403b vs rIRA ( w/401k Rollover) - Non-Trad, Starting Residency in June

[R1MD]

Hello,

Thanks to all for so much great information in this forum. First time poster here.

I've reviewed many of the threads re 401k vs 403b vs rIRA and have a specific question.

I had a previous business consulting career, several different companies, now have all my retirement $ in a 401k sponsored by last company before medical school. I will be starting residency in June in emergency medicine and will be 40 yo as a PGY-1 w salary ~$53k, not married.

My new hospital offers a 403b unmatched as a retirement option.

I am thinking of rolling my existing 401k (~$120k) into a new Roth IRA, paying the tax penalty, and making contributions to the Roth in residency as I would expect to jump into a higher tax bracket following training. I don't intend to make withdrawals, but a Roth would also give some flexibility for emergency funds (aging parents, etc.) down the road and allow me to prioritize loan repayment vs. savings beyond a basic rainy day savings fund.

Am I on the right track here? Any recommendations against the plan above, or alternatives to consider?

Thanks everyone.

[jfoxcpacfp]

R1MD wrote:

I am thinking of rolling my existing 401k (~$120k) into a new Roth IRA, paying the tax penalty, and making contributions to the Roth in residency as I would expect to jump into a higher tax bracket following training. I don’t intend to make withdrawals, but a Roth would also give some flexibility for emergency funds (aging parents, etc.) down the road and allow me to prioritize loan repayment vs. savings beyond a basic rainy day savings fund. Am I on the right track here? Any recommendations against the plan above, or alternatives to consider?

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You are on the right track. However, since you will have a few years in residency, I'd recommend spreading the conversion over the multiple years you'll be in a low tax bracket. No reason to push yourself into a higher bracket than necessary by doing it all in one year. Looks like you can at least keep yourself in the 25% bracket and - maybe - avoid phasing out of other benefits such as student loan interest deduction. This will take some planning - you might want to work with a CPA.

My advice would change in the event of a bear or significant correction while you're in residency - convert the rest at that point.

[R1MD]

Thanks! I will definitely look into spreading it out (especially since this year I will only have 1/2 year of income) and consider working with a CPA.

Also, when paying the taxes on the pre-tax amount that is converted, does that get taken out automatically, or would I be on the hook to come up with the taxes independently of the amount that is converted?

Again, I appreciate the advice! Have a great day.

[jfoxcpacfp]

R1MD wrote:

Also, when paying the taxes on the pre-tax amount that is converted, does that get taken out automatically, or would I be on the hook to come up with the taxes independently of the amount that is converted?

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You can do it either way. If you withhold any money from your TIRA to pay taxes, all of the withholding will be subject to tax and a 10% penalty (because you're < age 59-1/2), so you're still paying tax on the whole TIRA - it just doesn't all end up in the Roth IRA. If you do not want taxes withheld, be sure to elect 0% withholding or the custodian will automatically withhold 10%.

Obviously, it would be best to pay the taxes outside the account and keep all of the money in your Roth IRA to grow tax-free.

Ed Slott has a good article on this.

[DMFA]

Convert an amount equal to the next tax bracket minus your taxable income so that you don't go up to the next marginal rate. Figure out about what this is in mid-December and convert then, before the end of the year. This is called "filling up" your bracket.