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Married ED Docs, just finished residency - Convert 403b to Roth or not?

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  • PhysicianOnFIRE
    replied




    I plan on just keeping the 403b as it, as I have the option in that to invest in Vanguard admiral shares for the SP500. If my new employer’s 401K has self-directed option (and not just a single fund with a 0.7% ratio), I may roll it over into a 401K with Vanguard just to make all my investments under one roof.

    Thanks for the help guys. I appreciate it.
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    Good choice, in my humble opinion. I thought I read you had crummy funds in the old 403(b), but I stand corrected.

    You guys are in great shape. Two substantial incomes and the fact that you've discovered this site and posted in the forums -- you know what to do. Enjoy life, live on one paycheck or less, and the world is your oyster.

    Best,

    -PoF

     

    Leave a comment:


  • soundbyte
    replied
    I plan on just keeping the 403b as it, as I have the option in that to invest in Vanguard admiral shares for the SP500. If my new employer's 401K has self-directed option (and not just a single fund with a 0.7% ratio), I may roll it over into a 401K with Vanguard just to make all my investments under one roof.

    Thanks for the help guys. I appreciate it.

    Leave a comment:


  • fasteddie911
    replied
    I agree that you don't have to convert to a Roth IRA, based on tax implications, as the difference in taxes you pay now vs later would probably be minor, given the small account size.  If anything, it may be more favorable to not convert.  If I understand your situation correctly, though, you could also consider just keeping the 403b where it is.  It sounds like your new 401k options aren't great and having the 403b doesn't affect your ability to do backdoor roth's later.

    Leave a comment:


  • jfoxcpacfp
    replied





    There is NO guarantee that Roth IRAs will be available for conversion or contribution when today’s 30-something doc’s retire.
    Click to expand…


    So to clarify, you ARE a proponent for conversion to the Roth now (aka 403b rollover directly into Roth IRA)?
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    Yes, per my original response, that is what I would recommend.

    Leave a comment:


  • soundbyte
    replied
    Thank for that clarification. Knowing this, It appears I should definitely convert to a Roth now, so that future backdoor contributions can be done without Pro-rata issues.
    Thanks a ton! Definitely useful for me, and I'd imagine most recent graduates.

    EDIT: I see where I'm causing confusion. I can rollover my 403b into a 401k (non roth), which is outside of Pro rata. But to do this, I'd have to roll it over into my new employers 401k plan, which has expense ratios of 0.8 percent and extremely limited fund options.

    Otherwise, the only way to avoid future Pro rata is to convert to a Roth IRA

    Leave a comment:


  • AlexxT
    replied


    In the same token, by converting it into a Roth now,  this frees me up to do future “backdoor” Roth contributions without worrying about the pro-rata rule
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    Unless I'm missing something, I don't see where the pro rata rule applies here.

    The pro rata rule makes doing backdoor Roths a problem if you have any traditional IRAs.

    You  have a 401b.  If you can roll the money into a 401k it won't have a pro rata problem.  If you have self employed  income you could roll it into a solo 401k.  If you have a Sep-IRA it would be a problem.  But only IRAs make backdoor Roths essentially unworkable.

    Leave a comment:


  • AlexxT
    replied


    However, the question then becomes, given our current tax bracket is: are future additional “backdoor” Roth contributions worthwhile?
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    This is a great point.

    Backdoor Roths are no-brainers, because it's not an either -or choice.

    Here's why:  If you have the choice between a Roth or a traditional IRA, you choose based on your current tax bracket vs later.  So, if you're a resident in a low bracket, pay tax now, and put the money in  a Roth.  If you're an attending with a high bracket, use an IRA, defer the taxes, and pay them in retirement when they will be lower.

    But a backdoor Roth is done with money that you have already had to pay tax on. YOu had no choice.  You're earning too much to contribute to a Roth, so you put after tax money into an  IRA, then convert that to a Roth tax free, since the money in the IRA was already after tax.  So it's simply money that you put in a Roth in addition to your 401k contribution, not instead of a 401k.

     

    Leave a comment:


  • soundbyte
    replied




    If it’s just a question of converting an IRA to a Roth when you’re in the 33% bracket, you probably shouldn’t do it.

