Yr 5: $500+$125*4/$25k*5 = 0.8% Dr. Jim Dahle: (Since her job description is so flexible and those types of jobs typically don't pay very much, that's pretty easy to do. I’m an employee of WCI, LLC, an S Corp for tax purposes. Loans originated by SoFi Lending Corp. CFL 6054612 NMLS# 1121636. Are there some general principles on how we begin to approach problems of this nature? Although it can be straightforward, it can also be unnecessarily complex. Dr. Jim Dahle: What I would tell people is “You can record me and you can record me walking out the door or you can stop recording me and I’ll take care of your family member”. I wonder if it is worth the fee of setting aside about $65k in after tax savings 401k savings? The conversion is tax-free because you can't get a deduction for the contribution. Not sure I have enough info. Now, the bigger the system, the less likely they are to be flexible. And we added that in. Because it would have made more sense to load up the Roth space (as opposed to taking deduction at that time). I hope you can assist me or direct me to someone who can help me with this concern”. But if you do it right away especially during the same calendar year, a lot of times they'll go, “Oh, no problem. I’m guessing it will be the latter, which is why you didn’t qualify your statement. Although if it's tax deferred money, you'll owe taxes on it at your marginal tax rate. And there's got to be some sort of litmus test that can be applied to determine whether a new asset class that has not historically been part of your investment plan is a reasonable addition. And if I increase my 1099 income more to 56k I can still do my w-2 work Roth 401k for 19k plus whatever my employer contributes, and still contribute max of 56k into after tax solo401k? I have all the money I'm ever going to need. When it comes down to the pro rata rule, that'll be important. And I think there's a lot of truth to that. You will notice I am now using my $19K employee contribution at the partnership 401(k) instead of the WCI 401(k). We are only going to ship the books to a volunteer “champion” in the first-year class to distribute to their classmates. Most video recordings are legal with or without consent. If you have student loans, SoFi practically invented student loan refinancing in 2011. This deduction, designed to keep pass-thru business owners (sole proprietorships, partnerships, and S Corps) competitive with C Corps after the Tax Cuts and Jobs Act of 2017 (TCJA), is our new largest deduction (it used to be retirement account contributions and charitable deductions). Refinancing versus not refinancing. You want to be able to amend it, but not make it easy to amend it. Remember, it's a for-profit enterprise, but it should be dramatically less than you will notice on the blog and WCI forum. A stock mutual fund, a bond mutual fund, whatever. However, if you lose money in the account, it really makes your tax paperwork complicated because now you've got more basis than you actually had a conversion. This is the one I published in 2014. It's both personal and it's finance, behavioral and math. So that is step one, right? iQ401k is a White Coat Investor recommended retirement plan services provider. The backdoor Roth IRA contribution is a strategy and not a product or a type of IRA contribution. And that 401(k) can likely be rolled over into an inherited IRA. Thank you. And if you have a plan to take care of your loans, and it's a reasonable plan once you get out of school, you don't need to feel guilty about living on loans while you're in school. Lots of people are super interested in buying a home either when they get into residency or right when they come out of residency, often for a place they're only going to be in for two to four years. Ever wondered what you should do when you've maxed out your 401K, backdoor Roth IRA, and HSA but still want to save more? The new one admittedly has a better design, but its structure has a nasty side effect for young super-savers. And so, you may want to spread that out over a few years, so you don't get a big, huge tax hit all at once. The Tax Increase Prevention and Reconciliation Act of 2005 permitted conversions of nondeductible traditional IRA contributions into Roth IRAs starting in 2010. The lower, the better, right? I have a question about inheritances. Go in there and ask them. I searched the WCI forums and people are always just talking about Backdoor Roths. Dr. Jim Dahle: Dr. Jim Dahle: So basically a hundred thousand dollars for most people comes to you totally tax-free. My Mega Roth Conversion: A $212,000 Mistake? She has essentially inherited 401(k)s and IRAs. Here's your host, Dr. Jim Dahle. Just recently, however, as I was looking through all the plan documents again, I realized that there's an option on the DCP to contribute post-tax dollars above the mandatory 7% up to a total of $56,000. Converting to a Roth IRA may ultimately help you save money on income taxes. There just isn't much that you can do about it. It seems to me that some of the financial decisions that we have to make in very different areas have similar math. Dr. Jim Dahle: Obviously the less you have in there, the bigger the fee drag and the less the tax benefit. Lots of people are super interested in buying a home either when they get into residency or right when they come out of residency. iQ401k is a White Coat Investor