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Traditional 401k vs Roth 401k for new attendings

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  • Traditional 401k vs Roth 401k for new attendings


    I'm sure this topic has been brought up before but wanted to get some ideas from the hive here. My gf and I are both new attendings, I'm a physician and she's a pharmacist. Both of our jobs offer a choice of either a traditional 401k vs a Roth 401k. During our orientation, the "retirement" specialist seemed very enthusiastic about the Roth option and encouraged us to take advantage due to the untaxed growth, but I've been doing a lot of reading here on WCI as well as other sites and I'm not sure that's the best option.

    We're both young (I'm 30, she's 29) and in terms of salary, she'll make roughly 120k and me around 300k, with potential for growth as well (hopefully to around 1/2 million a year combined). I do have 2 years of a Roth IRA and am planning on backdooring it this year, while she has none (but will hopefully start as well).

    The traditional thinking (if I'm not mistaken) is the traditional 401k is great for someone who anticipates a lower tax bracket when they retire, so you save on paying taxes, but if you're anticipating a rise in your taxes upon retirement then its better off do pay it off now and do a Roth. I know nobody can predict the future with regards to tax brackets but as physicians, we're already being taxed in a high bracket and there's not that much more to go up. The other consideration is I'd like to get some retirement properties and open up other taxable accounts in 30 years so we'll be more financially sound, but even if I were to pull income from that, I'm not sure if my RMD's from a 401k combined with that would exceed my current income.

    So the question is: should we consider putting some into the Roth 401k and if so, what's the best breakdown (50/50, 70/30, etc.)?

    Thanks everyone.


  • #2
    You'll be in the 33% tax bracket plus state tax, unless you live in 1 of 7 states without a state income tax.

    With a 33% to 43% marginal tax bracket, I'd take all the tax relief I can get. That means 100% tax-deferred contributions to retirement accounts. That includes your 401(k), possibly a 457(b) and perhaps an HSA, as well. I'm much closer to retirement, but I have done the math and realized I will be able to get away with paying next to nothing in taxes as an early retiree.

    You can each do a Roth -- yours will have to be backdoor, but your girlfriend can contribute directly. That's $5,500 apiece. Better than nothing.



    • #3
      *Probably* traditional since you will probably be in 33% after deductions (or possibly AMT from the top of my head). We don't know how what future tax brackets will be, but we also don't know how well the Roth accounts will remain protected, either.

      The only truly wrong answer is not saving.


      • #4
        I would recommend a traditional. I wrote about this on my site if you want to search it. If your tax bracket is high and you need the tax relief (which most of us do) then it makes sense to do traditional. Then as you get older, and if you decide to cut back on your hours (go part time), your income and taxes will fall.


        At that point you could consider doing a roll over/conversion from traditional to roth at that point. You pay the taxes at your current tax bracket at the time of roll over/conversion and then have a roth 401k. That is my plan. When I go part time I will slowly move money from my traditional 401k to roth 401k.


        • #5
          For this year, assuming 1/2 year at low income and a few months at high, I'd go with the Roth option and consider changing when you have a full year of attending income. Your g.f., otoh, is in the 28% bracket. I'd be tempted to go for the Roth and then change if and when you marry. Our projections for many dual-professional couples are showing RMDs of $500k and up and I'm not expecting that to be taxed at 15%, even 20 -30 years into the future, but it's just a guess and not exactly educated at that. A split between the two might be a wise decision. Or it might not be - we really don't know.

          I happen to be a contrarian in this area and believe, where possible, to fill up as much tax-free space as you can afford. I will also recommend conversions during bears and market corrections and advise clients accordingly to be prepared to pay some taxes in those years if they want to take advantage of the opportunities.
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


          • #6
            Betterment has a calculator that you can input the metrics you have for the traditional 401K/ROTH 401K choices.  Your annual income and corresponding tax rate make make a tax deferred 401K the likely choice based on math.

