Announcement

Collapse
No announcement yet.

Roth vs Pre-tax Retirement Accounts for Residents-When to break the rules?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Roth vs Pre-tax Retirement Accounts for Residents-When to break the rules?

    Hi. New intern here, trying to figure out what to do for retirement accounts. I know the general rule is: get the match (if possible), switch to Roth, then go back to employer-based, pre-tax accounts. But I think I have some complicating factors that make me less certain about what I should do.

    Tax filing: married filing jointly (although I suppose we could change that next year if we needed to)
    Dependents: 1 child
    Spouse's gross income since we moved for my residency: 93,000
    Gross household income moving forward since I started residency: 153,000
    Federal margin tax bracket: 22%
    Federal effective tax bracket: 12.94%
    State marginal tax bracket: 8.75%
    State effective tax bracket: 7.73%
    Total marginal tax bracket: 30.75%

    As you can see, we live in a state with high income tax. Our city also has a pretty high cost of living.

    We are new to this city and our budget is only an approximation for now, but I think we can safely invest 20% of our joint gross income (around $15,500 annually for me and the same amount for my spouse) towards retirement now that I have a paycheck.
    My employer offers a 403b plan and a 457b plan. The 403b has a mandatory 3% contribution from my employer regardless of whether I contribute to it or not. So, I get the match there without having to actually match it.
    I just opened a Roth IRA and put $3,500 in it that is sitting there, uninvested, with recurring monthly deposits of $500.
    But now that I am trying to set up my 403b contributions, it looks like, within the 403b, I have the option of choosing either Roth contributions or pre-tax contributions.

    My question boils down to: Does Roth/post-tax contributions really make sense for my situation? I played with an online simulator, and it does seem that Roths grow faster. *But* people always make the argument that you should contribute to Roth in residency because you are in the lowest tax bracket for the rest of your life. I'm not sure if that is the case for us. Surely we are now in the lowest tax bracket for the rest of my career in medicine. But maybe not during retirement. In the context of the high tax burden my spouse and I will face next year, should I put all my money towards pre-tax contributions in the 403b? Do Roth IRA + leftover in Roth 403b? Do Roth IRA + leftover in pre-tax 403b?

    Do I do something different for this year compared to next, since we will still be a lower tax bracket this year because I didn't start residency until just now?

    Thanks for any advice.


  • #2
    You’re a resident. Even in a low tax state, you’re earning far lower income than you will after completing training.

    Favor Roth accounts.
    Last edited by Hank; 07-04-2022, 07:09 PM.

    Comment


    • #3
      You’re going to need to post more info to get a good answer.

      first of all, effective tax rates are entirely irrelevant. Marginal rates are all that matter.

      specialty?
      going for PSLF? PAYE?
      spouse’s income?
      considering early retirement?

      I am wondering what state imposes an 8.75% tax at the 22% bracket. I thought California’s wasn’t even that high.

      I have been on the fence about doing Roth, and my marginal rate as an attending isn’t even as high as yours. The fact that the market is down makes Roth a more appealing option.

      I would also check all the tax credits you might get phased out of if you choose Roth, such as the child tax credit and the child and dependent care credit. I can’t remember at what AGI the phase outs start. You may get 100% of them regardless.

      Comment


      • #4
        My guess with the 8.75 your write is that you are in Vermont. But with that HH income you posted your marginal rate is 6.6 and not 8.75. Either way I would do Roth. Your future self will than you when you’re not doing any Roth beyond the backdoor

        Comment


        • #5
          Pre-tax. Assuming little to no savings currently. Also, Roth IRA (backdoor) for both you and your spouse.

          Comment


          • #6
            Why do you presume in retirement you'll be in a lower tax bracket? Most docs don't drop to a lower bracket because of the lifestyle we tend to continue to live and need to fund.

            Also, if you remain a high saver AND have large tax deferred opportunities RMDs may become an issue too.

            The easy answer is pretax cause you'll benefit now. the finesse answer May be Roth.

            Comment


            • #7
              Originally posted by Lithium View Post
              You’re going to need to post more info to get a good answer.

              first of all, effective tax rates are entirely irrelevant. Marginal rates are all that matter.

              specialty?
              going for PSLF? PAYE?
              spouse’s income?
              considering early retirement?

              I am wondering what state imposes an 8.75% tax at the 22% bracket. I thought California’s wasn’t even that high.

              I have been on the fence about doing Roth, and my marginal rate as an attending isn’t even as high as yours. The fact that the market is down makes Roth a more appealing option.

              I would also check all the tax credits you might get phased out of if you choose Roth, such as the child tax credit and the child and dependent care credit. I can’t remember at what AGI the phase outs start. You may get 100% of them regardless.
              Pediatrics
              Not going for PSLF or PAYE. Have a small amount of student loans from medical school that I will just pay off with standard repayment.
              Spouse's income is currently $94,000 gross
              Early retirement: I would consider it in the abstract, but I feel like I'm too early in my career to really know what I want it to look like by then. But I value having financial options, so yes, I suppose.

              Thanks, I'll look into the tax credits.

              Comment


              • #8
                Originally posted by StarTrekDoc View Post
                Why do you presume in retirement you'll be in a lower tax bracket? Most docs don't drop to a lower bracket because of the lifestyle we tend to continue to live and need to fund.

                Also, if you remain a high saver AND have large tax deferred opportunities RMDs may become an issue too.

                The easy answer is pretax cause you'll benefit now. the finesse answer May be Roth.
                I dunno, it's hard for me to imagine really consuming more than $150,000/yr during retirement! Especially if I own a home by then. Maybe I'm wrong. It just seems like *so* much money to be spending a year. But certainly my mentality has been influenced by living on a tiny shoestring budget since I moved out on my own at 18.

                Comment


                • #9
                  Originally posted by zzplant View Post
                  My employer offers a 403b plan and a 457b plan. The 403b has a mandatory 3% contribution from my employer regardless of whether I contribute to it or not. So, I get the match there without having to actually match it.
                  FYI. It might seem like semantics, but you are receiving a non-elective (AKA profit sharing) employer contribution. It is not an employer match and is not mandatory.

                  Comment


                  • #10
                    Originally posted by zzplant View Post

                    I dunno, it's hard for me to imagine really consuming more than $150,000/yr during retirement! Especially if I own a home by then. Maybe I'm wrong. It just seems like *so* much money to be spending a year. But certainly my mentality has been influenced by living on a tiny shoestring budget since I moved out on my own at 18.
                    Just remember that “consuming” (i.e. if that means all money going out) includes income taxes, college costs, and health care. It is, of course, difficult to “imagine” spending in retirement the same amount you make now, but it is easy to limit our imaginations to what we know and experience rather than future potential. Sure, it is possible to spend less than $150k/yr and you may very well do so, but you really don’t know what you don’t know about the future. Plan for the potential instead of your current experience and, if you overshoot the mark, you will have much more flexibility (and happiness) than if you undershoot.
                    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                    Comment


                    • #11
                      150k mark --- most folk in here have a 150-200k range as a general marker in today's dollars. We have our Fat retirement set at 275k

                      Comment


                      • #12
                        Just remember that right now the federal tax brackets are scheduled to go up in 2026 unless the TCJA gets extended. If that’s the case, your marginal rate could be 28-33%.

                        Comment

                        Working...
                        X