recommended retirement plan services provider. And when I say real investment, I generally mean that it's either a productive asset, meaning something that produces something like earnings or rents. For a long time, I have generally recommended that doctors in their peak earnings years preferentially use tax-deferred retirement accounts. Step 4 above was to invest the money in the Roth IRA. For example, in ours, we said, we're not going to make any changes until after a three-month waiting period. But Michigan doesn't have an inheritance or an estate tax according to Google. There are very few laws which prohibit video recording. They are adorable, and hanging out with them brings back all the wonderful feelings from the honeymoon phase of discovering personal finance. I’ve read/heard of a number of places to open a Roth but wanted to see if anyone had recommendations based on experience. Most of the time you'll lose money. Do you have any advice for me on advising her what to do? You’d have to run the numbers. It's kind of a good overview for anybody at any stage of their career. For 2021 that's $6,000 if you're under 50. You do need an actuary to set it up, indeed, but that is no big deal. There are very few laws which prohibit video recording. In a 401k/403b, you must start taking out a fraction of the account every year once you hit retirement age (currently age 72). But there is a method to our madness. Now, will they let you take money that you designated to go into a 403(b) and now have it go into the defined contribution plan they have? Backdoor Roth IRAs are a frequently-discussed topic on physician blogs and social media sites. Dr. Jim Dahle: Now there is no dictionary definition of super-saver, but the idea behind it is if you are going to be well into the top tax bracket in retirement, you may want to rethink the traditional tax-deferred advice and instead make tax-free (Roth) contributions and maybe even do some Roth conversions, even at the top tax rate. Dr. Jim Dahle: These include the rent versus buy decision, student loan management during residency, starting to invest during residency, and disability and life insurance. It's not that complicated. So, it's been a crazy, crazy winter. I searched the WCI forums and people are always just talking about Backdoor Roths. The whole thing goes in there tax-free. What I did, work. But I was impressed with how much better the service was from both companies than what I've come to expect from Vanguard. This is the flip-side of the 80% deduction phenomenon I previously blogged about here. But honestly, most people are not having an emergency. So how do you get it to zero? It is worth doing for most doctors. Talk to your financial advisor or accountant for advice about your individual situation. Those reviews really do help us to spread the word. Although it’s hard for me to think of instances when a spouse would want to do that instead of just rolling it into their own IRA. If you're a physician or dentist doing your residency, SoFi has new lower interest rates for you. Social Security is geared for the low income, so there’s little benefit for the extra employment tax withdrawal from larger salaries. Thank you. Dr. Jim Dahle: Now, if you made the mistake of just leaving it all in cash, well, that's unfortunate. Unfortunately, the options for residents are not clearly spelled out and as I was planning my contributions for this year, it looked like the only accounts I had available were a 403(b) and 457(b) in addition to a DCP plan where an automatic 7% of our salary is contributed to this account and matched by the employer. If you want to hedge your bets and put 5% of your portfolio into oil or gold or Bitcoin or something like that, it's not crazy to do, right? Thanks With the potential increase of federal and state income tax rates, the ability to generate tax-free returns from your IRA investments is … Maybe I can talk them into sponsoring a podcast or something down the road. This process (after-tax contributions + instant Roth conversion) is known as a Mega-Backdoor Roth IRA. In most states it receives significant asset protection from your creditors in a bankruptcy situation. Your settlement fund or a money market fund. It's wonderful that you've inherited some money, but I think for most of us, we would rather have the person we inherited it from than the money that we got from them. So, she's got a long life ahead of her, hopefully, and I'm not sure if I should send her to a financial advisor or an accountant or both. This is retirement account space that you can't get back. So, don't procrastinate. Definitely applicable to me and something else to think about. Thanks. It's $7,000 if you're over 50. I've been accused by bloggers or whoever out there of not being sophisticated because I don't have some complicated investment scheme. But more importantly, consider doing it all ($56k) as after-tax for the mega-backdoor roth. A stock mutual fund, a bond mutual fund, whatever your financial plans says. Dr. Jim Dahle: You've got this and we can help. Thanks for help with such a simple question! What percentage of your portfolio do you reserve for "play money"? As the New Year begins, many a high-income professional who earns too much to make a direct Roth IRA contribution will use the backdoor to make a Roth IRA contribution of $6,000 or $7,000 (if age 50 or over). That would not