for your help!

[G]

I don't know what kind of income you're looking at after you finish residency, but I have two thoughts:

1) I doubt you're going to pay an effective tax rate of 40%, so don't sweat it unless it becomes a reality.

2) My biggest investing regret is that I put money into TIRAs instead of Roths when I was a resident.  It seemed like so much tax savings at the time....

Ugh, paying to be a resident?!  I'm having a hard time wrapping my head around that.  Is that similar to giving money to somebody to waterboard you?

[Chuck1]

If that is your biggest investing regret, then I think you have done better than most people!

It is pretty brutal. We aren't paid, have to pay tuition, make the school money through our production, and then say thank you for the opportunity! Good news is I love the program so as long as I put my financial blinders on its okay.  In my field there are only a handful of programs that are paid and those programs generally want applicants that have practiced general dentistry for a few years prior to applying.  For the most part only Oral Surgery and some Pediatric Dentistry residencies are paid, the rest stick it to ya one last time. I think they figured out people are going to be clamoring to get in whether they charge or not so why not make some extra money.

If I am calculating it right,  it looks like my effective tax rate will be approximately 36% because of the extra $5k paying the employer and employee FICA contributions.  My expected income when I graduate is going to be in the area of $250,000. So with that being the case would it make sense to do a Traditional and then convert it to a Roth once I am done with residency?

 

[hightower]

What do you mean effective tax rate of 36% as a resident?  Seems very high.  How did you calculate that?  I don't understand your tax situation either so hopefully someone on here will.

Unless I'm missing something about what it means to be working as an independent contractor, I'm pretty sure that with your yearly income level a Roth is a better vehicle for savings.  You may need to talk to a tax professional about your specific situation to shed some light on how much you should be setting aside for taxes.

[RadMoneyMD]

Roth!

Your tax rate will be low while a resident and moonlighting.  It will go up significantly after you are done and making $250k per year.

[WallStreetPhysician]

Chuck1 wrote:

Hello all! I am currently in a tuition based (brutal I know) dental residency. Unlike medical residencies, many dental residencies are not paid and actually require you to pay tuition. However, I am moonlighting this year and expect to make between $50-80k (wide estimates based on asking the older residents).

To be honest, I have tried understanding the intricacies of the taxes and what I am able to deduct but it just does not quite click for me.  I am open to any advice or recommendations on how to best handle my situation.

My questions is whether I should use a Roth or Traditional IRA for my savings (or another avenue). In my moonlighting, I am working as an independent contractor and was told my tax rate will be extremely high because I will have to pay 100% of the FICA taxes.  I was wondering if because of that it would make more sense to use a traditional IRA.

I also know it should not be in this thread but if anyone has advice on how to reduce my taxable income for this upcoming year I am all ears.  Saving 40% of my paycheck to go towards taxes is pretty frustrating.  I am open to any tips that you may have and honestly am not aware if I am missing out on an avenue to save some money.

 

Thank you for your help!

Click to expand...

Hi Chuck1, welcome to the forum! I wrote an article addressing this exact question a few weeks ago: The Traditional vs. Roth Decision for Medical Residents. In short, most residents should invest in a Roth account. While you are an independent contractor and have to pay the full FICA tax, I believe you can deduct half of that self-employment tax when you file. I'm no accountant (I just use H&R Block / TurboTax), so you should double-check that.

[MaxPower]

Another vote for Roth. Did Roth IRA contributions for my wife and me during 5 year residency and 1 year fellowship. It was a sacrifice at the time (was almost 20% of my salary some years), but those accounts have now grown to about $75,000 each.

My big regret from that time was not rolling over my 403b after leaving residency to an IRA that I could convert to a Roth when the tax hit would have been low. Oh well.

[WallStreetPhysician]

Chuck1 wrote:

If that is your biggest investing regret, then I think you have done better than most people!

It is pretty brutal. We aren’t paid, have to pay tuition, make the school money through our production, and then say thank you for the opportunity! Good news is I love the program so as long as I put my financial blinders on its okay.  In my field there are only a handful of programs that are paid and those programs generally want applicants that have practiced general dentistry for a few years prior to applying.  For the most part only Oral Surgery and some Pediatric Dentistry residencies are paid, the rest stick it to ya one last time. I think they figured out people are going to be clamoring to get in whether they charge or not so why not make some extra money.

If I am calculating it right,  it looks like my effective tax rate will be approximately 36% because of the extra $5k paying the employer and employee FICA contributions.  My expected income when I graduate is going to be in the area of $250,000. So with that being the case would it make sense to do a Traditional and then convert it to a Roth once I am done with residency?

 

Click to expand...

If you're going to use a traditional, don't convert it to a Roth IRA when you start working as a specialist. The conversion will be taxed at a higher rate than your tax deduction as a resident! Also, a Traditional IRA will limit your ability to do backdoor Roths in the future. Another reason to do Roth IRAs as a resident.

[Chuck1]

 

Okay after looking into it I miscalculated that effective rate.

Sorry, I am a little ignorant on the topic.. I had added in the FICA taxes when I was calculating my effective rate. The unfortunate aspect of being an independent contractor is that I will be paying roughly $10k in FICA taxes alone. I was not sure if placing money in a traditional IRA would be before the FICA taxes.

[Chuck1]

Thank you for all your responses, I really appreciate it! It sounds like I was probably just over (or under) thinking it.

I am just getting started with investing/saving as this is my first job cracking the $8 an hour ceiling, so I am hoping to learn a lot from everyone in this forum.