Physician in need of help
Physician in need of help
Greetings Bogleheads! I am a physician practicing in Southern California and in need of some financial advice. I finished residency about two years ago and was fortunate enough to pay off my student loan debt. I am now focusing on investing and setting up my retirement accounts, and would appreciate any advice on how to manage these well. Please forgive my ignorance as I am new to this. Here is my current situation:
Marital status: Single but engaged to a nursing student whom I claim as a dependent
Salary: 400-500k but should be increasing after partnership in ~9 months
Student loans: Almost fully paid off except for 28k with an interest rate of 1.875%
Employment status: Individual contractor working through my single-employee corporation
Debt: none except for my remaining student loan
Cash savings: close to 300k but still owe taxes for 2016
Retirement accounts: Vanguard Roth IRA: $5,500
Vanguard SEP-IRA: $30k
I want to start my backdoor Roth IRA contributions so I will need to rollover my Vanguard SEP-IRA into a Fidelity solo 401k and close the Vanguard account. Then I plan on maxing out my solo 401k contributions at 53k every year through my corporation.
My specific questions are:
1. At my current income bracket, is it worth doing a backdoor Roth?
2. I was also looking into opening a Vanguard solo 401k as well but there is no brokerage option for buying EFTs or Admiral shares. Do you think I should just stick with my solo 401k with Fidelity and invest in their low cost Spartan index funds?
3. Do you recommend I invest most of my retirement account in a target date fund or should I also put some in the S&P 500 index fund and/or mid to small cap stocks?
I know these are basic questions but I would be grateful for any feedback you can provide.
Thanks in advance!
Marital status: Single but engaged to a nursing student whom I claim as a dependent
Salary: 400-500k but should be increasing after partnership in ~9 months
Student loans: Almost fully paid off except for 28k with an interest rate of 1.875%
Employment status: Individual contractor working through my single-employee corporation
Debt: none except for my remaining student loan
Cash savings: close to 300k but still owe taxes for 2016
Retirement accounts: Vanguard Roth IRA: $5,500
Vanguard SEP-IRA: $30k
I want to start my backdoor Roth IRA contributions so I will need to rollover my Vanguard SEP-IRA into a Fidelity solo 401k and close the Vanguard account. Then I plan on maxing out my solo 401k contributions at 53k every year through my corporation.
My specific questions are:
1. At my current income bracket, is it worth doing a backdoor Roth?
2. I was also looking into opening a Vanguard solo 401k as well but there is no brokerage option for buying EFTs or Admiral shares. Do you think I should just stick with my solo 401k with Fidelity and invest in their low cost Spartan index funds?
3. Do you recommend I invest most of my retirement account in a target date fund or should I also put some in the S&P 500 index fund and/or mid to small cap stocks?
I know these are basic questions but I would be grateful for any feedback you can provide.
Thanks in advance!
Re: Physician in need of help
At your income level, I don't recommend doing a backdoor Roth.
The Fidelity Spartan funds are essentially interchangeable with Vanguard index funds, so no reason to move them. It's fine if you do, but there's no reason to.
At that student loan rate, I'd be tempted to not pay it off. Then again, it's a very small part of your income.
The Fidelity Spartan funds are essentially interchangeable with Vanguard index funds, so no reason to move them. It's fine if you do, but there's no reason to.
At that student loan rate, I'd be tempted to not pay it off. Then again, it's a very small part of your income.
Re: Physician in need of help
Fidelity solo 401(k) is widely considered to be the "best" solo 401(k), so I would just stick with Fidelity/Spartan funds. I know the interest rate is low, but I would pay off the student loans and be done with it. You're not going to top 1.875% with cash holdings or many of the "common" bond holdings you may be considering. In the grand scheme of things the arbitrage opportunity on $28k just isn't meaningful, especially so considering your high income. You can invest in the appropriate Fidelity Freedom INDEX Fund (make sure it's the Index variety of the fund) until you have more time to research how you want to structure your investments at which time you can start building a portfolio with multiple mutual funds.
Last edited by gclancer on Sat Oct 08, 2016 7:28 am, edited 1 time in total.