    First, try to anticipate how much money you will have in your IRA or 401k when you retire.  Will your required distributions put you in the 33% bracket?  For that to happen, you will need to have at least 5.7 million in your IRA.  But that would only put your marginal rate at 33%.  Your effective rate on that money would be lower.  ( Of course, you have to also factor in your Social Security and other taxable income ).  The point is, that unless you have significantly more than 6 million or more in your IRAs, you will be losing money by doing the conversion now.

    However, if you have after tax money that you can use to pay the tax on the conversion, then you are essentially doing a “backdoor Roth” with that money.

    Assuming a 33% marginal rate on withdrawal, then in a traditional IRA, you have 67% of the money growing tax free for you, and 33% growing for the IRS.  By converting to a Roth, you’re paying the 33% tax now, and after putting the 67% that’s left after paying the tax into the Roth, you get to add back the 33% using after tax money to grow tax free.  So what you accomplish is that you get more money into the Roth account to grow tax free.

    But there’s no point in doing it if you will be paying more tax now than you would have paid later, even if it will grow tax free, because if you invest in index funds, the tax drag is quite low.

     
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    This all makes sense. In the same token, by converting it into a Roth now,  this frees me up to do future "backdoor" Roth contributions without worrying about the pro-rata rule. However, the question then becomes, given our current tax bracket is: are future additional "backdoor" Roth contributions worthwhile?

    Leave a comment:


  • AlexxT
    replied
    If it's just a question of converting an IRA to a Roth when you're in the 33% bracket, you probably shouldn't do it.

    First, try to anticipate how much money you will have in your IRA or 401k when you retire.  Will your required distributions put you in the 33% bracket?  For that to happen, you will need to have at least 5.7 million in your IRA.  But that would only put your marginal rate at 33%.  Your effective rate on that money would be lower.  ( Of course, you have to also factor in your Social Security and other taxable income ).  The point is, that unless you have significantly more than 6 million or more in your IRAs, you will be losing money by doing the conversion now.

    However, if you have after tax money that you can use to pay the tax on the conversion, then you are essentially doing a "backdoor Roth" with that money.

    Assuming a 33% marginal rate on withdrawal, then in a traditional IRA, you have 67% of the money growing tax free for you, and 33% growing for the IRS.  By converting to a Roth, you're paying the 33% tax now, and after putting the 67% that's left after paying the tax into the Roth, you get to add back the 33% using after tax money to grow tax free.  So what you accomplish is that you get more money into the Roth account to grow tax free.

    But there's no point in doing it if you will be paying more tax now than you would have paid later, even if it will grow tax free, because if you invest in index funds, the tax drag is quite low.

     

    Leave a comment:


  • litovskyassetmanagement
    replied










    Returns may not be 10-12% but it doesnt matter. Its not as if they actually had 10-12% annual purchasing power increase. Inflation was higher and so were taxes, costs of investing, frictions, etc…that dramatically reduced your actual real, real return. I expect the nominal number may be lower, even dramatically, but in reality dont expect much of a difference.
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    It actually does matter because taking excessive risks can lead to significantly LOWER returns.  The whole point is that if you are overexposed to the markets, your return will be at the mercy of the market, which means that your fortune will rise and fall by the market, and that’s a terrible way to invest, especially if you are going to accumulate significant amount of money.  Understanding the statistics of the stock market is the first step before developing an investment strategy that should be robust to market risk.
    Click to expand…


    No, it doesnt because what I mentioned was neither here nor there. It was only about not getting caught up on nominal vs. real. If you pay attention to things like that you would understand there is no reason to take on extra risk to reach a nominal target when that makes no sense whatsoever and is therefore preventative to just the behavior you described.
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    I agree that inflation can hurt significantly, but we have no control over what inflation does.  The whole point of my answer was that we can't even set 'target' return because we have no idea what it would be, and that the more volatile the portfolio, the less likely we are to hit our 'target'.

