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  • Roth Conversion in Residency?

    My wife and I have been fortunate enough during our years of residency to max out both our Roth IRA and 401K accounts.  My wife is about to start her job as an attending and thus our/her tax bracket will bump up.  I will be in fellowship next year so still chugging along on the PGY scale. Before we reach our new higher tax brackets, does it make sense to convert our 401K to roth and take the tax hit now to enjoy decades more of tax free growth?  Is that even possible if we have maxed out our Roth accounts already?  We have no traditional ira accounts if that makes a difference.  All advice is welcome!  Thank you in advance.

  • #2
    Yes, it's definitely possible. 401k --> Rollover IRA --> Roth IRA. My wife, who is non-medical, did this when she switched jobs while I was in residency. We did it for the exact same reason you are thinking of doing it: extended tax-free growth while minimizing the upfront tax it (due to lower tax bracket). I don't regret doing it.

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    • #3
      Yes, you are at the prime time for converting to a Roth IRA. Of course, this assumes that your wife's job as an attending is with a different employer, freeing up her 401k for a rollover.

      The fact that you have no pre-tax IRAs is irrelevant in this situation as you are not taking advantage of the "back-door" Roth maneuver.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        I am a little unclear on Roth rules. Does the 5500 limit not apply to 401k/403b rollovers to Roth ira? I figured that since you have to convert a 401k/403b to an ira and then to a roth, you would be limited by the yearly amount (the process is almost like a backdoor Roth since you convert from an ira to a roth)? Is there any limit as to how much you can rollover from a 401k?

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        • #5
          Darkroom Investor, the $5500 Roth IRA limit to which you refer is the annual CONTRIBUTION limit. You can CONVERT (and pay taxes on) as much tax-deferred income from other accounts like 401k/403b into your Roth IRA as you would like.

          Where this might get confusing is the backdoor Roth IRA where you make a non-deductible contribution (I.e. You've already paid tax) to a Traditional IRA (annual limit $5500) before converting to a Roth IRA (annual limit $5500). That contribution amount is still limited to $5500 and thus so is the conversion if done in the same tax year.

          I plan on doing the same as my wife and I are both graduating from residency this month. Congrats to all my fellow residency graduates!

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          • #6




            I am a little unclear on Roth rules. Does the 5500 limit not apply to 401k/403b rollovers to Roth ira? I figured that since you have to convert a 401k/403b to an ira and then to a roth, you would be limited by the yearly amount (the process is almost like a backdoor Roth since you convert from an ira to a roth)? Is there any limit as to how much you can rollover from a 401k?
            Click to expand...


            nachos31 gave a pretty good explanation. Here's how I would put it:

            1. When you move money into a Roth IRA from a non-Roth IRA, it is called a conversion. Conversions are limited only by the amount in non-Roth IRA accounts. Of course, once you have no more in a 403b, IRA, SEP, etc., you have nothing left to convert. Since most conversions are from pre-tax accounts, the decision of how much to convert is usually based upon your tax bracket and how much you are willing/can afford to pay in taxes.

            2. IRA contributions are limited to the lesser of earned income or $5,500 per person, per year ($6,500 pp/py if age 55+). If your income is above the IRS threshold, part or all of your contribution is nondeductible.

            3. Back to rule #1. When you convert your nondeductible IRA, you can convert all or part of your nondeductible IRA balance. You can convert at any time, i.e. you can contribute to nondeductible IRAs for several years in a row before converting. The total amount you convert will be the balance in the account, which will change daily based upon what you bought. If you bought into a money market account and you convert a couple of days later, you may have a few cents, immaterial. If you bought mutual funds and the account value has risen when you convert, you will convert whatever that amount is and pay tax on the difference. If it has gone down, you convert less than $5,500 ($6,500) but do not get to take a capital loss.

            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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            • #7
              Just want to clarify something on this for residents...is it permitted to do a conversion every year? I just do not see the advantage of waiting until you are done with residency and converting 3-5+ years all at once (and facing the tax bill all at once). Or are you only allowed one conversion to a Roth?

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              • #8




                Just want to clarify something on this for residents…is it permitted to do a conversion every year? I just do not see the advantage of waiting until you are done with residency and converting 3-5+ years all at once (and facing the tax bill all at once). Or are you only allowed one conversion to a Roth?
                Click to expand...


                You can convert as many times a year as you wish. You are correct that there is no advantage to wait. In fact, there is a great disadvantage to doing so.

                You also no longer have to go from a 401k -> r/o IRA -> Roth IRA but can skip the middle step.
                Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                • #9
                  I was in a similar situation and decided NOT to convert a 401k to roth.  I ran the numbers for my situation and decided it wasn't necessary.  I had a small 401k (<$50k), was happy with our 401k plan and was not interested in taking the tax hit at that time.  What I looked at were potential savings rates, types of accounts, future returns and spending, tax brackets, etc.  In the end, I could potentially pay less taxes by keeping the 401k vs. converting it to a roth now, of course the future is uncertain and things may work out unfavorably or more favorably for me in the future.  However, in the grand scheme of things, the numbers I'm talking about are tiny relative to the income and savings potential of an attending.  If you need help crunching the numbers, I'm sure many here can help you out with that.

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                  • #10




                    Just want to clarify something on this for residents…is it permitted to do a conversion every year? I just do not see the advantage of waiting until you are done with residency and converting 3-5+ years all at once (and facing the tax bill all at once). Or are you only allowed one conversion to a Roth?
                    Click to expand...