Re: Physician in need of help
Sawhorse, can you please discuss why a backdoor is not recommended at a high income level? I was under the impression the backdoor provided an opportunity for high income earners to get funds into the Roth vehicle. Perhaps you are referring to the tax consequences at that income level when you roll the SEP into a Roth? Personally, I'd take the one time hit to open the option of having the backdoor Roth at your advantage for your entire career.sawhorse wrote:At your income level, I don't recommend doing a backdoor Roth.
To OP,
Congrats on your new adventure, paying off your student debt (obviously you can pay that 20k @ 1.875% off to clear your mind or invest to get returns over it, whichever you please).
1) I'd say yes, do the backdoor. I'm not in your bracket, but have many physician friends who are and they all backdoor. It will be interesting to read Sawhorse and other's comments on the drawbacks of backdoor at high income brackets.
2)I'm no expert on Fidelity vs. Vanguard solo 401ks operational aspects, but it seems the actual fund offerings are comparable.
3) If you do not want to manage/rebalance a simple 3 or 4 fund portfolio on your own, then yes, do a target fund. If you can do a yearly or semi-annual analysis and rebalance, I'd set it up your own portfolio. I'm sure you've read about them on here.
Good luck,
Sleepy
Re: Physician in need of help
Re backdoor roth. Do it. Your other options are either no IRA contribution or a non-deductible traditional IRA contribution neither of which is better than a backdoor roth. I don't see why a high income level would make this less advantageous.
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Re: Physician in need of help
Congrats on being in such good shape, most of us just out of residency have mountains of debt to work through.bob35 wrote:My specific questions are:
1. At my current income bracket, is it worth doing a backdoor Roth?
2. I was also looking into opening a Vanguard solo 401k as well but there is no brokerage option for buying EFTs or Admiral shares. Do you think I should just stick with my solo 401k with Fidelity and invest in their low cost Spartan index funds?
3. Do you recommend I invest most of my retirement account in a target date fund or should I also put some in the S&P 500 index fund and/or mid to small cap stocks?
I know these are basic questions but I would be grateful for any feedback you can provide.
Thanks in advance!
300K in cash is a lot of money that isn't doing much work, you should start investing it as soon as you can.
1. Yes you should do a backdoor Roth, it is superior to investing in a taxable account. I don't see your age but I'm going to assume you're pretty young (<35 years)
2. Stick with Fidelity solo 401K, no reason to switch to Vanguard
3. Til you have a better understanding of investing principles, I would just invest in an S&P500 or total market fund. In a 401K or IRA you could always change it to something different later without having to worry about tax consequences.
Re: Physician in need of help
Congrats on making excellent progress!
Yes, you should be maximizing every opportunity you have for tax advantaged space at your income including a backdoor Roth. The previous poster was incorrect in rejecting Roth, the tradeoff you are making is investing in taxable vs investing in Roth form as the upfront taxes you pay will be the same, but the Roth will compound tax-free forever whereas the taxable will owe capital gains in the future (it is highly unlikely you will ever be in a capital-gains-free tax bracket at your income level which would make the Roth equivalent to taxable investing).
Fidelity solo 401k is a good choice.
You can use target date funds for simplicity as long as the expense ratios are low, you can also read the wiki page on the three fund portfolio and use an asset allocation amongst the appropriate lowest-in-class ER Fidelity funds to form your retirement investing.
More than anything, while you are still young and making an excellent income, get a solid own occupation individual disability policy working with a trusted professional. I have seen many colleagues ignore this to their detriment, and you can self insure when the time is right and drop the policy.
Yes, you should be maximizing every opportunity you have for tax advantaged space at your income including a backdoor Roth. The previous poster was incorrect in rejecting Roth, the tradeoff you are making is investing in taxable vs investing in Roth form as the upfront taxes you pay will be the same, but the Roth will compound tax-free forever whereas the taxable will owe capital gains in the future (it is highly unlikely you will ever be in a capital-gains-free tax bracket at your income level which would make the Roth equivalent to taxable investing).
Fidelity solo 401k is a good choice.
