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Please Clarify: Why Roth IRA?

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  • Please Clarify: Why Roth IRA?

    I've been reading through past posts - and maybe I've missed some - there seems to be no clear explanation for why after 401K/403b contributions, attending physicians should invest in a Roth (via the backdoor Roth method).

    It's a major point in the White Coat Investor: convert a TIRA to a RIRA. But why? What's the advantage?

     

    Please, someone, clarify this. I'm sure others are confused about this.

     

    Thank you.

  • #2
    It's just additional tax advantaged space which many people do not take advantage of.

    If you invest the same amount ($5500) in a taxable account, your dividends / distributions incur taxes.

    Ultimately, when you sell the investment, the growth also incurs taxes.

    You don't have any of these taxes in a Roth IRA. Granted that it is a relatively small amount, but if you start early and contribute regularly, this can be a decent part of your portfolio.

    Another major benefit is the tax diversification you can utilize when you start taking distributions.

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    • #3
      The biggest advantage of a Roth over other retirement accounts is that there are no RMDs.  With high earners/savers who max out their 401k and tIRA over a long career, RMDs can create a "tax torpedo" which may force you to withdraw and pay tax on more income than you actually need to get by, and which also makes a lot of other income (such as your Social Security check) taxable as well.  With a Roth IRA, you (not the government) decide when and how much to withdraw.

      The second biggest advantage of a Roth is that withdrawals are not taxable, and withdrawals of prior contributions (although not the gains) can be made before age 59 1/2, which is handy for early retirees.

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      • #4
        Why not avoid taxes instead of paying them? Only 5500 per year, possibly x2 for spouse, but might as well takes advantage. Also as noted to rmd

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        • #5
          If you don't need the money in the short-term and will only use it for retirement, why not get the tax advantage instead of putting it in taxable?

          If you are in a high bracket and have even more tax-deferred space, such as a DBP, or a governmental 457(b), or an HSA, then you could consider prioritizing those ahead of the backdoor Roth IRA. But since you can't take a deduction for a traditional IRA and you can't contribute directly to a Roth IRA, the backdoor Roth provides the only tax advantage for an IRA.

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          • #6
            OK. So there's no real benefit to investing in a Traditional and pay taxes at withdrawal in a theoretically lower tax bracket?

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            • #7
              My understanding is that it also contributes to tax diversification. Someone please correct me if I'm wrong on this but lets say you take out 50k from a 401k for retirement. For incomes > $37,950 and < $91,900 the marginal tax rate jumps from 15% to 25%. Your total after tax is $39,872. Lets say you instead take out $37,950 from your 401k and the remaining $12,050 is from your Roth. You're left with $42,911, a 7.6% increase.

              Taking this further, lets say you took $75,000 out of a 401k. Your total after tax is $57,188. Now lets say you instead took out $37,950 from your 401k and the remaining $37,050 from a Roth. You're now left with $67,911. This is an 18.7% increase.

              Now obviously people typically work backwards (i.e. I need $50k/year net in retirement, how much do I need to withdraw to get to this amount) but I thought the point was better illustrated this way.

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              • #8




                OK. So there’s no real benefit to investing in a Traditional and pay taxes at withdrawal in a theoretically lower tax bracket?
                Click to expand...


                Of course there is.




                I’ve been reading through past posts – and maybe I’ve missed some – there seems to be no clear explanation for why after 401K/403b contributions, attending physicians should invest in a Roth (via the backdoor Roth method).
                Click to expand...


                It is assumed that you are already maximizing your tax deferred contributions, before you start a backdoor Roth IRA.

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                • #9




                  OK. So there’s no real benefit to investing in a Traditional and pay taxes at withdrawal in a theoretically lower tax bracket?
                  Click to expand...


                  Not as much benefit as there is in investing in a Roth and paying no taxes on withdrawal at all and freely choosing when to withdraw the money and how much to withdraw.

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                  • #10
                    OK. Thanks everyone. Makes sense.

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                    • #11
                      As an aside, there is a lot of anti-Roth IRA sentiment amongst the financial bloggers out there. I think that's because they feel that maxing out 401(k) savings beyond the match is superior to investing into a Roth IRA, which is possibly true depending on your trajectory.

                      That sort of thinking is irrelevant to physicians. We should be able to max out all available accounts, and the Roth IRA is usually the last place where we can stuff extra cash.

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                      • #12
                        Unless you are in a zero bracket at retirement, the Roth allows you to save more vs a traditional IRA since you are putting in after-tax dollars.  Same with a Roth 401k vs regular 401k.  $5,500 or $18,000 in my bank account after taxes is worth more than my employer saying he's going to pay me $5,500 or $18,000.  At retirement, $1M in your tax-free Roth is worth a lot more than $1M in your IRA, again if you are not in a zero bracket at retirement.

                        If you somehow find yourself in a tax free environment at retirement, then yeah you wasted some money on tax by throwing cash in a Roth vs a traditional IRA.

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                        • #13




                          OK. So there’s no real benefit to investing in a Traditional and pay taxes at withdrawal in a theoretically lower tax bracket?
                          Click to expand...


                          Well, dang it, I hit the like button once again instead of the quote button. Sorry for my fumble-fingers!

                          The issue is that, as a physician, a pre-tax TIRA is not an option for you. You get to choose between backdoor Roth and taxable account. So you're comparing an account that either grows totally tax free or an account that is taxed on all growth. What do you think wins out for all the people who understand how backdoor Roth IRAs work? Of course, there are many who are not privy to the fact that backdoor Roth's are even available (including many CPAs) and so they choose taxable accounts.

                          Explaining Backdoor Roth IRA's
                          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                          • #14


                            The issue is that, as a physician, a pre-tax TIRA is not an option for you.
                            Click to expand...


                            I guess I don't fully understand that statement. If I invest in a TIRA, does it not get deducted that year?

                             

                            Thank you

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                            • #15
                              You are taking post tax money and putting it into either a taxable traditional ira or Roth IRA backdoor.
                              You invest it how you want. In the first case you pay taxes. Second case you do not.

                              It does not get deducted in your scenario. Already post tax dollars are being used.

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