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Please Clarify: Why Roth IRA?

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  • RetiredERdoc
    replied
    Most docs will have too high an income to be able to deduct a traditional IRA, or contribute fully to a roth. for 2017, the limits are







    Roth IRA Income Limits (for single filers) Phase-out starts at $118,000; ineligible at $133,000








    Roth IRA Income Limits (for married filers) Phase-out starts at $186,000; ineligible at $196,000

    So most docs are looking at either a backdoor roth vs taxable investing.

    Even Financial Samuari, who is an opponent of the "regular" roth IRA, posted an article about how the backdoor roth might be a good idea if you are pessimistic about future taxation.

    http://www.financialsamurai.com/is-a-backdoor-roth-ira-for-high-income-earners-a-good-move/

    "While it’s pretty straightforward to create a backdoor Roth, is it really worth the hassle? $5,500 a year in extra saving isn’t exactly going to make you rich. But if you’ve maxed out your 401k, are saving even more in after-tax accounts, have extra liquidity to spare, are still in the 28% single or joint federal income tax bracket, and bullish about your income growth, then a backdoor Roth is a reasonable move for retirement diversification purposes. If you’re in the 35% federal income tax bracket or higher ($411,500+ for singles and married couples), I wouldn’t bother. You’re already getting fleeced! "

    Leave a comment:


  • DMFA
    replied
    IRA is not like employer accounts where it's reported to the IRS for you and is automatically removed from your taxable income because it's a salary reduction.

    With traditional IRAs, the ability to deduct contributions is variable. You don't tell your institution whether you're deducting your contribution or not. That's between you and the IRS when you file taxes. It's an active step...as are declaring your non-deducted contributions (basis) and conversions each year.

    Non-deducted traditional IRAs are inferior to taxable accounts imo. The only positive is no tax drag from dividends and turnover. The negatives are early withdrawal penalties, required minimum distributions, and most of all, taxation at the higher income rate than long-term capital gain rate. None of those are worth it without a high-bracket deduction up front.

    Unless you think you'll need it before retirement, or at least not within five years, backdoor Roth is superior to taxable for tax-free growth (dividends and CGs) and tax-free withdrawal.

    In a standard taxable brokerage account, all dividends and CGs are taxed (hence the name), though qualified dividends and long-term capital gains are taxed at a lower rate. You can withdraw at any time without penalty, unless you consider the short-term capital gains tax (< 1 year, equal to income bracket rate) a penalty.

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  • hightower
    replied







    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
    Click to expand...


    You make too much for those contributions to be tax deductible.

    *Oops, DMFA explains it better above.  Didn't see his post until after I posted my comment.

    Leave a comment:


  • DMFA
    replied
    If you have an employer account, there is an income limit for being able to deduct traditional IRA contributions ($71,000 single, $118,000 married joint, $10,000 married separate...and at that low income level Roth is prob better anyway).

    There is an income limit for making Roth IRA contributions ($133,000 single, $196,000 married joint). You also can't contribute if you're married filing separately.

    So, if your income is high, then you can't deduct it to a TIRA, and you can't contribute it to Roth...

    ...however, anyone with earned income can still *contribute* to a traditional, and anyone can *convert* traditional to Roth...

    ...so, the solution to getting tax-advantaged IRA money is to make a traditional IRA contribution, don't deduct it, and convert it to Roth before it earns. This is what a "backdoor Roth" is.

    Leave a comment:


  • q-school
    replied
    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.

    Leave a comment:


  • Amiriliano
    replied


    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

    Leave a comment:


  • jfoxcpacfp
    replied




    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

    Leave a comment:


  • Craigy
    replied
    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.

    Leave a comment:


  • retinadoc
    replied
    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.

    Leave a comment:


  • Amiriliano
    replied
    OK. Thanks everyone. Makes sense.

    Leave a comment:


  • artemis
    replied




    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.

    Leave a comment:


  • TheAbacus
    replied




    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.

    Leave a comment:


  • antheus
    replied
    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.

    Leave a comment:


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

    Leave a comment:


  • DMFA
    replied
    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.

    Leave a comment:

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