Backdoor Roth - Does It Make Sense? Other Thoughts?

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bonedoc6
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Joined: Tue Apr 30, 2019 2:07 pm

Backdoor Roth - Does It Make Sense? Other Thoughts?

Post by bonedoc6 » Tue Apr 30, 2019 3:58 pm

I am still in the early stages of researching personal finance, and am hoping Bogleheads' members can give me some advice, as I have read/heard some conflicting advice recently. I will give some financial background in hopes of receiving better advice knowing the whole picture. My biggest question is whether or not a Backdoor Roth IRA makes sense or not, but any other advice is certainly welcome as well.

I am 36, married, have a nice home, and 2 daughters (ages 6 and almost 3). My wife is currently not working, staying home with the kids when not at school, though she may begin a part-time job in 2-3 years.
I had $400,000 of medical school loans, after paying a small amount monthly during all of my training. I am currently down to approximately $310,000 over the past 1.5 years, after paying this somewhat aggressively on a $375,000 salary, while also maxing out 401k's, IRA's, HSA's, 529 plans, etc, trying to play catch-up from 10 years of medical school, residency, fellowship. I aim to pay this off at a rate of $15,000/month x ~2 years, and should be able to do so. Perhaps this is not the absolute smartest based on percentages/principal, but I also absolutely detest this loan, and therefore the mental satisfaction of finally being done with this is worth something. Current interest rate is 3.91%.
I just started a new job April 1 (no move required), and am now making $705,000 per year, not including $50,000 of bonuses spread over the first 2 years. I have no state income tax where I live, but am in the highest tax bracket now.

Current Financial Breakdown:
Medical School Loan: $310,000 (was $400,000, refinanced to 3.91%, starting to pay off at anticipated $15,000/month x ~ 2 years, beginning next month)
Combined IRAs: $105,000 all in Vanguard (about $31,600 to be transferred to Vanguard from Fidelity next month once able after leaving last job).
529s: $8,500/child ($17,000 total) currently, just started last year, will max out $30,000/child each year (married filing jointly), $3,333 per month each starting last month, continue next year at $30,000/year. Anticipating likely private high schools as well as private colleges, so I'm calling this around $45-50,000/year x8 years each child.
401k/403b: $19,000 maxed out via 401k prior to leaving previous job, not eligible for 403b this year, will max out next year.
457: $19,000 (maxing out 2019 over next 2 months), match of approximately $8,500 beginning next year, fully vested in 5 years.
HSA: $12,650 (maxing out 2019)
House: $730,000 remaining, 4.5% interest, $3,900/month payment (seller-financed - see comment below about this)
Cash: $100,000 (thinking of putting in Vanguard Money Market, as currently it's earning about 0.1% on average...).
Bonus: $30,000 from previous job coming in soon - what to do with this?

I have read conflicting arguments regarding Backdoor Roth IRAs... On the one hand, taxes are paid now (but I'm in highest bracket currently, so this might not make sense - please help!) but it all grows tax-free. If I do NOT do a Backdoor Roth IRA, then there are no taxes now, but taxes later, when I'll be in a lower tax bracket. This makes sense, but I've also read some theories that taxes are only going to increase, perhaps in part due to Social Security likely to not be around in the future (so maybe they'll increase taxes between now and then to increase Social Security funds, thus keeping it alive). If tax rates are likely to increase, then perhaps paying taxes later at a lower rate (but climbing) in the future is thus a moot point...?

Anyone have any suggestions regarding Backdoor Roth IRA contributions given my situation?

Anything else people would do differently or recommend? My plan is to max out pre-tax and tax-advantaged accounts, fund my girls' educations heavily, allowing time for hopeful growth.

Should I not focus so much on paying off my medical school loan (3.91%, $310,000 remaining principal), even though I hate the thought of it? Should I play the game in the market and invest everything other than my minimum payment ($6,200)?

