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Best "Clean Slate" Strategy

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  • Best "Clean Slate" Strategy

    This question stemmed from another question I had about traditional IRAs. Current situation: Husband is 4th year med student, I work full time with income at about $100k. I have been contributing to IRAs since right out of college, about half and half to a traditional IRA and a ROTH IRA. I have just under $50k in my traditional currently. After recently being introduced to WCI by SDrH I have learned about the backdoor ROTH and I want us to be able to take full advantage of that when the time comes...which may be in 2019. What is the best strategy to getting a "clean slate" for the backdoor ROTH contributions. Should we go ahead and convert the traditional IRA to a ROTH now considering our current tax bracket? Should we roll it over to a 401k? Should we do some now and some next year. Next year DrH will have about half of a year's 1st year residency salary and mine may go up about 5%-10% but we do both plan on maximizing our 401ks next year. I was hoping to catch up on my 401k through the end of this year and was depending a little bit on having a nice tax return early next year to help make up for that.

  • #2
    Best is move to 401k.


    • #3
      Converting (Rollover more specifically) your traditional IRA to a 401K would be cleanest for executing a backdoor IRA starting in 2019.  Depending upon circumstance, you can also consider a conversion of the traditional IRA to a Roth.  The conversion would be considered taxable income in year executed.  Depending on where you are within your current tax bracket, expectation of tax rate in retirement it is something to consider with a CPA accountant.


      • #4
        If you're in the 15% federal income tax bracket, I would convert to Roth at least up to the top of the 15% bracket. If you can afford the tax payment, it's not bad to convert in the 25% bracket either. You could spread it out over a couple years to ease the tax pain.

        The simplest, of course, is to roll it over into a 401(k), but the 401(k) may not have the greatest investment options, and you many never again be in low tax brackets like you are between now and after your husband's residency.


        • #5
          I think the Roth space is extremely valuable for purposes of tax diversification and lack of RMD.  If I were in your shoes, and I could afford the tax bill, I would convert to a Roth, as your income and tax rate will only be higher in the foreseeable future.  Should you change your mind (perhaps if stock prices and value drop significantly, or the Trump tax plan convinces you otherwise), you can recharacterize within a certain timeframe.



          • #6
            I'd convert what you can to Roth while staying in a low bracket and consider either taking the tax hit on the rest or rolling it into a 401(k).

            [plz stop capitalizing all of ROTH's an eponym not an acronym ;-) Round On The House? lol]


            • #7

              [plz stop capitalizing all of ROTH btw…it’s an eponym not an acronym
              Click to expand...

              Retire. Omit Taxes. Hooray!


              • #8
                Ha! Will do, @DMFA  but maybe I'll just keep capitalizing it and go with @PhysicianOnFIRE's acronym...I like that better anyway. By the way, I wonder, what "FIRE" is an acronym for?   Maybe this is why they had to start a separate board for beginners who weren't posting...We'll get there...go easy on us.

                Going to work on a tax estimate to see if we can get down to the 15% tax bracket. I have a business that will be reporting a loss as well, so that should help get us down...I think.


                • #9

                  By the way, I wonder, what “FIRE” is an acronym for?   Maybe this is why they had to start a separate board for beginners who weren’t posting…We’ll get there…go easy on us.
                  Click to expand...

                  It's in his signature, it stands for "financial independence, retire early." There's a whole culture devoted to FIRE.  The most famous of FIRE bloggers is Mr. Money Mustache, in case you have heard of him.


                  • #10
                    I know...I was joking about being a beginner. Bad attempt at a joke!  


                    • #11
                      I vote for converting to a Roth. Since you asked, I'm presuming that you can find a way to pay the taxes. As to whether to do it all this year or 50:50 with 2018, that depends upon your tax projections and the market. Don't forget that you have until 10/15/18 to recharacterize all or part of the conversion, which is close to having your cake and eating it, too. Or at least getting to lick the icing bowl.

                      But here are 2 more options:

                      • You do some moonlighting next year, set up a solo-401k and roll your TIRA into it.

                      • You do some future moonlighting and, in the meantime, contribute only to the nondeductible TIRA. When you find a way in a year or 2 or 3 to start a side IC business, then convert the TIRA to your solo-k and convert the nondeductible TIRA balance to a Roth.

                      This gets you a clean slate, but it's not as simple as simply rolling your pre-tax TIRA into your current employer's 401k. But then, of course, you lose control of that $50k until you leave your employer. If you and your hubby will have to move for residency, though, that may not be too far into the future.
                      My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
                      Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


                      • #12
                        Thank you all for the advice! I am going to estimate about how much we can convert to the roth this year based on last year's taxes since they should be pretty similar. We will see how next year unfolds and go from there!

                        I actually work remotely @jfoxcpacfp and plan to worth through residency at minimum. Looking forward to having a dual income so we can "catch up" to where we would like to be!