    However, I still don't agree that returns don't matter.  If that's the case, then we should just invest in 30-year treasuries because they will most likely produce a return on par with inflation.  There is a reason why we try to get a return that beats inflation (or hope to do so) by investing in stocks.  However, given the uncertainty of the market and certainty of inflation, we should not be throwing numbers like 10%-12% or even 8% return without specifying some sort of a spread/range.  In fact, my second point is that if we actually want to get a return with a narrower range of outcomes, we have to lower our exposure to risky assets, and that would hopefully produce a return that might beat inflation with a higher degree of certainty than if we just go all in with stocks.

    Leave a comment:


  • litovskyassetmanagement
    replied










    Returns may not be 10-12% but it doesnt matter. Its not as if they actually had 10-12% annual purchasing power increase. Inflation was higher and so were taxes, costs of investing, frictions, etc…that dramatically reduced your actual real, real return. I expect the nominal number may be lower, even dramatically, but in reality dont expect much of a difference.
    Click to expand…


    Also, when advisers state to their clients to expect 10%-12% returns, and that advisers know how to get those returns over the long term by ‘properly diversified’ portfolio, that’s called malpractice.  No adviser can do any such thing.  They have no idea how to get returns, because markets deliver returns.  The only thing an adviser can do is decrease investment cost and manage risk, which is not something that can be done with 100% stock market exposure, diversified or not, especially in the long term.  This is why many clients drop advisers by the way – they think somehow advisers are supposed to produce returns, while they can do no such thing, and because holding over 30+ years is no guarantee that returns will be anywhere near historical averages.
    Click to expand…


    Actually, I have never stated this to my clients, never will. I give them the historical facts and explain that this is all we have to go on, not hypotheses about what may or may not happen. I also give them a copy of Simple Wealth, Inevitable Wealth, which explains planning in the context of investing (which is only to serve the plan) far better than I can ever articulate.

    Our target is 8% and we will never achieve that by including bonds unnecessarily in a portfolio for which we have planned for the long term. Given that, our clients have no need for knee-jerk reactions based upon a bear market lasting a year or two – or even three. We have already included that possibility in the plan (knowing that the stock market drops intra-year, on average, 14.1% and that a bear market occurs, on average, every 5.5 years. Having those expectations prevents the reactions that result in reduced long-term results. We don’t review clients’ results for a 5 year period – what is the need? We already know what they will need from their savings in the next 5 years and have already allowed for it. No adjustments necessary.

    Speaking of inflation, it has averaged 3% since 1926, high-quality corporate bonds’ average return is 6%, large-cap stocks, 10% and small-cap stocks 12%. Subtracting inflation from each sector, large-cap stock returns are double the net return of bonds and SC stocks are triple. Why settle for so much less just because you can’t (or refuse to) plan if you can crelate a plan and follow it instead?

    I guarantee you that, in the Brexit episode, I had far fewer panicked phone calls and emails than any advisor who doesn’t engage in this level of education and explanation. The investing is a piece of cake. It’s everything else that makes the difference.
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    Nobody is arguing against planning, and I never mentioned bonds. You said 10%-12%, and that's why I had to reply. A target of 8%, what is your margin of error?  That's what the charts I posted explain very well.  You can't will 8% any more than you can will that it rains tomorrow (or not), and bonds have nothing to do with it (in fact with bonds your spread is much lower so you can at least know that you won't be as far away from the target as when you have 100% stocks).  The charts show that if you measure S&P returns, they depend on the entry and exit, not on the holding period.  You can hold for 40 years, and if you happen to be unlucky, your return can be significantly lower than 8%.  Quoting past averages is meaningless because you are more likely to win the lottery than to hit the average value for some random number of years.  And drawdowns are also never average.  Averages don't mean a heck of a lot, and research shows it very well.

    Leave a comment:


  • Zaphod
    replied







    Returns may not be 10-12% but it doesnt matter. Its not as if they actually had 10-12% annual purchasing power increase. Inflation was higher and so were taxes, costs of investing, frictions, etc…that dramatically reduced your actual real, real return. I expect the nominal number may be lower, even dramatically, but in reality dont expect much of a difference.
    Click to expand…


    It actually does matter because taking excessive risks can lead to significantly LOWER returns.  The whole point is that if you are overexposed to the markets, your return will be at the mercy of the market, which means that your fortune will rise and fall by the market, and that’s a terrible way to invest, especially if you are going to accumulate significant amount of money.  Understanding the statistics of the stock market is the first step before developing an investment strategy that should be robust to market risk.
    Click to expand...