You can use target date funds for simplicity as long as the expense ratios are low, you can also read the wiki page on the three fund portfolio and use an asset allocation amongst the appropriate lowest-in-class ER Fidelity funds to form your retirement investing.
More than anything, while you are still young and making an excellent income, get a solid own occupation individual disability policy working with a trusted professional. I have seen many colleagues ignore this to their detriment, and you can self insure when the time is right and drop the policy.
Re: Physician in need of help
Yes!bob35 wrote:My specific questions are:
1. At my current income bracket, is it worth doing a backdoor Roth?
Stick with Fidelity as you plan, but keep a close eye on their costs. As a for-profit company, Fidelity may try clever ways to hide costs they charge you. Be vigilant about this!2. I was also looking into opening a Vanguard solo 401k as well but there is no brokerage option for buying EFTs or Admiral shares. Do you think I should just stick with my solo 401k with Fidelity and invest in their low cost Spartan index funds?
You'll have more "control" by using the components, but for you at your age a distant target date fund may be okay - look at the costs between them, though. Costs matter HUGE over an investing lifetime.3. Do you recommend I invest most of my retirement account in a target date fund or should I also put some in the S&P 500 index fund and/or mid to small cap stocks?
If you will also be doing some investing in non-retirement accounts (we generally refer to these as taxable accounts), be sure to read the section in the wiki on "tax efficiency".
Welcome to the forum!
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
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Re: Physician in need of help
1 Yes.bob35 wrote:Greetings Bogleheads! I am a physician practicing in Southern California and in need of some financial advice. I finished residency about two years ago and was fortunate enough to pay off my student loan debt. I am now focusing on investing and setting up my retirement accounts, and would appreciate any advice on how to manage these well. Please forgive my ignorance as I am new to this. Here is my current situation:
Marital status: Single but engaged to a nursing student whom I claim as a dependent
Salary: 400-500k but should be increasing after partnership in ~9 months
Student loans: Almost fully paid off except for 28k with an interest rate of 1.875%
Employment status: Individual contractor working through my single-employee corporation
Debt: none except for my remaining student loan
Cash savings: close to 300k but still owe taxes for 2016
Retirement accounts: Vanguard Roth IRA: $5,500
Vanguard SEP-IRA: $30k
I want to start my backdoor Roth IRA contributions so I will need to rollover my Vanguard SEP-IRA into a Fidelity solo 401k and close the Vanguard account. Then I plan on maxing out my solo 401k contributions at 53k every year through my corporation.
My specific questions are:
1. At my current income bracket, is it worth doing a backdoor Roth?
2. I was also looking into opening a Vanguard solo 401k as well but there is no brokerage option for buying EFTs or Admiral shares. Do you think I should just stick with my solo 401k with Fidelity and invest in their low cost Spartan index funds?
3. Do you recommend I invest most of my retirement account in a target date fund or should I also put some in the S&P 500 index fund and/or mid to small cap stocks?
I know these are basic questions but I would be grateful for any feedback you can provide.
Thanks in advance!
2. Fidelity Solo 401(k) is fine. Vanguard's is not necessarily better. Worse in some ways, better in others. Etrade's might be the best, depending on your needs.
3. Asset allocation is a rather personal decision. Both options are fine. Pick the one that fits you better. Do you embrace complexity in the hopes of having slightly higher returns? Or do you prefer a simple solution that will probably be just fine if combined with a reasonable savings rate?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy |
4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: Physician in need of help
Agree per above.
Except sawhorse, that comment makes no sense.
Except sawhorse, that comment makes no sense.
I know nothing!
Re: Physician in need of help
With respect to using a Target Date Fund ask yourself this series of questions:
If you can answer yes to the following questions then a Target Date Fund is a good fit for you.
1) Does selecting a small number of individual funds to achieve proper allocation and diversity and periodically (e.g., once a year) rebalancing amongst those funds seem like too much work?
2) Are you okay with the fund's recommendations on the percentage of international equities and bonds to have in a portfolio?
2a) Are you okay with the allocations the fund uses in their Target Date Fund now and into the future when you reach retirement age (aka the "glide Path").
