I’m a big proponent of maxing out available Roth space during low income/training years. However, most of us don’t have enough income to put $23,500 post-tax dollars away on resident/fellow income. Below I will share how I contributed $23,500 post-tax dollars to my Roth IRA/Roth 403b last year on $53,000 PGY2 income.
STEP I. MAKE A BUDGET.
This is a guest post on my colleague White Coat Money’s Blog. You can read the rest of the article at his blog.
How I Contributed $23.5k to Roth IRA/Roth 403b in 2015 as PGY2
fantastic questions!
my answers after A> below
Is it good time to open the IRA ROTH after the Brexit incident?
A> there’s never a good or a bad time to invest. now is always best in my opinion.
no one has crystal ball, so some may say, it’s great that Brexit dropped the market, now you get to buy low and stay the course
others might say, things are going to get worst and that you should wait for market to drop more before buying.
the most important factors in my opinion at our age (young professionals) are saving rate (how much you actually invest) and time value of money (the longer you invest, the harder/longer your $ works for you.)
Do you recommend to rollover this TIAA-Nevada pre-tax one into Vanguard and convert to ROTH when I finished my PGY1?
A> i definitely support conversion to ROTH whenever you can, the sooner the better, as you know pretty much for sure that each year your income is growing that converting to Roth (paying taxes) will get more expensive. so do it the first moment you are able to (knowing your taxes are only going up from now) is my #1 rule of thumb.
Any other tips at this point? I greatly appreciate all of your guidance!!!
A> I recommend that you start the 30 day mindful financial practice with DWM YouTube videos (upper left corner of my webpage). It will set you on a trajectory of financial success much steeper/faster than if you would if you didn’t watch and learn from these short and sweet videos.
always remember the priceless-ness of your time, and the time value of $, and use both to your advantage.
Hello DWM,
Is it good time to open the IRA ROTH after the Brexit incident? I know market is down right now which can be a plus to buy. Just curious what your thoughts are on this.
Anyhow, I opened up the IRA ROTH Vanguard with $1,000 today (Vanguard Target Retirement 2055) today. Hope I didn’t screw anything up. Like you recommended, I am going to passively invest until 59.5 yo…
Here is my plan during my training years for investment:
PGY1 – Contribute 6.2% match into pre-tax 403b each month (TIAA-Nevada), max out $5,500 for IRA ROTH 2016 year contribution (VANGUARD, expense ratio 0.16%), $3,600 into 403b ROTH (TIAA-Nevada) this year
PGY2-5 – attempt to max out $18,000 into 403b ROTH (TIAA-Texas) and $5,500 into IRA ROTH (VANGUARD) annaully
As you can see, I have Vanguard IRA ROTH and the rest is from TIAA. It looks like I will have only one pre-tax contribution from the match one from PGY1. Do you recommend to rollover this TIAA-Nevada pre-tax one into Vanguard and convert to ROTH when I finished my PGY1? Also, it seems convenient for me to rollover 403b ROTH (TIAA-Nevada) into 403b ROTH (TIAA-Texas) which I will plan to do as well.
Any other tips at this point? I greatly appreciate all of your guidance!!!
Ally bank seemed to have the highest APY for regular saving acct of 1% as of today compared to other competitors. Hope it stays that way.
Anyhow, I looked through the CD (Certified Deposits) option as well. The limitation for this type of saving acct is that you can only deposit once and that is it until the term maturity is complete. So, you will be locked with one time deposit of fund when opening CD. I think this concept is the same across all the banks, I assume. At least I checked BoA and Ally ones.
Since I need my cash fund transferred to saving acct monthly basis, CD won’t work for me. It seems like I won’t get 3% return unless I take a chance buying stocks, but I am leaning toward not taking my principle amount at risk and utilize the Ally saving acct until I leave REPAYE. This my current thought 🙁
i see perhaps you can consider doing this.
put money into savings account every paycheck, collect one year of paycheck saved money.
then start a CD for 3 years. 3 year CD’s pay you 1.64% interest rate.
then your money is free in 4 years…
just a thought.
i have not looked into bonds or treasury yet, i’d think it should be more than 1.64% if you are willing to lock it up for 3 years.
this is based on the assumption that you don’t plan to take money out of the CD for 3 years because you only need the money when you turn attending, which is really 6 years from now.
in fact, you can probably go for the 5 year CD if you don’t need to pull money until 1+5 years later.
5 year CD gives you as high as 2.08%
Check here. http://www.bankrate.com/cd.aspx
Thank you for sharing your novel tips!
I like your idea where I will collect and save portion of cash overflow (~$600/mon = amount of interest/mon during PGY1 after the subsidy applies under REPAYE) into Ally Savings acct during the one year of intern, then transfer all funds ($7200+interest) into Ally CD for a term of my choice, 3 or 4 yrs during the time I start PGY2. I am hesitant on 5 yr CD since my future is uncertain for fellowship vs. non-profit or private job vs. life matters (housing/marriage/car), etc…
Quick question and I am curious which option you chose for Vanguard IRA ROTH acct. They asked me how I would like my dividends and interest credited to my account. There were two options, reinvest vs. transfer to money market settlement fund. I chose reinvest for the greater growth with risk tolerance. Just curious how you did as well.
