DCP, 457 pre-tax, after tax, for a resident physician

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kidshrink
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Joined: Mon Mar 25, 2013 2:33 pm

DCP, 457 pre-tax, after tax, for a resident physician

Post by kidshrink » Mon Mar 25, 2013 2:50 pm

Long time listener, first time caller.

My primary question is: How should I split up contributions for 2013, based on my current and future taxability? I know that Emergdoc and others suggest Roth all the way for residents, but I'm unclear if this is the best option since I may move to a lower tax state in 1-2 years (though income goes up).

Stats:
Age 31
2012 income: 55k W2 + 10k 1099 = 65k
Federal bracket: 25%
State bracket: half year Texas (0%) and half year California (9.3%), though the way CA computes taxes is not intuitive (and isn't exactly half of 9.3.)

2013 estimated gross: 62k W2 + 16k 1099 = 78k
Federal: 25%
State: 9.3%

Roth: 5000
DCP pretax: 3500
old 403b: 1000

2013 Retirement sources:
1) Roth IRA
2) DCP after tax (which allows in service rollover/conversions to Roth IRA)
3) pretax 403b
4) pretax 457b
5) SEP-IRA (or solo 401k) from my 1099 moonlighting income

Tax Brackets
2012 -- somewhere between 29.5 - 31.5%
Fed: 25%
TX half year + CA half year: approx 4 - 6%

2013 -- 34.3%
Fed: 25%
CA: 9.3%

2014 -- 37.3% (CA full year) OR 31-34% (if moving to TX for last 6 mo)
Fed: 28%
CA: 9.3%

OR

CA half-year + Texas (half year): approx 4 - 6%

2014 and beyond (full-time attending) -- 42.3% OR 33%
Fed 33%
CA: 9.3%

OR

TX 0%

Should I:

a) Contribute to the DCP and rollover to a Roth this year?
b) Contribute pretax to the 457 (preferred since there are no withdrawal penalties whereas the 403b does)?
c) Split the difference? How should I split it-- 70% after/30% pretax? etc.

What marginal tax rate do people "too high" to convert or pay taxes on a Roth?

I've searched exhaustively for answers but can't find a definite answer (though I know there isn't always one.) Thanks all.
Last edited by kidshrink on Tue Mar 26, 2013 12:28 am, edited 1 time in total.

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zebrafish
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Re: DCP, 457 pre-tax, after tax, for a resident physician

Post by zebrafish » Mon Mar 25, 2013 11:01 pm

In California, you just get absolutely killed on taxes.

Personally, while you are a CA resident (for 2013 at least, it sounds like) I would put money in the 457/403b first. I'm not sure I would put money in a Roth before maxing out the 403b/457 at this point given your income and pretax contribution options (457 + 403b = $35,000 room for contributions). Yes, you can get money out of the 457 easier, so you could put money in that first.

I would make sure you have the cash buffer for when you need to move to a new location after residency.

I live in CA, and I max out a 457, 403b, Keogh, and TSP first before contributing to a Roth, because my tax rate is about 30% between state and federal.

BerkeleyChris
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Joined: Sat Feb 09, 2013 11:23 am

Re: DCP, 457 pre-tax, after tax, for a resident physician

Post by BerkeleyChris » Mon Mar 25, 2013 11:20 pm

kidshrink wrote:DCP after tax (which allows in service rollover/conversions to Roth IRA)
Hi, Kidshrink,

are you a university of california employee? If so, I have a question for you. I work for UC and am trying to find the documentation that says I can do in service rollover of DCP aftertax to Roth IRA with no penalty. Have you had any luck finding this information?

I've been taking full advantage of the 457/403, but haven't done the DC because gains are taxed as ordinary income wheras a traditional account's gains are taxed at lower capital gains rate. Rolling everything from DC into Roth would change the equation for me if that is allowed...

Thanks,
Chris

kidshrink
Posts: 11
Joined: Mon Mar 25, 2013 2:33 pm

Re: DCP, 457 pre-tax, after tax, for a resident physician

Post by kidshrink » Mon Mar 25, 2013 11:44 pm

Yes, I'm a UC employee, and I contacted Fidelity today to confirm that in-service rollovers are absolutely allowed.

However, when I asked if the taxes are pro-rated (a la pro-rata taxes of tIRA and Roth IRAs), she told me to consult a tax professional as they do not handle that. There are other threads if you search for "UC DCP after tax" and a user named Shawn has been doing this for many years. He never mentioned any pro-rating of taxes so it should be safe to assume so.

So yes, CA is a tax happy state although by the time I move to Texas, I will be in a higher bracket, meaning that my time for Roth conversion is likely coming to an end.

Any thoughts about my other question, how high a tax bracket is too high for Roth/backdoor Roth conversions? 30, 40, 50%?

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White Coat Investor
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Re: DCP, 457 pre-tax, after tax, for a resident physician

Post by White Coat Investor » Tue Mar 26, 2013 12:18 am

Maybe the key is to do the conversion in the year you move to Texas. That way you don't have to pay state tax one it, but you're not quite into your full attending salary yet. I did a little converting the year I got out of the military at 25%, mostly to create a future backdoor Roth option. I think Roth contributions and conversions are best done at 10-15%. Much above there and you really have to wonder if it wouldn't be better to wait until retirement.
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