Traditional 401k vs Roth 401k for new attendings

[Peds]

No.

[jhwkr542]

No, but use the irs online calculator. There's a place for you to add a previous job, which is what you need. For your residency or fellowship, that income had tax withheld thinking you were only making a resident's salary for the whole year so that tax was underpaid. You need to make up for lost time, or be prepared to own a pretty penny at tax time. You won't owe a penalty. Just be sure to have some cash handy when you file or try to adjust accordingly.

[mayberry]

I give a talk to graduating fellows each year and wanted to discuss this as several of the fellows are joining my group in next couple years. Their fellowship does not have a 401k plan. The group allows access to the employee 401K/psp starting the second year of employment. No match but there is the option for roth. In general new docs to our group ramp up quickly within first 2 years to approximately 400K in income, but there is a step up in income which functions as a buy in to the group. I did traditional 401K but looking back I wonder if I should have done, and should recommend to the new guys, the roth 401K as there income increases over the 1st 3 years before they become partner at the end of their 3rd year of employment. The new guys are all married with children and non-employed or only partially employed spouses.

[ENT Doc]

mayberry wrote:

I give a talk to graduating fellows each year and wanted to discuss this as several of the fellows are joining my group in next couple years. Their fellowship does not have a 401k plan. The group allows access to the employee 401K/psp starting the second year of employment. No match but there is the option for roth. In general new docs to our group ramp up quickly within first 2 years to approximately 400K in income, but there is a step up in income which functions as a buy in to the group. I did traditional 401K but looking back I wonder if I should have done, and should recommend to the new guys, the roth 401K as there income increases over the 1st 3 years before they become partner at the end of their 3rd year of employment. The new guys are all married with children and non-employed or only partially employed spouses.

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The decision completely depends on their drawn down (tax rate during draw-down, current account balances, asset allocation, account diversification (taxable/Roth/401k), pension availability, etc).  Their current situation/benefit is known to them - $ contributed and marginal tax rate where they'll benefit from those contributions - but you haven't described that here.  What is their starting salary?  State?  It's impossible to give one-size fits all advice for this at all points in time.  However, IF they are starting out with zero to little in their 401k account the "correct" financial decision at that time is to fund the traditional 401k.  The only thing that matters is the marginal decision.  As you add dollars to the 401k this has a marginal effect across multiple future years and accounts in the future.  If you are starting at little to no balance then the initial draw-down (if assumed to be coming from the 401k) is not taxable (standard deduction assumed to still be in existence), so this is a clear win - don't pay tax on X% now, pay no tax in the future.  The decision becomes more complicated with each marginal contribution.  Others have posted here who have substantial pensions where contributing to a traditional 401k now made little sense because their tax bracket in the future was going to be catapulted higher by the pension benefit.  Same thing for when the 401k balance gets very high and required draw-down is already very high - the marginal contribution creates a marginal withdrawal at a high tax rate.  A Roth 401k is more optimal in those instances, but specifics of any given situation matter.