    No, it doesnt because what I mentioned was neither here nor there. It was only about not getting caught up on nominal vs. real. If you pay attention to things like that you would understand there is no reason to take on extra risk to reach a nominal target when that makes no sense whatsoever and is therefore preventative to just the behavior you described.

    Leave a comment:


  • litovskyassetmanagement
    replied




    There you go again. I’m talking about a plan, a long-term plan. You are talking about individual years and your personal “research” and biases, which is not predictive of what those without a plan will do. Those with a long-term plan already know what measures to take for periods of time. A single year means nothing in the context of an authentic long-term plan, implemented, monitored, and updated on an interactive, continual basis. All we can really base a plan upon is what we know, not what we think or fear will happen in the short term or a specific year.
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    This is not my research, this is pretty much mainstream stuff that is available openly from multiple sources.  Has nothing to do with one year.  We are talking here about LONG TERM results. This is the same research you are quoting except that it shows ALL investment results, not just an end to end average for a single period. You stated that in the long run a 100% stock portfolio can be expected to produce 10%-12% return, and that's what I'm responding to.

    Leave a comment:


  • soundbyte
    replied


    There is NO guarantee that Roth IRAs will be available for conversion or contribution when today’s 30-something doc’s retire.
    Click to expand...


    So to clarify, you ARE a proponent for conversion to the Roth now (aka 403b rollover directly into Roth IRA)?

    Leave a comment:


  • jfoxcpacfp
    replied







    Returns may not be 10-12% but it doesnt matter. Its not as if they actually had 10-12% annual purchasing power increase. Inflation was higher and so were taxes, costs of investing, frictions, etc…that dramatically reduced your actual real, real return. I expect the nominal number may be lower, even dramatically, but in reality dont expect much of a difference.
    Click to expand…


    Also, when advisers state to their clients to expect 10%-12% returns, and that advisers know how to get those returns over the long term by ‘properly diversified’ portfolio, that’s called malpractice.  No adviser can do any such thing.  They have no idea how to get returns, because markets deliver returns.  The only thing an adviser can do is decrease investment cost and manage risk, which is not something that can be done with 100% stock market exposure, diversified or not, especially in the long term.  This is why many clients drop advisers by the way – they think somehow advisers are supposed to produce returns, while they can do no such thing, and because holding over 30+ years is no guarantee that returns will be anywhere near historical averages.
    Click to expand...


    Actually, I have never stated this to my clients, never will. I give them the historical facts and explain that this is all we have to go on, not hypotheses about what may or may not happen. I also give them a copy of Simple Wealth, Inevitable Wealth, which explains planning in the context of investing (which is only to serve the plan) far better than I can ever articulate.

    Our target is 8% and we will never achieve that by including bonds unnecessarily in a portfolio for which we have planned for the long term. Given that, our clients have no need for knee-jerk reactions based upon a bear market lasting a year or two - or even three. We have already included that possibility in the plan (knowing that the stock market drops intra-year, on average, 14.1% and that a bear market occurs, on average, every 5.5 years. Having those expectations prevents the reactions that result in reduced long-term results. We don't review clients' results for a 5 year period - what is the need? We already know what they will need from their savings in the next 5 years and have already allowed for it. No adjustments necessary.

    Speaking of inflation, it has averaged 3% since 1926, high-quality corporate bonds' average return is 6%, large-cap stocks, 10% and small-cap stocks 12%. Subtracting inflation from each sector, large-cap stock returns are double the net return of bonds and SC stocks are triple. Why settle for so much less just because you can't (or refuse to) plan if you can crelate a plan and follow it instead?

    I guarantee you that, in the Brexit episode, I had far fewer panicked phone calls and emails than any advisor who doesn't engage in this level of education and explanation. The investing is a piece of cake. It's everything else that makes the difference.

    Leave a comment:

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