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  • Roth IRA Conversion for Newly Graduating Resident

    Hi everyone,

    This is my first post on the forums but I've been an avid reader and podcast listener for some time. My question to the community is if people thinks it makes sense for me to do a Roth IRA conversion this year. I just graduated residency and will be starting as an attending in August (6 month resident salary and 5 months attending salary).

    Filing Status: Married filing jointly (wife is currently a fellow making around 60k)
    Expected Joint Income for 2021 minus 401k deductions: 200k (Expect to be in 24% marginal tax bracket this year + 8% state tax)
    403b Amount: Approximately 80k (mine; thinking about converting the full amount this year), 50k (wife's; don't plan to convert this. She's not eligible to roll over anyway until she finishes fellowship)
    Roth IRA Amount: 120k (mine), 60k (wife's)
    No student loans or significant debt for either of us.

    I've ran the math on various Roth Conversion calculators and it seems like I will be better off in the long run converting to Roth if my retirement marginal tax bracket is over 20% (25% with state). I plan to pay for the conversion with money I would otherwise put into a taxable investment account. My next job is not offering a 401k but my wife can still max out her 403b each year.

    I'm having a hard time figuring out what to expect in terms of my retirement tax bracket. It seems like with some clever maneuvering it's possible to keep my retirement tax bracket pretty low but not sure how low is possible. We're hoping for a retirement income of around 150-200k in today's dollars. No clue what state we will end up retiring in but I don't think it will be one of the income tax free states so 5% state tax seems like a reasonable estimate. The other consideration I have is that a Roth conversion has some good estate planning perks and will allow me to invest my money more freely. My current 403b plan does have some cheap index fund options though so definitely workable. Plus I won't have to take RMD's on the Roth money if I convert.

    Right now I'm leaning towards a Roth conversion since it seems like my retirement tax bracket will likely be higher than 20% to maintain a 150-200k income. This is especially true if tax rates go up in the next 30 years which seems like a reasonable assumption.

    Thanks for your input!

  • #2
    Attached is an image from Schwab's Roth Conversion calculator with a 22% retirement withdrawal rate which at a retirement income of 150-200k may be reasonable but not sure if I'm overestimating my retirement marginal rate.

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    • #3
      If it were me and if I were as good a financial planner and CPA for myself as I were for our clients, I would do it. (Unfortunately, I suck at DIY and absolutely hate dealing with my own finances but enjoy helping clients. Strange, isn’t it?)
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

      Comment


      • #4
        Originally posted by jfoxcpacfp View Post
        If it were me and if I were as good a financial planner and CPA for myself as I were for our clients, I would do it. (Unfortunately, I suck at DIY and absolutely hate dealing with my own finances but enjoy helping clients. Strange, isn’t it?)
        So does that mean you have a financial planner and CPA for your own finances?

        Comment


        • #5
          Wow so much to unpack here:

          1. Your marginal rate now is 32%. How did you come to the conclusion that 25% marginal on withdrawal is the cutoff?

          2. No 401k? Boo-urns.

          3. The answer is an unequivocal NO. Do not convert.

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          • #6
            Originally posted by Lithium View Post

            So does that mean you have a financial planner and CPA for your own finances?
            Yes, lol. I get a pretty good rate, of course 😉. And I don't mind if mine gets done last.
            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

            Comment


            • #7
              Originally posted by ENT Doc View Post
              Wow so much to unpack here:

              1. Your marginal rate now is 32%. How did you come to the conclusion that 25% marginal on withdrawal is the cutoff?

              2. No 401k? Boo-urns.

              3. The answer is an unequivocal NO. Do not convert.

              1. I used multiple Roth conversion calculators (see 2nd post with Schwab calculator screen shot). The cut off is actually closer to 27% marginal withdrawal rate where I end up netting more money by converting

              2. Yes it’s a small private practice where owner is about to retire so they don’t have 401k set up. I can probably set one up in the future though.

              3. Do you say unequivocal no because my assumption about retirement tax bracket is wrong? I’m assuming by withdrawing 150-200k in retirement (conservative estimate I think) I’ll be at or close to 24% federal and 5% state. Especially considering tax rates are likely to go up in next 30-40 years. Plus Roth has other advantages including no RMD’s and estate planning perks.

              Comment


              • #8
                Originally posted by jfoxcpacfp View Post

                Yes, lol. I get a pretty good rate, of course 😉. And I don't mind if mine gets done last.
                Smart choice.
                1. Emotionally, it feels like uncompensated work.
                2. Lack of a sense of contribution.
                3. Personal bias leads to many rabbit holes and assumptions. An independent set of eyes is a check and balance. A great attorney or a great doctor will gladly pay for professional services (in their specialty). CPA’s and CFP’s are wise to do the same.

