403b vs backdoor roth

[Redwings13]

First time poster,

I recently just got married this past June, and I was looking for some advice in allocating retirement contributions for this fiscal year. My wife graduated from residency this year, and is now an attending physician working in a private practice with limited benefits (401k without employer match) as of last month. I am currently a fellow with a much lower salary. We thankfully do not have student loans, and have some savings. We each have our own individual disability insurance policies as well. For this fiscal year, we can afford to begin contributing to my employer's 403b (without an employer match), or to a HSA. My employer does offer a roth IRA, but we will not be able to contribute "directly" due to income limits. We anticipate that we can afford to contribute about $20k this year to retirement after moving expenses, emergency fund saving, etc. With my access to the 403b, and to a HSA, is there an advantage to contribute to a backdoor roth first for both myself and my spouse, or is it better to maximize the 403b ($18k) followed by the backdoor and then the HSA if we have enough leftover? Many thanks for reading.

 

[DMFA]

I don't understand. Employers don't offer Roth IRAs. They're *Individual* Retirement Arrangements.

Aside from that, whether to deduct your retirement contributions now to be taxed as income upon withdrawal in retirement or to pay taxes now and have it be withdrawn tax-free is a complicated decision. A way to try to (over)simplify it is by bracket; if you're 28% or above then pretax is likely better, 25% toss-up, and less means Roth is better.

Of course, you can do some of one, and some of the other, and ideally you'd do both your pretax employer accounts and Roth IRA.

[Redwings13]

Thanks for the reply. It sounds complicated but basically I can allow my employer to automatically contribute my roth IRA prior to cutting me a paycheck. My wife and I will likely be in the 28 or 33% tax range this year, and in the 39% tax range next year. I am leaning towards maximizing the 403b prior to the backdoor roth, but will have to re-do the numbers to be sure.

[spiritrider]

The IRA contribution sounds like nothing more than a direct deposit of a portion of your net paycheck. You can do this with any employer that allows direct deposit to more that one account. I would not do this. You have more flexibility to do this on your own from your own accounts.

I would prioritize in the following order with no employer match for either spouse.

1. HSA contribution by payroll deduction (not direct deposit as above). HSA contributions by payroll deduction are federal/state (except AL, CA and NJ) pre-tax and pre-FICA. Then distributions for qualified medical expenses are tax free (except AL, CA and NJ).

This is by far your most tax advantaged option. To further take advantage of this, you should save receipts of all qualified medical expenses and defer distributions until retirement.

2. Start out with making the same percentage pre-tax employee deferrals to both spouses qualified plans, that when combined with the HSA contribution maxes your retirement savings rate. Dedicate 1/2 of all future raise to this percentage. When the highest earning spouse has reached the employee deferral limit (2017 = $18K), increase the lower earning spouse's deferral percentage until they also are maxing the deferral limit.

3. Then as your retirement savings rate allows, utilize the Backdoor Roth equally for both spouses.

4. Then as your retirement savings rate allows make taxable investments.

5. When your retirement savings rate has reached your financial Independence goals consider funding 529 accounts for your children.
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All of the above assumes you are dedicating a portion of your net income to adequately funding your emergency fund.

[Redwings13]

Thank you for the reply spiritrider. I have looked again at my benefits package, and noted that it will change next month when I am a fellow. I am now only offered a roth 403b in addition to a traditional 403b. I no longer have the HSA option. Given that I will not be in my "peak earning years" until 2019 with my wife (39% tax bracket), it seems that a roth 403b may be the better option vs the traditional 403b. Either way, we will try and maximize both, but if anyone has any other input, it would be much appreciated.

[jfoxcpacfp]

I wonder if the confusion may be that your employer offers a Roth option and you think that your income precludes you from participating? The Roth option in a qualified retirement plan has no income restrictions. The "Individual" Roth is subject to income limitations, hence, the popularity of the backdoor Roth conversion.

[Redwings13]

Thank you jfoxcpacfp. I have explained my situation poorly, which is leading to confusion. I will not be able to contribute to a roth IRA this year due to my combined income with my wife (married filing jointly) unless I use the backdoor approach. Right now I am trying to see how I should contribute to my employer's roth 403b and traditional 403b given that I likely will not be able to maximize contributions to both this year. I do not have a HSA currently, and it is not longer offered through an employer when I start my fellowship next month.