3) Are you okay with paying a small extra expense to have the fund perform 1 & 2 above for you?
EDIT - to remove reference to Vanguard as OP is leaning towards using Fidelity.
P.S., If OP feels overwhelmed by the number of financial decisions that he/she is having to make in a short period of time just going with a Target Date Fund for now is a good default choice.
If you can answer yes to the following questions then a Target Date Fund is a good fit for you.
1) Does selecting a small number of individual funds to achieve proper allocation and diversity and periodically (e.g., once a year) rebalancing amongst those funds seem like too much work?
2) Are you okay with the fund's recommendations on the percentage of international equities and bonds to have in a portfolio?
2a) Are you okay with the allocations the fund uses in their Target Date Fund now and into the future when you reach retirement age (aka the "glide Path").
3) Are you okay with paying a small extra expense to have the fund perform 1 & 2 above for you?
EDIT - to remove reference to Vanguard as OP is leaning towards using Fidelity.
P.S., If OP feels overwhelmed by the number of financial decisions that he/she is having to make in a short period of time just going with a Target Date Fund for now is a good default choice.
Re: Physician in need of help
A couple of notes:
Your retirement savings are below grade for your income. It's good that you've moved your focus to them - clearly you've focused on debt repayment; now it's time to catch up on retirement savings before you get used to the high income.
Second: how can you legally claim your fiancee as a dependent? That seems sketchy to me.
Your retirement savings are below grade for your income. It's good that you've moved your focus to them - clearly you've focused on debt repayment; now it's time to catch up on retirement savings before you get used to the high income.
Second: how can you legally claim your fiancee as a dependent? That seems sketchy to me.
Re: Physician in need of help
Probably not atypical for a physician 2 years out of residency.Sandi_k wrote:A couple of notes:
Your retirement savings are below grade for your income.
Yeah - OP may want to revisit that with a tax adviser. Dependents for tax purposes are qualifying children or relatives. Don't see how a financee meets that test.Sandi_k wrote: Second: how can you legally claim your fiancee as a dependent? That seems sketchy to me.
Re: Physician in need of help
I just wanted to add that for now, target date index funds are perfectly fine for your situation.
However, with your income, I suspect you will end up with a significant portion of your assets in taxable brokerage accounts. It would be well worth your time to continue learning about investing basics and strategies so you can hold asset classes individually (outside of target date funds) in order to be as tax efficient as possible (hold your fixed income and any REITs, if you choose to hold those, in tax advantaged accounts).
However, with your income, I suspect you will end up with a significant portion of your assets in taxable brokerage accounts. It would be well worth your time to continue learning about investing basics and strategies so you can hold asset classes individually (outside of target date funds) in order to be as tax efficient as possible (hold your fixed income and any REITs, if you choose to hold those, in tax advantaged accounts).
Re: Physician in need of help
When you become partner, will you still be an independent contractor? If not, you will not be able to make the large contributions to the SEP.
Re: Physician in need of help
Whoops you're right. I ignored the part about him not including the SEP in the rolloverSleepKing wrote:Sawhorse, can you please discuss why a backdoor is not recommended at a high income level? I was under the impression the backdoor provided an opportunity for high income earners to get funds into the Roth vehicle. Perhaps you are referring to the tax consequences at that income level when you roll the SEP into a Roth? Personally, I'd take the one time hit to open the option of having the backdoor Roth at your advantage for your entire career.sawhorse wrote:At your income level, I don't recommend doing a backdoor Roth.
Re: Physician in need of help
Thanks for your replies, all of which were very helpful. It looks like I have a lot of studying to do on investment strategies. I haven't claimed my fiancé as dependent yet but based on the research I did it seemed possible. I guess not...
I appreciate all the advice and recommendations!
Bob
I appreciate all the advice and recommendations!
Bob
Re: Physician in need of help
Regarding dependent status:
Check IRS Pub 17 for detail, but the Taxaide Volunteer Resource Guide 4012 says, among much else, in the requirements of a "qualifying relative", if the person doesn't meet a number of specified relationships,
"The person ......must live with you all year as a member of your household (and your relationship must not violate local law)."