                Comment


                • #9
                  Originally posted by noviceinvestor View Post


                  1. I used multiple Roth conversion calculators (see 2nd post with Schwab calculator screen shot). The cut off is actually closer to 27% marginal withdrawal rate where I end up netting more money by converting

                  2. Yes it’s a small private practice where owner is about to retire so they don’t have 401k set up. I can probably set one up in the future though.

                  3. Do you say unequivocal no because my assumption about retirement tax bracket is wrong? I’m assuming by withdrawing 150-200k in retirement (conservative estimate I think) I’ll be at or close to 24% federal and 5% state. Especially considering tax rates are likely to go up in next 30-40 years. Plus Roth has other advantages including no RMD’s and estate planning perks.
                  Your assumptions are incorrect. Why do you think $130k in pre-tax savings with nothing else affecting your taxation level will come out at a marginal rate of 22+%?

                  Comment


                  • #10
                    Originally posted by ENT Doc View Post

                    Your assumptions are incorrect. Why do you think $130k in pre-tax savings with nothing else affecting your taxation level will come out at a marginal rate of 22+%?
                    Unless I'm missing something if I'm withdrawing 130k from my pre-tax (403b) account I would be in the 22+% federal tax bracket. The 2021 federal 22% tax bracket for married filing jointly is $81,051-$172,750

                    Comment


                    • #11
                      Originally posted by noviceinvestor View Post

                      Unless I'm missing something if I'm withdrawing 130k from my pre-tax (403b) account I would be in the 22+% federal tax bracket. The 2021 federal 22% tax bracket for married filing jointly is $81,051-$172,750
                      You are estimating your future marginal rate incorrectly. Others disagree with me, but the following blog post from Frugal Professor as well as the Bogleheads Wiki does not:

                      https://frugalprofessor.com/trad-vs-...sdom-from-mdm/

                      https://www.bogleheads.org/wiki/Trad...misconceptions

                      See the section on "Estimating Future Marginal Tax Rate".

                      In a nutshell, you have to assume something here in terms of growth of your investments and a withdrawal scheme. So assume your $130k is going to grow at 5% real and be withdrawn in 30 years at a 4% SWR. You'll have $562K in real terms in 30 years (today's dollars and thus today's tax brackets since this controls for bracket inflation). Withdrawn at 4% this is $22,480 in today's dollars and bracket terms. That is UNDER the standard deduction. That means that this money is currently going to be coming out at a 0% tax rate on the margin. Converting wouldn't be the dumbest thing in the world, but it would likely rank just above going out and buying universal life insurance and then getting the cash value back after a few years. You'd be literally throwing money away to Uncle Sam.

                      You also forget about the asymmetric risks of a Roth (given to me by a fellow Bogleheads member):
                      -Retiring early
                      -High medical deductions
                      -Possible new tax policy to require a VAT (not as likely) or Roth RMDs (more likely)
                      -Higher possibility of low tax rates and standard deduction being untouched for low-middle class people (which you would be in retirement)
                      -Moving to a lower tax state
                      -Both spouses die early
                      -Both spouses live long lives

                      Comment


                      • #12
                        Originally posted by ENT Doc View Post

                        You are estimating your future marginal rate incorrectly. Others disagree with me, but the following blog post from Frugal Professor as well as the Bogleheads Wiki does not:

                        https://frugalprofessor.com/trad-vs-...sdom-from-mdm/

                        https://www.bogleheads.org/wiki/Trad...misconceptions

                        See the section on "Estimating Future Marginal Tax Rate".

                        In a nutshell, you have to assume something here in terms of growth of your investments and a withdrawal scheme. So assume your $130k is going to grow at 5% real and be withdrawn in 30 years at a 4% SWR. You'll have $562K in real terms in 30 years (today's dollars and thus today's tax brackets since this controls for bracket inflation). Withdrawn at 4% this is $22,480 in today's dollars and bracket terms. That is UNDER the standard deduction. That means that this money is currently going to be coming out at a 0% tax rate on the margin. Converting wouldn't be the dumbest thing in the world, but it would likely rank just above going out and buying universal life insurance and then getting the cash value back after a few years. You'd be literally throwing money away to Uncle Sam.

                        You also forget about the asymmetric risks of a Roth (given to me by a fellow Bogleheads member):
                        -Retiring early
                        -High medical deductions
                        -Possible new tax policy to require a VAT (not as likely) or Roth RMDs (more likely)
                        -Higher possibility of low tax rates and standard deduction being untouched for low-middle class people (which you would be in retirement)
                        -Moving to a lower tax state
                        -Both spouses die early
                        -Both spouses live long lives
                        For some reason this is very confusing to me. I definitely get what you're saying that right now, he'd paying to convert money to Roth that would otherwise be taken out at 0% assuming no SS etc. However, money is fungible right? So while right now it doesn't make sense, we can expect that he will 100% be contributing a lot in tax deferred over his career. Possibly 59k (whatever 401k max is) plus cash balance for say 10-20 years. So shouldn't we assume that at retirement even with this roth conversion a 4% withdrawal of whatever his future pretax contributions will bring will get him out of the lowest tax brackets that we're using right now to argue it's a waste to convert these dollars to roth?