Vanguard told me that I will need $1,000 for Vanguard Target Retirement fund vehicle. So, I will wait for my first check to fund, likely. Like you said $20 fee can be waived to sign up for electronic delivery method. Thanks!
i have 90% of money in Vanguard Total Stock Market Admiral Share with expense ratio of 0.05%
5% is in a target fund
Yes there’s 1k requirement
once you get to 10k admiral share, the expense ratio is even lower 🙂
Thank you for your valuable inputs, again!
I will be on REPAYE plan at least during my residency training PGY 1-5 (will start PGY 1 this July) for sure. I will save the leftover cash flow into the interest bearing vehicle. What do you recommend to invest these leftover cash flow into? My original plan was to save these cash in to BoA Savings account that has an interest growth. Do you recommend putting them rather into Vanguard, for example? Any example of investment account I can take a look at for me to invest for short period of time (5-6 yrs) and be able to withdraw original+interest with tax benefit to pay off the loan interests before I will leave REPAYE 5-6 yrs from now?
Like we discussed, I plan to max out IRA Roth (Vanguard) annually and contributing 6.2% match into 403b non-Roth (TIAA) spaces during intern year and investing into 403b Roth space (Vanguard) during PGY 2-5 (No match at my advanced program). I will roll over 403b non-Roth (TIAA) into Vanguard and convert into Roth after internship is done. Other than the plan above, which type of investment account should I look at just for the sake of saving/investing leftover cash amount that I will intend to withdraw after 5-6 yrs to pay off loan interests before I will leave REPAYE and refinance with bank to pay off on my own?
Huge thanks!
if you can tolerate risk, i’d buy index funds and hope that it’s worth much more in 5-6 years when you need to pull it to pay your student loans.
but if you are risk adverse, i’d look into BONDS or Certified deposits, which will bear higher return/interest without the uncertainty of stock market.
Thanks again!
I recently heard about the Ally bank where the online regular saving acct offers APY of 1.00% compared to 0.01% for major banks. So, I may just save on this interest bearing account online.
I appreciate your valuable input everytime!
1% is good for savings account for sure. but if you are going to put money away for a few years, certified deposits may give you greater return. higher interest. or US treasury for 3 years should also be higher than 1%. you are great with learning and doing research. go check those options out and let us know what rates/returns you could get. i’d aim for investing with greater than 3% return since your student loan interest EVEN with subsidy is still more than 3% and inflation is more than 2% too.
what do you think?
Thank you, DWM! Another follow-up question…
I signed up for medical resident plan, pre-tax 403b 6.2% match via TIAA (Teachers Insurance and Annuity Association of America) and the fund vehicle is the Vanguard Target Retirement 2055.
Unfortunately, roth is only available for 403b without match option. So, I only left with IRA roth option when looking at roth space. So, during my PGY1, I will focus on maxing out IRA roth and contribute 6.2% into pre-tax 403b. I am not confident to contribute anything into 403b roth during PGY1. From PGY2-5 (no match available), I will just contribute as much as I can into 403b roth and maxing out IRA roth annually. I will roll over pre-tax 403b (TIAA) into Vanguard before leaving the internship like you suggested. Hope this rollover process is quick and simple…
Now, I have to open up the IRA roth. TIAA also has an option for it, too. Is it wise to open up an account with Vanguard for IRA roth? If I choose the Vanguard Target 2055 for IRA roth as well and after rolling over pre-tax 403b which also has 2055 target fund, are both accounts going to be combined for fund growth?
Thank you for your time and helpful advises as always!
great plan pretty much what i would do
i would
1. get the match
2. max out Roth IRA
3. come back to contribute as much as possible to Roth 403b or Roth 401k (whichever vehicle offers Roth option)
gpy2
i’d go with the lowest fee possible for Roth IRA and Roth 403b
no need to combine the 403b Roth with the rollover from intern year 403b funds in the same place, because separate smaller funds grow just the same as larger consolidated funds
combining funds is just more convenient and simple
but i’d go for whatever option gives you the lowest fee overall.
DWM,
I will check with HR if they have ROTH 401K while getting the non-Roth match. I doubt it as well since they only offer either 403b non-match but roth, or 403b match, but no-roth.
After my internship and at my rad program next year, they do not have a match but have 403b roth only. So, it looks like I will contribute to only 403b roth, non-match and IRA roth accounts during rad residency training. In this case, if I contributed 6.2% during my internship into pre tax 403b, can I move or convert this account to 403b roth? If not, I will have a total of 3 retirement accounts (403b match, non-roth from intern year, IRA roth, 403b roth), right? And it is up to me to decide whether I want to have same or different Vanguard fund vehicle for each 3 account?