be reasonable. If you follow the directions, you can still report it okay on your tax forms. Dr. Jim Dahle: Lots of people screw this up, but basically you got to look around all those forgotten IRAs you might have from some old job and look at all your IRAs, simple IRAs, SEP IRAs, traditional IRAs, rollover IRAs. On the other end of the spectrum, you've got Bitcoin and Tulips. It leaves me to E-trade and Fidelity. My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. But in most places, people are allowed to surreptitiously not only record video but also audio. No way. Put it in a traditional IRA first. Dr. Jim Dahle: You see, mysolo401k.net isn't going to function as the custodian of the funds. And so, a lot of times they'll let you do that, but it's really up to them. It's called The White Coat Investors Guide for Students. Here are the steps to do a Backdoor Roth IRA: Step 1: Make a non-deductible IRA contribution to a traditional IRA. Since I'm a resident and in my lower earning years, I want to maximize Roth as much as possible. If you do all these assignments, you will get up to speed with the rest of the people in the White Coat Investor community very, very quickly over a matter of just a few weeks. Of course, Roth money, whether it's a Roth 401(k) or Roth IRA, there's no taxes due when that comes out of the account. So what's the solution? Even if I were only making $56K with WCI, I would still pay the maximum Social Security tax each year. A SEP-IRA does not. And finally, they could not convert a traditional IRA, prepaying the taxes and moving that money into a Roth IRA. The whole Mysolo401k, Fidelity en Custodian combo sounds more cumbersome than the “not off-the-shelf’ Vanguard solution I have used for several years. Before we dive in, I’ll remind you that I am a doctor, not an attorney or accountant. Luckily I have been a bit sow/lazy. Well, asset classes you want to add to your portfolio generally should have some sort of positive real return, right? So, if you want to check that out, be sure to watch this on YouTube, rather than just listening to it on the podcast. They are people who have their practices, mostly full of people like physicians and dentists, but they give advice to other people as well. Your email address will not be published. The longer the time frame, the more the investments have the opportunity to grow, making tax-free withdrawals in retirement all the more valuable. Our most recent one came in from Jrober, who says “Jim Dahle has made me a money genius. But your math looks fine to me. As part of the transaction WCI will provide the licensing, legal and regulatory framework, as well as day-to-day in-country staffing. I also talk about the advantages of being a non-traditional student, how to choose a specialty, both for physicians and dentists. Why does the overall cap not apply in this situation? WCI, I am interested in the list. However, some people are willing to pay a little bit of extra money for the feeling of owning their own house for the ability to paint their walls, without having to talk to the landlord, to redo the landscaping, that sort of stuff is worth a certain amount of money to them. I'm not sophisticated enough. You can just roll the money in there. Ben: iQ401k offers a robust “open architecture” retirement plan services platform that is ideal for small to mid-size medical practices, such as dental groups, radiology groups, anesthesiology groups, etc. But we did make provisions that if something changed and we wanted to add another asset class, we could make those changes. Otherwise, you’re limited to putting about $6K into a tax-deferred solo 401(k). Now obviously if somebody is in extremis, we can't abandon them just because we are being recorded. How much income would I need to make so I could put 26k into it? Let's take a question off the Speak Pipe. Rearranging our financial lives in order to maximize it is well worth our time and effort. And the math would agree with you that if you take on a reasonable amount of extra risk maybe, you're likely to beat that return. They're essentially choosing to consume a little bit more housing than the otherwise might need to, and thus choose to buy rather than rent. My group retirement account is with Principal, but I have not been impressed with the options in our retirement account. Dr. Jim Dahle: And then you reconvert it. That's no good. I don't get involved in a bunch of this cash value life insurance, where you're putting money into the policy and borrowing it out. More practically speaking, especially in other states, really, this is a business decision. It allows you to circumvent the Roth income restrictions and contribute to the retirement vehicle even if you’re earning more than $135,000 a year. The White Coat Investor, LLC files taxes as an S Corp. How much salary does she need to be paid in order to be able to contribute $56K to a 401(k) as employee tax-deferred and employee after-tax contributions? Dr. Jim Dahle: $32K tax-deferred employer contribution into my partnership 401(k)/PSP I’m not sure you can take it over your lifetime like the old stretch IRA though. At the White Coat Investor, we have a recommended list to financial advisors. For 2021 that's $6,000 if you're under 50. Our case was relatively simple since I have a govt pension and any SS I might qualify for is offset by my govt annuity payment, so it was just