New Attending - What to do with Residency/Fellowship Retirement Accounts?

[greenhat06]

Hey All,
My wife and I are new attendings this year and I'm trying to figure out what's the best course of action that we should take with some of our retirement accounts that we've opened up throughout residency and fellowship. Mainly with the income transition from training to attending year, especially this being the first "half training/half attending" income year. I've re-listened to this WCI podcast episode a bunch of times but can't seem to figure out the answer. All of my accounts are some form an S&P 500/TSM Index fund through various providers. I have a Roth IRA for both myself and my wife, but that will obviously stay untouched (and hopefully able to contribute to it for years to come, but we will see). I have a 403b from residency, as well as an HSA through residency - which are both fairly sizable at this point after 5 years of residency. And then myself and my wife also have a 403b from our single year of fellowship, so much smaller in size.

With my income this year being the "lowest" it will ever be since half of the year was my fellowship salary, is there a reason that I should CONVERT these funds to a ROTH account? Or is this even something that I can do? My wife will have access to a 403b at her academic job, but I will not as a private practice guy. Or would she just roll her into her current 403b? Or do we just leave them alone and let them sit/grow and start with our new accounts? Sorry for the crazy post and hopefully you guys can understand what I mean - mainly, do I take advantage of these last few months of "LOW INCOME" and pay the tax on the accounts now to have them as Roth going forward (if that's even possible?) or anything else that I should be doing with them?

Thanks in advance!

[JBME]

We need to know what you expect your 2021 marginal tax rate (fed + state) to be in order to better assist. It would be helpful too if you have a good idea of what your 2022 household income will be. It would also be helpful if you told us exactly how much you have in your 403b from residency + fellowship. I know you said "sizable" but be aware for those of us here who have been attendings for over 5 years, 401k/403b balances over $500k is very common and I doubt you have close to that amount.

Most likely the answer is yes you should convert but please provide details. Be aware too that you don't need to convert all of it. This isn't all or nothing. If you have $50k in the 403b, you can convert $25k and leave the rest alone, for example.

What do you mean you don't have access to a 403b/401k as a private practice guy? You need to set up an i401k. And what do you mean you "will see" if you can hopefully contribute to a Roth IRA for yourself and your wife in the years to come? Unless your HH income is under $175k or so there's no excuse to not contribute to your Roth IRAs.

[jfoxcpacfp]

In general (and IamnotyourfinancialadvisororCPA), if I could afford to pay the income taxes, I would personally jump all over the Roth conversion this year. But, because IamnotyourfinancialadvisororCPA, I don’t know anything about your personal situation or finances other than the little in this post I read from a stranger. So take that with a grain of salt and I hope it helps.

[Tim]

Marginal rate this year vs marginal rate next year is the short term answer. Convert up to the point of the same marginal rate.
Long term, the comparison is not next year, but the expected marginal rate in retirement. So many variables, most default to the short term answer. You may find that your withholding on the part year attending actually results in some excess withholding that is available to cover the cash needed to pay the tax from a cash flow perspective.
That tax free growth is valuable.

[Mitchel674]

Convert to a Roth now and then watch it grow.

When I finished my ENT residency 30 years ago, I was shocked to find that I had money in a retirement account. This was only allotted to residents who were employed for more that 5 years. Most of my colleagues cashed out and paid the taxes since they needed the money for moving expenses, etc... I stuck that $12k away and it's now worth over $160k!

[DynamicHipScrew]

Not to hijack this thread, but I'll have close to 50k in a 401a when I graduate next summer. I'll go complete one year of fellowship at PGY6 salary. Would that be a good time to convert my 401a? What are the tax implications of that? I see a lot of posts about 403b, but not a lot about 401a. The practice I'm looking at signing with would give me access to a 401k that I could contribute up to 59k(?) per year, if that makes any difference

[JBME]

Not to hijack this thread, but I'll have close to 50k in a 401a when I graduate next summer. I'll go complete one year of fellowship at PGY6 salary. Would that be a good time to convert my 401a? What are the tax implications of that? I see a lot of posts about 403b, but not a lot about 401a. The practice I'm looking at signing with would give me access to a 401k that I could contribute up to 59k(?) per year, if that makes any difference

yes you should be able to convert your 401a money to a Roth IRA once you graduate. You'll pay the taxes on that conversion at your marginal tax rate for 2022. Marginal rate is the federal tax bracket you fall into based on your 2022 income (minus any pre-tax money you put in the 401k/403b at your fellowship employer) plus the state tax.

Confused about you saying you'll do fellowship and join a practice next year. I'm assuming you are in residency until summer 2022 and you'll do a fellowship from summer 2022 to summer 2023. You could have access to a retirement plan during fellowship, and you should utilize that if you're able

[DynamicHipScrew]

yes you should be able to convert your 401a money to a Roth IRA once you graduate. You'll pay the taxes on that conversion at your marginal tax rate for 2022. Marginal rate is the federal tax bracket you fall into based on your 2022 income (minus any pre-tax money you put in the 401k/403b at your fellowship employer) plus the state tax.

Confused about you saying you'll do fellowship and join a practice next year. I'm assuming you are in residency until summer 2022 and you'll do a fellowship from summer 2022 to summer 2023. You could have access to a retirement plan during fellowship, and you should utilize that if you're able

Yes, that timeline is correct. Sorry for the confusion and thanks for the info.

[Otolith]

Greenhat,

If I were personally in your situation I would probably convert yours to ROTH (assuming reasonable tax rate). For simplicity and paying less taxes when money can be tight this year I would have your wife roll hers over into her new employers 403b.

You will pay taxes at some point the idea being that your tax rate is lower now than in future

[Tim]

ROT: Convert and pretax to Roth at the lowest marginal rate you anticipate.
The constraint is cash to pay the taxes. Don’t sacrifice current contributions (especially for match). The cash available typically doesn’t solve itself until the attending cash flow kicks in for the transition year. A lump sum conversion at that time typically works best from a cash flow perspective.
It’s tough to fully fund $19.5 pretax and $6k Roth and then pay tax on a conversion on fellowship income.
The lower tax rate is a plus only if you can afford it.