Backdoor Roth vs Traditional IRA for 2 Provider Family

[jpbulldog16]

I know this topic has been discussed in detail but I was wondering if our situation was a little unique, so I wanted to see what the forum thought. Any input if appreciated. I am about to finish fellowship and in addition to my wife (a clinical pharmacist) maxing out our 401K/403B, I plan was planning to start a backdoor Roth IRA for both of us. My wife has been working for several years while I have been training and will likely plan to go part-time or even less over the next 7-10 years. This will have a big effect on how our tax bracket will look now compared to when we would be withdrawing from a potential IRA. I was wondering if this would make a traditional IRA more of a benefit for us since we could likely be in a higher tax bracket now versus later in life. I know that a backdoor Roth seems to be the way to go for most but I appreciate any input possible. Thanks in advance!!

[jfoxcpacfp]

Are you saying you would be in a low enough tax bracket this year to contribute to a deductible IRA? That's a little surprising since you'll be a new attending for 1/2 year and your wife is a f.t. clinical pharmacist.

[DMFA]

jpbulldog16 wrote:

I know this topic has been discussed in detail but I was wondering if our situation was a little unique, so I wanted to see what the forum thought. Any input if appreciated. I am about to finish fellowship and in addition to my wife (a clinical pharmacist) maxing out our 401K/403B, I plan was planning to start a backdoor Roth IRA for both of us. My wife has been working for several years while I have been training and will likely plan to go part-time or even less over the next 7-10 years. This will have a big effect on how our tax bracket will look now compared to when we would be withdrawing from a potential IRA. I was wondering if this would make a traditional IRA more of a benefit for us since we could likely be in a higher tax bracket now versus later in life. I know that a backdoor Roth seems to be the way to go for most but I appreciate any input possible. Thanks in advance!!

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I doubt you'll even be eligible (see Johanna's link above) since I'd be surprised if your AGI is less than $194,000.  Plus, it is beneficial to have some Roth holdings regardless of your income to maximize tax efficiency of your investments, especially high-earning equities (even if fairly tax-efficient, high earnings means high taxes) and REITs.

[jpbulldog16]

We would not be in a bracket that allows for deduction. Guess this means that a backdoor Roth IRA would still be the best method for us to save additional retirement funds.

[jfoxcpacfp]

jpbulldog16 wrote:

We would not be in a bracket that allows for deduction. Guess this means that a backdoor Roth IRA would still be the best method for us to save additional retirement funds.

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Only tax-deferred/tax-free method at this point. Like @DMFA, I believe that all doctors should have a Roth IRA allocation.

[DMFA]

jpbulldog16 wrote:

We would not be in a bracket that allows for deduction. Guess this means that a backdoor Roth IRA would still be the best method for us to save additional retirement funds.

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Yep.  There's three ways to get a tax advantage: deduction on contribution, tax-free growth, and tax-free withdrawal.

• Traditional IRAs, 401(k), 403(b), DBPs do the first two


• Roth IRAs do the last two


• HSAs do all 3 (if used for healthcare, otherwise just the first two)


• 529s might give you a limited state deduction, grow tax-free, and are withdrawn tax-free if used for education

So if the alternative is no tax advantage at all, then a Roth IRA is the way to go.  Though that isn't to say taxable brokerage accounts are no good - they have their own advantages, especially if you maximize your tax-advantaged accounts and still need/want to contribute to retirement to get to that 20-25% annual goal.

[Clueless]

Hello all

I apologize for adding a different question to this thread (closest topic to my question).

I made almost 40k via 1099 in 2016.  My CPA told me I could put 3k into SEP IRA for 2016 (which I just opened at vanguard). He said to enter as "individual" contribution. I spoke to vanguard and they said since I did backdoor roth for 2016 I maxed out individual contribution with the 5500 so the 3k for the SEP needs to be categorized as a contribution as "employer." My CPA says no, he wants me to ensure they know I'm sole proprietor. I called vanguard and they said it doesnt matter for IRA max is 5500/yr. So CPA says open it with another institution. Who is correct?  How do I fix this?  (BTW I plan to open i401k for this year so I can roll everything into this going forward).


On my tax year 2016 contribution summary on vanguard it says I am maxed out (lists Traditional/Roth/Sep IRA (individual contribution) as one category and SEP IRA (employer contribution) into another category).

Please help.  Thank you so much everyone!

Clueless

[jfoxcpacfp]

Clueless wrote:

Hello all

I apologize for adding a different question to this thread (closest topic to my question).

I made almost 40k via 1099 in 2016.  My CPA told me I could put 3k into SEP IRA for 2016 (which I just opened at vanguard). He said to enter as “individual” contribution. I spoke to vanguard and they said since I did backdoor roth for 2016 I maxed out individual contribution with the 5500 so the 3k for the SEP needs to be categorized as a contribution as “employer.” My CPA says no, he wants me to ensure they know I’m sole proprietor. I called vanguard and they said it doesnt matter for IRA max is 5500/yr. So CPA says open it with another institution. Who is correct?  How do I fix this?  (BTW I plan to open i401k for this year so I can roll everything into this going forward).


On my tax year 2016 contribution summary on vanguard it says I am maxed out (lists Traditional/Roth/Sep IRA (individual contribution) as one category and SEP IRA (employer contribution) into another category).

