New Roth IRA account question

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Topic Author
heman466s
Posts: 5
Joined: Sat Jul 18, 2020 10:14 pm

New Roth IRA account question

Post by heman466s »

I'm a 34 y/o physician just getting started with improving my personal finances.
Need recommendations about investment options for my roll over IRA.
Should I go for 100% investment in VTSAX vs. adding an international index fund ( which one and how much %) in my portfolio.
lakpr
Posts: 6725
Joined: Fri Mar 18, 2011 9:59 am

Re: New Roth IRA account question

Post by lakpr »

For a 34 year old physician, I would recommend at least 20% in bonds (My thumb rule is Age-20 to Age-10 in bonds, I just picked this as a midway point in that range).

VTSAX (Vanguard Total Stock Market Index) and VBTLX (Vanguard Total Bond Market Index).

The bigger problem is that, as a physician, you will be earning mucho dolares, you will not be able to make Roth IRA contributions based on your salary (if you fall into the 24% tax bracket or above). Are you just about completing residency, and are you sure you are eligible to contribute to Roth IRA based on your income?

That eligibility phases out at $124k gross income as SINGLE, and $206k gross income for MARRIED FILING JOINTLY.

You can do a 'Backdoor Roth' process -- but that would mean there cannot be any Rollover IRA. You need to roll that Rollover-IRA into your current employer plan 401k / 403b. Why not consider taking that step -- THEN worry where to invest it?
Topic Author
heman466s
Posts: 5
Joined: Sat Jul 18, 2020 10:14 pm

Re: New Roth IRA account question

Post by heman466s »

Thank you for your reply!

I'm just starting my first attending job.
I was thinking of doing roll over 401k-->IRA-->backdoor ROTH. I did'nt know this was not possible.
lakpr
Posts: 6725
Joined: Fri Mar 18, 2011 9:59 am

Re: New Roth IRA account question

Post by lakpr »

heman466s wrote: Fri Jul 24, 2020 6:45 pm Thank you for your reply!

I'm just starting my first attending job.
I was thinking of doing roll over 401k-->IRA-->backdoor ROTH. I did'nt know this was not possible.
That sentence makes me think -- you may be confusing a "Roth conversion" with "Backdoor Roth".
Roth conversion is when you have a source of pre-tax funds (your Rollover IRA, for example), then slowly convert piece by piece of those assets to Roth. That's ALWAYS allowed and POSSIBLE.

"Backdoor Roth" is a PROCESS, not a type of IRA. It's where you make a contribution to a non-deductible Traditional IRA. You won't get a tax benefit out of it, so what's the point you may ask ... the point is, you can convert it to a Roth IRA almost immediately, and you will not have to pay any tax. You are subject to the typical IRA contribution limits: $6k if younger than 50, $7k if 50 or older.

It's that second step in that process, the Roth conversion, that gets you. In the eyes of the IRS, you have only one big giant IRA, with one piece here, another piece there, a third piece elsewhere, etc. When you convert something from Traditional to Roth, IRS considers it to be a proportional conversion of your pre-tax assets and non-deductible assets to Roth; and expects you to pay tax on the 'pre-tax' portion that's converted to Roth.

Example: You have $54k in a Rollover IRA. Today you are not eligible to make a direct contribution to Roth IRA, so you want to contribute $6k to a non-deductible Traditional IRA, then convert to Roth.
You may be thinking: $6k I paid tax on already, $6k I am converting to Roth -- so $0 tax due.
IRS interpretation: you have $60k in Traditional IRA before conversion, you converted $6k to Roth. Of this, $6k/$60k or 10% is non-deductible, so no tax due. The remainder 90%, or $5.4k, is taxable income, so you pay 24% or higher tax on $5.4k.

WHAT IF -- you rolled the Rollover IRA into a 401k prior to the Roth conversion?
You are left with $0 in the traditional IRA, you add $6k to that IRA, all of it non-deductible. Convert to Roth. $0 tax due. IRS also agrees with this.