                        I guess it depends on how luxurious you want your retirement to be. For MMM people I can see this math making more sense, maybe I'm just thinking that it breaks down for super savers or very high net worth early retirees?

                        Comment


                        • #13
                          Originally posted by ENT Doc View Post

                          You are estimating your future marginal rate incorrectly. Others disagree with me, but the following blog post from Frugal Professor as well as the Bogleheads Wiki does not:

                          https://frugalprofessor.com/trad-vs-...sdom-from-mdm/

                          https://www.bogleheads.org/wiki/Trad...misconceptions

                          See the section on "Estimating Future Marginal Tax Rate".

                          In a nutshell, you have to assume something here in terms of growth of your investments and a withdrawal scheme. So assume your $130k is going to grow at 5% real and be withdrawn in 30 years at a 4% SWR. You'll have $562K in real terms in 30 years (today's dollars and thus today's tax brackets since this controls for bracket inflation). Withdrawn at 4% this is $22,480 in today's dollars and bracket terms. That is UNDER the standard deduction. That means that this money is currently going to be coming out at a 0% tax rate on the margin. Converting wouldn't be the dumbest thing in the world, but it would likely rank just above going out and buying universal life insurance and then getting the cash value back after a few years. You'd be literally throwing money away to Uncle Sam.

                          You also forget about the asymmetric risks of a Roth (given to me by a fellow Bogleheads member):
                          -Retiring early
                          -High medical deductions
                          -Possible new tax policy to require a VAT (not as likely) or Roth RMDs (more likely)
                          -Higher possibility of low tax rates and standard deduction being untouched for low-middle class people (which you would be in retirement)
                          -Moving to a lower tax state
                          -Both spouses die early
                          -Both spouses live long lives
                          Interesting points and good articles. After doing some more calculations and using the algorithms in the Boglehead wiki article you provided I still think my retirement marginal income could be higher than 27% and definitely won't be 0% as in your example. Your example does not account for future 401k contributions, taxable account contributions (resulting in taxable qualified dividends), and social security income all of which are additional sources of taxable income.

                          Assuming retirement age of 65, yearly contributions of 50k to taxable, 19.5k to 401k, 30k in social security benefits, 5% real return, and subtracting 25k standard deduction my taxable income at retirement will be 174k (24% federal tax bracket, 8% state tax if I don't move). This may even be a conservative estimate as I likely can save even more than this in a 2 physician household.

                          Based on the above I don't think the decision to convert or not to convert is as unequivocal as you're suggesting.



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                          • #14
                            Furthermore, the comparison between marginal tax rates now and effective/marginal tax rates in retirement on money taken out is only accurate if we assume the difference was invested, right? There's taxes due right now; would OP (or most people) actually invest the equivalent of taxes due now if he didn't end up converting it to roth?

                            Im not even close to needing to worry about this yet but my feeling is that pre-tax space is more abundant than roth space, physicians here are probably going to end up with a lot more money than they predict, and people generally do not invest the difference between pretax and roth - all things that favor doing roth if youre in low income years.

                            For a MMM person who's planning on retiring at 35 with 40k per year for the rest of their life this makes more sense to me

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                            • #15
                              Originally posted by Turf Doc View Post

                              For some reason this is very confusing to me. I definitely get what you're saying that right now, he'd paying to convert money to Roth that would otherwise be taken out at 0% assuming no SS etc. However, money is fungible right? So while right now it doesn't make sense, we can expect that he will 100% be contributing a lot in tax deferred over his career. Possibly 59k (whatever 401k max is) plus cash balance for say 10-20 years. So shouldn't we assume that at retirement even with this roth conversion a 4% withdrawal of whatever his future pretax contributions will bring will get him out of the lowest tax brackets that we're using right now to argue it's a waste to convert these dollars to roth?

                              I guess it depends on how luxurious you want your retirement to be. For MMM people I can see this math making more sense, maybe I'm just thinking that it breaks down for super savers or very high net worth early retirees?
                              Money being fungible has nothing to do with this. Decisions you make right now (on the margin) have a marginal effect later in life. Marginal decisions today don't have some effective rate of pooled money effect in the future. Yes, you have pooled dollars but that doesn't mean you get to ignore the marginal effect of today's contributions on later amounts and withdrawal plans.

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