Roth IRA vs traditional IRA for graduating resident

[omfs21]

Hi all,

I am in my last year of residency and 3mos away from graduating. I have started looking into learning about personal finances and investing and throughout my reading kept thinking how I wish there was a bigger emphasis placed on this as we go through school and residency.

Anyways, I have a question which I hope you guys can help me with. For the first time in a while due to having to repay big expenses and a big tax return, I have some spare money and would like to start investing. My current resident salary is of about 70k. I am starting my new job likely end of July where my salary will be at least 600K.

I was hoping to get some guidance on opening a Roth IRA now (If I'm even eligible) vs simply a traditional IRA for the tax deduction since my income for the year will be about 300k vs backdoor Roth?

Thanks in advance

[Dreamgiver]

You can't do a Roth IRA based on the income you indicated (335k for 2017, correct?). You can do a backdoor Roth of course. If you start a traditional IRA more rules kick in for a backdoor Roth so watch out for that. I'd look at what retirement plans your new job offers and take advantage of those first, then do a backdoor Roth. What I would do now (before tax day) is a $5500 contribution to a Roth IRA for 2016.

[omfs21]

Thanks for the input!

I didn't really know with the Roth IRA for 2017 if I'm allowed to contribute to one now since my current salary is 70k and currently eligible or not since my total salary for 2017 will be over 300k.

[ENT Doc]

Put $5,500 in a Traditional but don't take the deduction.  You won't be able to take a deduction based on your income in 2017 anyway.  You'll need to fill out an 8606 form when you do your taxes, but you should be able to do a Roth conversion from that $5,500 contribution right away.  Forget about your salary right now.  You are a 300k+ earner for 2017 and should just do the backdoor Roth like anyone else in that income category.  Not sure about what rules Dremgiver was referring to but am curious.  The pro rata rule perhaps?

[Laeno]

I agree with the others, go ahead and start a traditional roth IRA, then backdoor it into a Roth.

https://www.whitecoatinvestor.com/retirement-accounts/backdoor-roth-ira/

https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

I've used vanguard for my wife and I's, and I'm satisfied.  Probably something we'll continue to do yearly from now on (and so should you).

[visoriano]

Let me piggyback to this question: what if 2016 Roth IRA is already maxed and have made some 2017 contributions via automated monthly deposits, should that be stopped right now and start a Traditional IRA? Would there be a penalty because of those contributions?

[jfoxcpacfp]

omfs21 wrote:

Hi all,

I am in my last year of residency and 3mos away from graduating. I have started looking into learning about personal finances and investing and throughout my reading kept thinking how I wish there was a bigger emphasis placed on this as we go through school and residency.

Anyways, I have a question which I hope you guys can help me with. For the first time in a while due to having to repay big expenses and a big tax return, I have some spare money and would like to start investing. My current resident salary is of about 70k. I am starting my new job likely end of July where my salary will be at least 600K.

I was hoping to get some guidance on opening a Roth IRA now (If I’m even eligible) vs simply a traditional IRA for the tax deduction since my income for the year will be about 300k vs backdoor Roth?

Click to expand...

You still have time to do a backdoor Roth IRA for 2016; recommend you start there. See Explaining Backdoor Roth IRAs. You can go ahead and make your 2-step 2017 TIRA contribution/Roth conversion at the same time, if you want and have that much spare cash available.

 

[jfoxcpacfp]

visoriano wrote:

Let me piggyback to this question: what if 2016 Roth IRA is already maxed and have made some 2017 contributions via automated monthly deposits, should that be stopped right now and start a Traditional IRA? Would there be a penalty because of those contributions?

Click to expand...

It depends on your specific situation. What were your 2017 contributions made to? What is your AGI and so forth? Are you asking about 2016, also, or just 2017?

[visoriano]

Thank you for following up. Im a graduating resident with a spouse in another profession. For 2016 our combined income of 131000 and for 2017 expect it to be north of 300k. My 2017 contributions were made to a roth IRA and the question is just for 2017.

[ENT Doc]

Uggh.  This happened to me.  You have to request the money back or have it recharacterized to a traditional IRA.  Contact your brokerage firm about what forms to fill out.  You'll taxes on any growth on the contributions that were made in error (2017).  And stop those contributions.  This is not to say you can't do a backdoor later.  Things will just be more complex come tax time next year.

[jfoxcpacfp]

visoriano wrote:

Thank you for following up. Im a graduating resident with a spouse in another profession. For 2016 our combined income of 131000 and for 2017 expect it to be north of 300k. My 2017 contributions were made to a roth IRA and the question is just for 2017.

Click to expand...

Concur with ENT Doc. Maybe your brokerage firm will make it a simpler process than his/hers did   .

Better for you to keep the nondeductible TIRA contributions in a MMA until you convert, btw, so you won't have taxable gain or nondeductible loss when you convert.

[ENT Doc]

Yeah, mine was in an annuity.  Don't ask.  One of the reasons I'm a DIYer now (for the most part).

[visoriano]

:S Thanks a lot for the responses. I have already stopped the auto contributions, now will figure how to do the re-characterization with Betterment. @jfoxcpacfp your recommendation is great, I was about to open a TIRA and start doing auto contributions to that until it was time to convert...

[artemis]

visoriano wrote:

@jfoxcpacfp your recommendation is great, I was about to open a TIRA and start doing auto contributions to that until it was time to convert…

Click to expand...

May I suggest opening a dedicated savings account just for your backdoor Roth contributions, and contributing your monthly auto contributions to that instead?  Now that interest rates are going up, over the course of a year those montly contributions to a TIRA will earn interest and that will complicate your rollover.  If instead you make your monthly auto contributions to a regular taxable savings account, at the end of each year you can transfer exactly $5500 from the savings account to your TIRA and then roll it over into your Roth IRA right away, making for a nice, clean transfer with no taxes owed on the conversion (as any interest gains you'll leave behind in the savings account).

(Plus, savings accounts are FDIC insured, while money markets are not.)

[omfs21]

I got a bit ahead of myself. I started reading about all this stuff maybe a month ago and wanted to get started, even if it was with a small amount.

I originally figured I wouldn't be eligible for a Roth IRA for 2017, so I opened a traditional IRA for 2017 with only $500 to get started. I now took the advice given here and placed $2500 into a Roth IRA for 2016 prior to the deadline.

What should I do with the $500 in the traditional Roth? Will that complicate doing a backdoor Roth later in the year?

I would also like to max out the 2016 Roth IRA that I just started. Can I move over the $500 from the traditional IRA account into the Roth? I'm not sure how to go about doing that on Wealthfront.