            Assuming you work 25 to 30 years, continue to maximize tax deferred contributions etc., get decent returns, you'll likely have a tax deferred savings that will be multiples of the non-taxable accounts.  At retirement, you may still find yourself in the highest tax bracket anyway because your RMD's will then be taxable. I like the idea of trying to even out the tax-deferred versus non-taxable retirement savings, though in your case it does not make sense mathematically to eat a current 33% marginal tax rate unless future tax rates are going to be much higher, and there is no political/legislative indication of higher future rates in the US.


            • #7
              Thanks for the suggestions everyone, will definitely look into the Betterment calendar.

              One thing I forgot to mention is that I live/work in CA which has some of the highest taxes in the nation. I assume the suggestions posted above would still hold true?



              • #8
                I agree with the above. Go with the tax deferred option. You can take a sabbatical year or two outside of California and do conversions in larger rollovers to help with tax arbitrage.


                • #9
                  when we started out as attending many many many years ago, we ran through the scenarios with multiple financial advisors.  they all recommended going in traditional.  that may or may not be somewhat related to the hope of them managing higher amounts of money, but they universally felt the tax drag was too much to sacrifice versus time and growth opportunities.

                  as the years passed, tax rates changed, including corporate gains.  incomes changed.  our jobs changed and state tax rates changed.

                  i think it is very very hard to accurately predict that far into the future.

                  fwiw, most of my senior partners who are good savers, still find themselves in fairly high tax brackets in retirement, so it may not be wholly accurate to assume you can tax plan around it unless you really do retire young.

                  good luck!

                  i think sometimes we lose sight of the forest for the trees.

                  imo, saving aggressively and working hard will go a lot farther than micromanaging investments and marginal tax arbitrage.  ymmv.



                  • #10
                    One key benefit folk forget:  Roth IRA (and rolled 401k to IRA at retirement/leaving) are NOT SUBJECT TO RMDs and roll over on inheritance and RMDs for life of that beneficiary.    This is a key crucial issue on inheritance and something to think about if you're fortunate enough to be leaving retirement dollars to the next generation with superb planning.



                    • #11
                      I have a similar question and didn't want to make a brand new thread so I'm bumping this one...

                      I just transitioned from fellowship to first attending job. I understand the concept for this year being a good idea for a Roth 401k instead of a traditional 401k since the first half of the year I was making a fellow's salary at a lower tax bracket

                      However, now I am getting hit with that 33% tax for my attending paycheck. Logistically how do I "average in" the first half of the year to save on taxes since the contributions I would make now to a Roth 401k already have been taxed 33%? Is there something on the tax forms that will account for this? Sorry if it's a dumb question  :cry:

                      (didn't have a 401k while I was a fellow. Started my first 401k as an attending, it is currently a traditional 401k but I can switch over to making roth 401k contributions anytime if I want)


                      • #12
                        If you can, why not max both?


                        • #13
                          @wash, it sounds like you're confusing tax withholding on your paycheck to tax bill. Whatever% is withheld from your paycheck is essentially a guesstimate about what your tax liability will be. Whatever is withheld is not the same as your marginal tax rate. You'll figure that when you get your w-2s. You can try to calculate it and get close, but I think that's what you're confusing. You average in your taxes by filling out your w-4 appropriately. The IRS has a calculator that may be worthwhile for you.


                          • #14
                            You're in Cali? Easy, traditional for everyone including this year.


                            • #15

                              @wash, it sounds like you’re confusing tax withholding on your paycheck to tax bill. Whatever% is withheld from your paycheck is essentially a guesstimate about what your tax liability will be. Whatever is withheld is not the same as your marginal tax rate. You’ll figure that when you get your w-2s. You can try to calculate it and get close, but I think that’s what you’re confusing. You average in your taxes by filling out your w-4 appropriately. The IRS has a calculator that may be worthwhile for you.
                              Click to expand...

                              Oh ok, I was confused about that.

                              I may have filled out my W-4 incorrectly then. Am I supposed to count my completed residency/fellowship and my current job as multiple jobs even though I did not hold them concurrently?


                              And the Betterment calculator mentioned above is recommending that I contribute to traditional 401k, so maybe I'll just stick with what I have set currently...