her situation to consider. Or should you first do a Roth conversion on your deferred 401(k) contributions? That's sofi.com/whitecoatinvestor. Just one more thing to remember to do with a back door Roth. But most importantly in this section, I free students from the guilt that comes from living on loans. You can also subscribe without commenting. The term is intended to honor Vanguard founder and investor advocate John Bogle.. But it was good enough for our purposes for a long time. The backdoor Roth IRA contribution is a strategy and not a product or a type of IRA contribution. As long as their estate wasn't above that they don't own any estate taxes either. If you have a 401(k) or 403(b) at work, they almost surely accept IRA rollovers. I suspect I will eventually take advantage of this feature to move some of my very tax-inefficient debt real estate/hard money loan funds out of taxable and into tax-protected. If you're confused about it, read the comments and questions below those posts and they will walk you through it. My husband has no 1099 income right now, but if this is possible I need to convince him to do more speaking conferences, etc to earn 1099 income just for this purpose, right? You have to get the behavior right first. I guess if they’re still under 59 1/2 and want to spend from it. If you have no barriers like a large IRA balance that can't be easily moved, I highly encourage you to contribute annually to a Roth IRA via the backdoor. The big problem now, however, was that the Vanguard individual 401(k), at least the off-the-shelf version, doesn't allow after-tax employee contributions or in-service conversions/rollovers, the two features necessary to do a Mega Backdoor Roth IRA. Step One: Contribute to the traditional IRA. He discusses how to prioritize paying off … All of that already had me thinking about changing over to Roth 401(k) contributions for the employee portion of our 401(k)s, but when the TCJA was passed, it was the final nail in the coffin. Dr. Jim Dahle: If so, that's a good thing. You couldn't do any of that stuff before 2010. It is now quite possible that we will have an estate tax problem I never expected, especially if the estate tax exemption is lowered at some point in the future. Maybe we'll be in the 37% bracket in retirement, maybe we won't, but we'll certainly be in a bracket higher than 29.6%. We basically tell them the hospital lawyers don't allow you to record this procedure. You can just roll the money in there. In fact, I think that's what happened to us in 2010. I generally think it’s not a great idea to pick stocks, with or without The Motley Fool’s help. Dr. Jim Dahle: Good luck with this moving forward! Because it's self-directed, you can buy real estate properties on your own or leverage RE crowdfunding platforms like Equity Multiple, RealtyMogul, Fundrise, Roofstock, CrowdStreet, etc. We get no deduction for these contributions, and, if the 401(k) allows it, we can either do an instant Roth conversion of those funds inside the 401(k) or transfer the money to an outside Roth IRA, tax-free. So much so they get themselves worked up over hypothetical changes to the tax code or student loan crisis. taxed and not deducted) contribution to a Traditional IRA. Also, an option. Not all products available in all states. You have two options most of the time. Suggestion for future podcast… It's a CD, it's a real estate backed loan, it’s those sorts of things. We've got screenshots that will walk you through that. So how do you get it to zero? We've got videos that'll walk you through that. Dr. Jim Dahle: But that's what I would do, if you don't know what you're doing. Ignoring actual ER in the funds: Then the next day, move that money from the traditional IRA to a Roth IRA. Probably not. Say someone had $25k/ yr vs the full 55k. Once I got our 401(k) money over to Fidelity, I was disappointed to discover that I couldn't buy the 0% ER Index Funds after all. If you cannot contribute to a Roth IRA because your income exceeds the income eligibility limit, you can still choose to contribute indirectly through a two step process known informally as the Backdoor Roth.To do the backdoor Roth, you: (1) Make a nondeductible (i.e. May be a blog post? So, it's not an easy process and that's the way it ought to be to amend your written investment plan. How many of you are paying full-time employees less than Katie is paid part-time?). And so, all the rules about contributions apply to the first step and all the rules about conversions apply to the second step. In This Show:Podcast #194 Show Notes: The Backdoor Roth IRA Made EasySponsorNew Book and New T-ShirtQuote of the DayThe Backdoor Roth IRA Made EasyHistory of Backdoor RothsDoing a Backdoor Roth IRAFixing ErrorsRecommended Reading:Reader and Listener Q&AsAdding Asset Classes to Your Investment PlanRecommended Reading:Tax Implications for Inherited MoneyRecommended Reading:Helping Parents with Financial AdviceBehavioral and Math Components to Personal FinanceLegal Issues with Being Recorded at WorkRecharacterizing Contributions to Retirement AccountsEndingFull Transcription. Or it's an interest-bearing instrument. And the importance of being a thrifty student. But if you want to put a little bit of your portfolio into it, that's okay. So, on one end of the spectrum, you've got equities, bonds and broadly diversified index funds. The good news is I