I know that paying down my mortgage another $9,000 or so per month (if not paying my school loans most aggressively, thus having $9,000 extra per month) would make sense, as it is a higher principal and higher interest rate than my loans, but the seller-financed deal is incredibly generous of the previous owners, and I don't want to disrupt this, though I know it doesn't make the most sense numbers-wise.

Thanks for reading and for the great website.

Appreciate any and all suggestions/thoughts/comments.

-E

mhalley
Posts: 7782
Joined: Tue Nov 20, 2007 6:02 am

Re: Backdoor Roth - Does It Make Sense? Other Thoughts

Post by mhalley » Tue Apr 30, 2019 9:14 pm

A couple of posts to review. First, from wci, pay off loans vs invest
https://www.whitecoatinvestor.com/stude ... investing/
Second. POF on the marginal utility of the backdoor Roth

https://www.physicianonfire.com/value-of-backdoor-roth/
I was fortunate to come out of med school with little debt, but I hated debt and paid it off ASAP, as well as paying off my mortgage and doing backdoor roths.

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Earl Lemongrab
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Joined: Tue Jun 10, 2014 1:14 am

Re: Backdoor Roth - Does It Make Sense? Other Thoughts?

Post by Earl Lemongrab » Tue Apr 30, 2019 9:37 pm

I don't understand the question. At that salary level with a company plan, you would not have the option to deduct the IRA contribution. So backdoor makes sense.

abonder
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Joined: Sat Nov 03, 2012 10:52 am

Re: Backdoor Roth - Does It Make Sense? Other Thoughts?

Post by abonder » Tue Apr 30, 2019 9:42 pm

I’d do the Backdoor Roth, once you make sure that you don’t have any pretax IRAs That would complicate the process. Your aggressive loan repayment plan is awesome and I wouldn’t worry if it’s the perfect plan....it’s a good one and it will help preventing you from growing into that new big income all at once. Once the loans are paid off, keep saving that same money in a taxable account and you’ll build wealth very quickly.

As for the Backdoor Roth - it’s only 6000 per year and it helps build some Roth space with can be valuable down the line for diversification of assets. I think you are having a bit of a misunderstanding. There is essentially no downside to doing a Backdoor Roth IRA. This is not like a 401k where you might have to choose pre-tax vs Roth and choosing Roth would force you to lose that pre-tax money. With a Backdoor Roth IRA you are comparing putting after tax money either into a taxable account or a Roth account. The Roth account has many advantages and the only downsides would be the money is relatively inaccessible until retirement. This should be a negligible downside for a person in your tax bracket.

beginner
Posts: 34
Joined: Sat Dec 10, 2011 1:32 am
Location: TX

Re: Backdoor Roth - Does It Make Sense? Other Thoughts?

Post by beginner » Tue Apr 30, 2019 9:44 pm

mhalley wrote:
Tue Apr 30, 2019 9:14 pm
A couple of posts to review. First, from wci, pay off loans vs invest
https://www.whitecoatinvestor.com/stude ... investing/
Second. POF on the marginal utility of the backdoor Roth

https://www.physicianonfire.com/value-of-backdoor-roth/
I was fortunate to come out of med school with little debt, but I hated debt and paid it off ASAP, as well as paying off my mortgage and doing backdoor roths.
Thank you for the pof link. The math is nicely laid out

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MP123
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Joined: Thu Feb 16, 2017 3:32 pm

Re: Backdoor Roth - Does It Make Sense? Other Thoughts?

Post by MP123 » Tue Apr 30, 2019 10:14 pm

Your backdoor Roth contribution is only $6k and your mortgage is almost $50k/yr.

I think you should focus on the $1,000,000+ in mortgage and student loan debt first. At your income you should be able to get rid of that fast.

Assuming you're maxing out your tax deferred accounts the backdoor Roth is arguably a better choice than sticking the $6k in a taxable account for most people given that you have to pay taxes on it anyway. But not as good as getting that debt paid down IMHO.

As an aside I'm not sure about your reported $12,650 HSA contribution. The limit is $7k for 2019.

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