HENCE THE SUGGESTION: Do not keep a Rollover IRA. Roll that into your employer plan (403b or 401k) first. Then do the steps above (contribute to a n-d-tIRA, convert to r-IRA).
000
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Location: Gone

Re: New Roth IRA account question

Post by 000 »

I personally do not and would not want to put 100% of my investments in US stocks. Personally I think 40-50% of stocks in international stocks is reasonable.
Topic Author
heman466s
Posts: 5
Joined: Sat Jul 18, 2020 10:14 pm

Re: New Roth IRA account question

Post by heman466s »

lakpr wrote: Fri Jul 24, 2020 6:57 pm
heman466s wrote: Fri Jul 24, 2020 6:45 pm Thank you for your reply!

I'm just starting my first attending job.
I was thinking of doing roll over 401k-->IRA-->backdoor ROTH. I did'nt know this was not possible.
That sentence makes me think -- you may be confusing a "Roth conversion" with "Backdoor Roth".
Roth conversion is when you have a source of pre-tax funds (your Rollover IRA, for example), then slowly convert piece by piece of those assets to Roth. That's ALWAYS allowed and POSSIBLE.

"Backdoor Roth" is a PROCESS, not a type of IRA. It's where you make a contribution to a non-deductible Traditional IRA. You won't get a tax benefit out of it, so what's the point you may ask ... the point is, you can convert it to a Roth IRA almost immediately, and you will not have to pay any tax. You are subject to the typical IRA contribution limits: $6k if younger than 50, $7k if 50 or older.

It's that second step in that process, the Roth conversion, that gets you. In the eyes of the IRS, you have only one big giant IRA, with one piece here, another piece there, a third piece elsewhere, etc. When you convert something from Traditional to Roth, IRS considers it to be a proportional conversion of your pre-tax assets and non-deductible assets to Roth; and expects you to pay tax on the 'pre-tax' portion that's converted to Roth.

Example: You have $54k in a Rollover IRA. Today you are not eligible to make a direct contribution to Roth IRA, so you want to contribute $6k to a non-deductible Traditional IRA, then convert to Roth.
You may be thinking: $6k I paid tax on already, $6k I am converting to Roth -- so $0 tax due.
IRS interpretation: you have $60k in Traditional IRA before conversion, you converted $6k to Roth. Of this, $6k/$60k or 10% is non-deductible, so no tax due. The remainder 90%, or $5.4k, is taxable income, so you pay 24% or higher tax on $5.4k.

WHAT IF -- you rolled the Rollover IRA into a 401k prior to the Roth conversion?
You are left with $0 in the traditional IRA, you add $6k to that IRA, all of it non-deductible. Convert to Roth. $0 tax due. IRS also agrees with this.

HENCE THE SUGGESTION: Do not keep a Rollover IRA. Roll that into your employer plan (403b or 401k) first. Then do the steps above (contribute to a n-d-tIRA, convert to r-IRA).

Thank you for taking the time to explain this so eloquently. I appreciate it!
I had my 401k roll over transferred to vanguard MMF. I will withdraw it and add it into my employer 401k and then contribute separately to tIRA and then r-IRA.
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Eagle33
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Re: New Roth IRA account question

Post by Eagle33 »

In addition to this Bogleheads forum, being a physician you may also want to check out The White Coat Investor website to aid you with your future finances.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
McDougal
Posts: 227
Joined: Tue Feb 27, 2018 3:42 pm

Re: New Roth IRA account question

Post by McDougal »

heman466s wrote: Fri Jul 24, 2020 10:05 pm Thank you for taking the time to explain this so eloquently. I appreciate it!
I had my 401k roll over transferred to vanguard MMF. I will withdraw it and add it into my employer 401k and then contribute separately to tIRA and then r-IRA.
Be careful how you withdraw from the IRA and contribute it to the 401K. First make sure 401K allows a rollover into it from your IRA. Call the 401K and request a direct transfer to move the money from your IRA into your 401K without touching your hands. They should give you the steps to take to do this transfer properly. Good luck!
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