Please help.  Thank you so much everyone!

Clueless

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SEP contributions are classified as "employer". Your CPA may be clueless. Also, this has nothing to do with your backdoor Roth contribution/limitation, which is personal. Could you mixed 2 conversations together? Also also, you should be able to contribute 20% of your net 1099 profits to a SEP. Did you have $25k of business deductions?

Be sure to r/o the SEP into the SOLO-k before 12/31/17.

In the future, fwiw, you will get more notice if you post a question as a new thread.

[Clueless]

Thanks so much @jfoxcpacfp (I have actually heard a lot of great things about you!!)

My CPA wont speak to vanguard, he said just open SEP somewhere else.  He didnt even mention opening SEP to help me with my finances/retirement/saving taxes (apparently this move cut down on my federal taxes by almost 2k), I had to ask him to calculate it for me.  I didnt have that much in business deductions maybe a few thousand.  Should I just cut away from him and just start all over with a new CPA?  I dont know how I am going to resolve this issue.  I dont know if I will be penalized in the future for the incorrect categorization of this measly 3k (currently categorized as employer, vanguard wont let me change to individual).  Om my profile in vanguard this is what it looks like:

 

2016

Investment type                                                            Contribution limits               Contribution           Remaining contribution

Traditional, Roth and SEP IRAs (individual contribution)      5500                                  5500                     0

SEP-IRA (employer contributions)                                    53,000                               3018                     49,982

[jfoxcpacfp]

You're welcome and thank you for the kind words.

I don't know enough about the relationship and what you are looking for to recommend you find a new CPA, but the indications aren't promising. I've never heard of a CPA who refused to work with a custodian - kind of unprofessional, don't you think? Vanguard won't change the SEP contribution to individual because they can't change it to individual. It is not an option that exists in their system because a SEP is an employer contribution, no matter how your business is organized.

In case you do decide to look for another CPA, you have until 10/15/17 to fund the SEP-IRA, in case you want to contribute any more. Is that all you can afford at this time? This article may help. Just ask your current CPA to return your information. He's required to do so by law, whether you pay him or not (hint).

[DMFA]

jfoxcpacfp wrote:

Clueless wrote:

Hello all

I apologize for adding a different question to this thread (closest topic to my question).

I made almost 40k via 1099 in 2016.  My CPA told me I could put 3k into SEP IRA for 2016 (which I just opened at vanguard). He said to enter as “individual” contribution. I spoke to vanguard and they said since I did backdoor roth for 2016 I maxed out individual contribution with the 5500 so the 3k for the SEP needs to be categorized as a contribution as “employer.” My CPA says no, he wants me to ensure they know I’m sole proprietor. I called vanguard and they said it doesnt matter for IRA max is 5500/yr. So CPA says open it with another institution. Who is correct?  How do I fix this?  (BTW I plan to open i401k for this year so I can roll everything into this going forward).


On my tax year 2016 contribution summary on vanguard it says I am maxed out (lists Traditional/Roth/Sep IRA (individual contribution) as one category and SEP IRA (employer contribution) into another category).

Please help.  Thank you so much everyone!

Clueless

Click to expand…

SEP contributions are classified as “employer”. Your CPA may be clueless. Also, this has nothing to do with your backdoor Roth contribution/limitation, which is personal. Could you mixed 2 conversations together? Also also, you should be able to contribute 20% of your net 1099 profits to a SEP. Did you have $25k of business deductions?

Be sure to r/o the SEP into the SOLO-k before 12/31/17.

In the future, fwiw, you will get more notice if you post a question as a new thread.

Click to expand...

Clueless CPAs are about as common as clueless doctors...and how often do we see the latter? (far too often imo) >_<

[jfoxcpacfp]

DMFA wrote:

jfoxcpacfp wrote:

Clueless wrote:

Hello all

I apologize for adding a different question to this thread (closest topic to my question).

I made almost 40k via 1099 in 2016.  My CPA told me I could put 3k into SEP IRA for 2016 (which I just opened at vanguard). He said to enter as “individual” contribution. I spoke to vanguard and they said since I did backdoor roth for 2016 I maxed out individual contribution with the 5500 so the 3k for the SEP needs to be categorized as a contribution as “employer.” My CPA says no, he wants me to ensure they know I’m sole proprietor. I called vanguard and they said it doesnt matter for IRA max is 5500/yr. So CPA says open it with another institution. Who is correct?  How do I fix this?  (BTW I plan to open i401k for this year so I can roll everything into this going forward).


On my tax year 2016 contribution summary on vanguard it says I am maxed out (lists Traditional/Roth/Sep IRA (individual contribution) as one category and SEP IRA (employer contribution) into another category).

Please help.  Thank you so much everyone!

Clueless

Click to expand…

SEP contributions are classified as “employer”. Your CPA may be clueless. Also, this has nothing to do with your backdoor Roth contribution/limitation, which is personal. Could you mixed 2 conversations together? Also also, you should be able to contribute 20% of your net 1099 profits to a SEP. Did you have $25k of business deductions?

Be sure to r/o the SEP into the SOLO-k before 12/31/17.

In the future, fwiw, you will get more notice if you post a question as a new thread.

Click to expand…

Clueless CPAs are about as common as clueless doctors…and how often do we see the latter? (far too often imo) >_<

Click to expand...

Tell me it ain't so. Please.