The fiancee might qualify depending on all the other factors other than relationship.
Check IRS Pub 17 for detail, but the Taxaide Volunteer Resource Guide 4012 says, among much else, in the requirements of a "qualifying relative", if the person doesn't meet a number of specified relationships,
"The person ......must live with you all year as a member of your household (and your relationship must not violate local law)."
The fiancee might qualify depending on all the other factors other than relationship.
Re: Physician in need of help
"Who Can I Claim as a Dependent?" - irs.gov
"Can I Claim a Boyfriend/Girlfriend As a Dependent on Income Taxes?" - TurboTax Blog
Not to be depressing, but will you have a prenuptial agreement?
I had an acquaintance that put his wife through dental school - she served him with divorce papers one week after graduation and ran off with one of her classmates.
I'm not sure if she also made off with half of his property - after all, she was now a dentist, and her soon-to-be-ex-husband was a pilot in the Air Force (captain, O-3), which paid decently, but probably not as much as the future income of a dentist.
"Can I Claim a Boyfriend/Girlfriend As a Dependent on Income Taxes?" - TurboTax Blog
Not to be depressing, but will you have a prenuptial agreement?
I had an acquaintance that put his wife through dental school - she served him with divorce papers one week after graduation and ran off with one of her classmates.
I'm not sure if she also made off with half of his property - after all, she was now a dentist, and her soon-to-be-ex-husband was a pilot in the Air Force (captain, O-3), which paid decently, but probably not as much as the future income of a dentist.
"Ritter, Tod und Teufel"
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Re: Physician in need of help
The IRS classifies two types of people one can claim as a dependent: qualifying child, and qualifying relative. "Relative", however, is not literal.bob35 wrote: based on the research I did it seemed possible. I guess not...
Per Turbotax:
https://turbotax.intuit.com/tax-tools/t ... 14242.htmlYou can claim a boyfriend or girlfriend as a dependent on your federal income taxes if that person meets the Internal Revenue Service's definition of a "qualifying relative."
Don't get tripped up by the word "relative" here -- according to the IRS, it can include an unrelated person who passes the four following tests concerning residency, income, support and status.
If she makes more then $4,000 though, it's a no-go but should be ok while she's a full-time student.
Re: Physician in need of help
I do plan on getting a prenuptial agreement. I have been taken advantage financially by family members and learned a valuable lesson from it.
It looks like I can claim her as a dependent. Thanks for clarifying.
Bob
It looks like I can claim her as a dependent. Thanks for clarifying.
Bob
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Re: Physician in need of help
Just curious why you don't pay off the $28k in student loan debt left with the $300k in cash. I'd pay it off today and be done with student loans. Congrats, your in great shape and nice financial future ahead with your income if you live smart and out of debt.
Re: Physician in need of help
Bob you need to realize the tax situation before Roth conversions--here's how my accountant explained it: Say you're in the 50% bracket (you are) and contribute $5000 to a tIRA now and leave it in cash. That $5k is post tax income so net contribution is $2500. Then next year if you roll that into a Roth you have to claim that $5k on line 15a of your 1040 and it's taxed again as part of your AGI (line 37). Good thing is you're young and can leave your Roth alone for maybe 40 years making it a nice nest egg to tap without paying tax. I'm over 60 and don't convert anymore since my tax bracket is still ugly. And I'd pay off your student loan since it's a relative small amount for you--the interest isn't deductible (is it?) and the small check-a-month is a pita.
Re: Physician in need of help
by spitty » Sun Oct 09, 2016 7:15 am
Bob you need to realize the tax situation before Roth conversions--here's how my accountant explained it: Say you're in the 50% bracket (you are) and contribute $5000 to a tIRA now and leave it in cash. That $5k is post tax income so net contribution is $2500. Then next year if you roll that into a Roth you have to claim that $5k on line 15a of your 1040 and it's taxed again as part of your AGI (line 37). Good thing is you're young and can leave your Roth alone for maybe 40 years making it a nice nest egg to tap without paying tax. I'm over 60 and don't convert anymore since my tax bracket is still ugly. And I'd pay off your student loan since it's a relative small amount for you--the interest isn't deductible (is it?) and the small check-a-month is a pita.