already have a decent amount of Roth money due to annual contributions during residency (+ spousal contributions) and rolled over 401k money to Roth in the half year after graduating residency. Lots of resources on the website to help you do your backdoor Roth IRA. A white coat investor champion for your class. One point I think might be good to clarify is that savings of every dollar in a tax deferred 401k is at the marginal rate, but withdrawals in retirement will fill the lower tax brackets first. Roth contributions are not as valuable as an attending physician. Dr. Jim Dahle: Mega Backdoor Roth; Articles & Resources; WCI-2. Thanks for asking! I occasionally get into situations that family members are videotaping me with their cell phones and without my consent. If you follow the directions, you can still report it okay on your tax forms. The issue, of course, is that the 199A deduction, at least at our income level, is partially based on the salaries our company pays. That means I can invest it in anything I want (except Fidelity 0% ER index funds apparently). And you can take it over 10 years. It's got a lot of great material in it. So, we took out 201, 202, 203, 204 and put them into a PDF. If you Google “Backdoor Roth IRA” it will pop up on the first page of Google. Roll it over into their own IRA, and then it is treated as if it were theirs all along. The quote of the day comes from Sunny Sakar who said. All the usual caveats. Dr. Jim Dahle: If she doesn't have any sort of a written financial plan, she needed that before she inherited the money. https://www.whitecoatinvestor.com/multiple-401k-rules/. Even if you're under that limit and you go through the backdoor, it's no big deal. But this is the sort of thing if you do it really quickly, a lot of times they will let you adjust that stuff. Ever wondered what you should do when you've maxed out your 401K, backdoor Roth IRA, and HSA but still want to save more? If you forget to do the conversion, you might end up with some huge gain. It's technically not earned income. It seems really silly to take a 29.6% deduction now knowing we would be paying at least 32% at withdrawal on that money. You can also roll over more than the yearly contribution limit into a Roth IRA if the traditional IRA has more than $6000. [Disclosure: If you register for WCI CON 21 using this link, ... You can spot them by their excited puppy dog eyes and endless questions about the backdoor Roth IRA. If you decide to shop around, perhaps you could turn your experience into a guest post. Step number four now is to invest the money in the Roth IRA. Dr. Jim Dahle: With a Roth 401(k) contribution, you're trying to decide which is better — tax-deferred or tax-free. My initial thoughts were to prioritize tax deferred on the 1099/solo401k (minus the 5% Roth TSP match for BRS) since the military income was state tax-free while the California W-2 wages had half of SE taxes subsidized by my employer. If you have some self-employment income, you can open an individual 401(k) and roll the IRA in there. Great question. So, she's got a long life ahead of her, hopefully, and I'm not sure if I should send her to a financial advisor or an accountant or both. Again, it's personal and financial. Dr. Jim Dahle: And that is the case for the vast majority of physicians and dentists out there. If you refinance your student loans through SoFi, you’ll get a $500 cash welcome bonus just for listeners of this podcast. These restrictions are easy to bypass by making a “backdoor contribution” which involves converting a non-deductible Traditional IRA into a Roth IRA. After shopping around a bit, I settled on mysolo401k.net. PGY4 trying to get finances in order finally and looking to open a new Roth IRA and max it out at $6000 for the 2020 tax year. Greg. As far as those tax-deferred dollars, you can always convert those when you separate from the system the year you leave residency. It's available on Kindle as well. So, you can't put it into your retirement accounts, but you can live off of it and put the money you're earning into your retirement account, since money is fungible. A Backdoor Roth IRA is not the same as a Roth 401(k) contribution. That might involve paying some taxes. This first one comes in from an anonymous listener. My question for you is this. Dr. Jim Dahle: While I can see a good argument for those being able to max from day one, I’m a little torn on the half way option. In order to get this book for your class, your class needs a champion. Dr. Jim Dahle: All they did is made their paperwork a little more complicated, which is not a big deal if you just follow the directions. What does it take to get a constitutional amendment? Notify me of followup comments via e-mail. I know you have the option to roll it into your own account. Wondering what you would advise in my situation. I have read this post over 3 times. She has a little more complicated situation. The idea is that those lines should be zero or something very close to them, not something like $6,000. My understanding is that we are limited to 19000 employee contributions across all the 401ks. Adding New Asset Classes to Your Portfolio. But if you do it right away, especially during the same calendar year, a lot of times they'll go, “Oh, no problem. If you’re wanting to put in $56K as a tax-deferred employer contribution, you’ll need $280K of net income to do so.