                    You can't convert every year because you will still be with the employer.  You have to leave the employer to roll the 401k into an IRA (roth or otherwise).  Unless your plan allows in-service rollovers which I believe is rather rare.

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                    • #11




                      I was in a similar situation and decided NOT to convert a 401k to roth.  I ran the numbers for my situation and decided it wasn’t necessary.  I had a small 401k (<$50k), was happy with our 401k plan and was not interested in taking the tax hit at that time.  What I looked at were potential savings rates, types of accounts, future returns and spending, tax brackets, etc.  In the end, I could potentially pay less taxes by keeping the 401k vs. converting it to a roth now, of course the future is uncertain and things may work out unfavorably or more favorably for me in the future.  However, in the grand scheme of things, the numbers I’m talking about are tiny relative to the income and savings potential of an attending.  If you need help crunching the numbers, I’m sure many here can help you out with that.
                      Click to expand...


                      I'd be intrigued to see your calculations on the subject.  I'd be surprised if the $7,500 tax hit (assuming 15% bracket) now is worse than the tax hit you'd take on it after three decades of earnings, which assuming 5% annual gains and retiring in the 25% bracket, would be over 4x as much...though $7,500 in a year is indeed a pretty big hit to take in residency, but maybe in your first year as an attending it might be OK.

                      People in med school with zero AGIs can should be able to convert an amount up to their exemptions and deductions each year ($10,300 if single) and pay zero taxes on it.

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                      • #12
                        Just to clarify, very few plans allow in-plan Roth conversions, and the same is true for withdrawals, so the only way you can get Roth assets in your 401k is if you are either 1) making Roth salary deferral (which is technically not converting) or 2) roll the 401k into an IRA, which you can only do once you change jobs.

                        I agree, those with low AGIs should absolutely convert to Roth if you can (or do Roth salary deferrals - this is much easier to do and allowed by most plans).  You will not have many opportunities to build the Roth bucket later on if employed unless you have 1099 income or have your own practice.  However, that said, there are opportunities to do strategic Roth conversion at retirement, and that too can potentially lower your eventual RMD.
                        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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                        • #13







                          I was in a similar situation and decided NOT to convert a 401k to roth.  I ran the numbers for my situation and decided it wasn’t necessary.  I had a small 401k (<$50k), was happy with our 401k plan and was not interested in taking the tax hit at that time.  What I looked at were potential savings rates, types of accounts, future returns and spending, tax brackets, etc.  In the end, I could potentially pay less taxes by keeping the 401k vs. converting it to a roth now, of course the future is uncertain and things may work out unfavorably or more favorably for me in the future.  However, in the grand scheme of things, the numbers I’m talking about are tiny relative to the income and savings potential of an attending.  If you need help crunching the numbers, I’m sure many here can help you out with that.
                          Click to expand…


                          I’d be intrigued to see your calculations on the subject.  I’d be surprised if the $7,500 tax hit (assuming 15% bracket) now is worse than the tax hit you’d take on it after three decades of earnings, which assuming 5% annual gains and retiring in the 25% bracket, would be over 4x as much…though $7,500 in a year is indeed a pretty big hit to take in residency, but maybe in your first year as an attending it might be OK.

                          People in med school with zero AGIs can should be able to convert an amount up to their exemptions and deductions each year ($10,300 if single) and pay zero taxes on it.
                          Click to expand...


                          In my case, I was in the 15% bracket but the State tax at that time would bring it up to $10k.  If I took that $50k, with 2% of real returns over 30 years, I get about $90k in today's dollars.  Withdrawing that all at once using today's tax brackets in the same State as before, with no other income, it would be about $14k in taxes.  However, I plan to stay within the 15% bracket (not 25%) in retirement and if I spread out that $90k over 3 years (using today's brackets), and fill in the rest of my retirement needs using a roth, I spend $6k on taxes over those 3 years (in the same State as before).  In the grand scheme of things, the difference is minor and there are so many assumptions and variables that can make the result more or less favorable there there is no clear cut answer, but the fact that it would be a $10k tax hit in the midst of residency made the decision a little easier.  BTW, this 401k I had was from a job I had prior to med school and I'm married.

                          As for the OP, by the time he can rollover their 401k's, his wife will be an attending (at least for part of the year) and earning a partial years worth of attending salary which might bump them up to the 25%+ bracket, in which case taking the tax hit now may not be a straightforward decision and could depend on the assumptions their willing to make regarding the future.

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                          • #14
                             

                            (new thread started, duplicate deleted)

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                            • #15
                              Sounds like all trainees should do this when starting their first attending job then? Should I? Please see below, and thanks in advance!

                               

                              I finished fellowship august 2017 and start attending job October 2017 (two months unpaid vacation in between). I have 56,000 in old my state university 403(b), all in extremely low cost vanguard index funds. The expense ratios are lower than vanguard even offers to individuals because it’s at a state “institutional rate”. I can keep them with my old employer plan, or convert to IRA and roll over to Roth IRA – but I’m torn. Starting in 2018 my income goes up :

                              For 2017 I will make:
                              38,000 fellowship + 102,750 attending = 140,750

                              2018 I will make:
                              411,000 attending = 411,000

                              If it’s best, I’m ok with paying a tax bill this year to convert my 403(b) to Roth. It makes sense to me to convert in 2017 since my income is lower this year, but am I thinking through this correctly? The down side is that by converting, my expense ratio goes up slightly even if I put it all in vanguard index funds (since I lose the “state institutional rate”).

                               

                               

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