I think the description you gave is not applicable for the OP. The OP will start with a zero balance on all tIRA's. Then will make a non deductible contribution (post tax) to the tIRA. The conversion to a Roth will not be taxed on line 15 at all (except for the possibility of a few dollars of earnings).
The situation described by smitty is either an explanation by someone who does not understand the back door Roth or applies to those of us with a large balance already in a traditional IRA. The ideal pre-existing balance in traditional IRA's is zero for the back door Roth.
Re: Physician in need of help
I do not qualify for a student loan interest deduction due to my MAGI being over 80k. I guess there is no reason not to pay off the remaining 28k. I was under the impression that the money could be used for investment purposes instead of paying off a low interest student loan, but given the money is just sitting there and I have a consistent stream of income from my job, the 28k should not impact me too much.
It looks like the backdoor Roth is the way to go but there are some opposing arguments here. All opinions are appreciated!
I was also thinking about opening a taxable mutual fund account with Vanguard and contributing at least 10k in the Total Intl Stock Index Fund so I can benefit from the foreign tax credit.
Bob
It looks like the backdoor Roth is the way to go but there are some opposing arguments here. All opinions are appreciated!
I was also thinking about opening a taxable mutual fund account with Vanguard and contributing at least 10k in the Total Intl Stock Index Fund so I can benefit from the foreign tax credit.
Bob
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Re: Physician in need of help
No one is opposing the backdoor rIRA. You should definitely do it before taxable investing. And the foreign tax credit is not free money, your logic makes no sense.bob35 wrote:I do not qualify for a student loan interest deduction due to my MAGI being over 80k. I guess there is no reason not to pay off the remaining 28k. I was under the impression that the money could be used for investment purposes instead of paying off a low interest student loan, but given the money is just sitting there and I have a consistent stream of income from my job, the 28k should not impact me too much.
It looks like the backdoor Roth is the way to go but there are some opposing arguments here. All opinions are appreciated!
I was also thinking about opening a taxable mutual fund account with Vanguard and contributing at least 10k in the Total Intl Stock Index Fund so I can benefit from the foreign tax credit.
Bob
I know nothing!
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Re: Physician in need of help
Given that you have lost a considerable amount of earning potential to go through your training, the most important thing that you can do (because you cannot get back the lost years of compound interest) is to save at a higher rate.
If you gross 500K you should save at least 30% of that. If possible, I would try and save 50%. That means putting away 150-250K per year. As an independent contractor, I would:
1. Keep 6 months of cash in a money market account
2. Keep separate savings account for what you will need to pay taxes and auto transfer with each pay check
3. Pay off student loan with the existing cash you have
4. Roll your SEP-IRA to a Fidelity solo 401(k) and max our annually in low-cost Spartan index funds. Hold your bond allocation here
5. Backdoor Roth annually in Vangaurd. Hold stocks here
6. If you have a high-deductible health care plan available, max that account annually. Hold stocks here
7. Invest remainder in taxable account (or save cash for big purchases like house). Hold stocks here
8. If you do not have a firm understanding of how to maximize itemization for federal taxes then get a good accountant to help you with your taxes
9. Enjoy the remainder of your money
If you gross 500K you should save at least 30% of that. If possible, I would try and save 50%. That means putting away 150-250K per year. As an independent contractor, I would:
1. Keep 6 months of cash in a money market account
2. Keep separate savings account for what you will need to pay taxes and auto transfer with each pay check
3. Pay off student loan with the existing cash you have
4. Roll your SEP-IRA to a Fidelity solo 401(k) and max our annually in low-cost Spartan index funds. Hold your bond allocation here
5. Backdoor Roth annually in Vangaurd. Hold stocks here
6. If you have a high-deductible health care plan available, max that account annually. Hold stocks here
7. Invest remainder in taxable account (or save cash for big purchases like house). Hold stocks here
8. If you do not have a firm understanding of how to maximize itemization for federal taxes then get a good accountant to help you with your taxes
9. Enjoy the remainder of your money