Thanks!!
it is up to me to decide whether I want to have same or different Vanguard fund vehicle for each 3 account?
yes you are right
but i’d imagine that when you leave your internship, you can roll over your then 401k traditional (pre-tax) fund into a vanguard account if you’d like for convenience sake.
that way you will have your 403b Roth for rads residency and your Roth IRA and your 401k roll over in Vanguard.
when you select your 403b Roth during pgy2-5, make sure you try to get the lowest fee index funds possible.
my roth 403b is set up with fidelity by my hospital, but i was able to select vanguard funds, with expense ratio of 0.04% (because it is considered institutional rather than individual). pretty sweet. you may have the same options.
i’ve seen some people’s company index funds with 1% fee… that’s way too much, hopefully you have low fee options.
As I will start internship in July, I have few questions about opening up a retirement account. I will have to find out with HR to find about the 403b ROTH at my program. But for IRA ROTH account, I am not sure when and which type of acct I should look at. I was looking at the Vanguard ones such as Moderate Lifestragegy and Growth and Target Retirement. If I start with a certain plan, it is better to stay on that track for many years to come rather than switching to different one in the middle, right?
Is there a specific timeline where we should max out the ROTH accounts by, like by the deadline for tax return? Do most people save up some cash reserve first before they put the max amount at once or do people open up when they start internship and put it by monthly basis? I was curious how you put cash into the account. My plan was to save up some cash till I have more than enough 5.5k then invest it to IRA ROTH at once before April, Tax season.
Thanks,, DWM!
hey, https://www.youtube.com/watch?v=c9svIaILkO4 this video is made for you. Roth IRA 101. Enjoy! keep you awesome questions coming.
I have follow-up questions:
I briefly read that some Vanguard IRA ROTH acct costs $1k and others for $3k to just open it. I am sure the opening fee may depend on the type of acct. Is this opening fee included as part of 5.5k contribution amount? Or, is this totally separate from 5.5k contribution?
As I will start the internship this July, it seems like I will have to max out 5.5k in 2016 before tax season (April, 2017). This means I only have from July, 2016 – Deadline for tax file in 2017 (mid-April), correct? In this case, it is better to passively (automatically) withdraw cash from every biweekly check into IRA acct starting in July compared to saving it and put it 5.5k at one time when I have this amount, right? From my understanding, it is better to put contribution early so those cash can work for me earlier.
Thanks!
Great questions
one I don’t recall there’s an opening fee. There is a $20 administration fee, that is waived with online documents. So I didn’t pay that fee, you don’t have to either.
Secondly you do have now till the end of the year and then into four and half months of 2017 to max out your 5.5 K of Roth IRA contribution for 2016, I think having a certain amount deducted from your paycheck passively and contributing every paycheck is a great idea.
If you have any lump sum you are welcome to put it in now, if you believe that now is a good time to purchase lump sum.
Just don’t blame yourself later if prices drop even lower in the index funds.
Same idea if you hold onto the money and save until you have 5.5 thousand and then buy index funds in a lump sum, you might not like fluctuations with the prices after you make the purchase.
Dollar cost averaging and buy regular smaller amounts with automated paycheck deduction, in my my opinion, is the best way to go.
DWM,
Follow-up questions:
My intern program at the University of Nevada School of Medicine provides two plans for retirements: Medical Resident/Postdoc scholar retirement plan with 6.2% match 100% (dollar for dollar), but not a ROTH, and the other one is supplemental 403b plan without match, but a ROTH is available. Both plans are for immediate vesting. Website is here: http://www1.tiaa-cref.org/tcm/nshe/plans/plan2/plan-details/index.htm
I should still go with the matching one, correct? If so, how can I calculate the amount of each paycheck that I should contribute to get that match from my first paycheck? In addition to this contribution, I plan to also contribute from each paycheck for the IRA ROTH to max out from July till mid-April (tax file deadline) – 9 months (18 total paychecks). My first year salary will be 50k (no state income tax). Any guidance on how to calculate this?
Thank you!!
yes, absolutely take advantage of the match, first and foremost. since they match up to 6.2%. just sure to contribute 6.2% of every paycheck. so take your paycheck gross pay and x 6.2% to get the dollar amount. sometimes you can just sign up and designate 6.2% rather the actual dollar amount. either way works.
also, check with you HR, it may be possible for you to contribute to Roth 401k while getting the non-Roth match… some companies allow you to do that. my hospital didn’t I needed to contribute to pre-tax 401k to the pre-tax 401k company match. so if i want my contribution to become Roth dollars, I’ll have to find an opportunity to convert the pre-tax to Roth by paying taxes, so ideally sooner the better.
then, you can just set up an automatic withdrawal from your bank account to take 5.5k/ 18 paycheck for the Roth IRA to be contributed to a vanguard index funds or wherever you choose to invest your Roth IRA in.
Hello,
I have a question maybe you can answer: I’m currently contributing to a traditional 403b, even though we have Roth 403b, because I want to make a little more $ during residency. My plan is to rollover my 403b to a Roth IRA (where I’m also contributing ~5k every year) during fellowship next year, where I will still be in a relatively low tax bracket (depends on how much moonlighting I do however)…
When I do rollover, I will take a huge tax blow though (I will have ~70k in my 403b after residency). Is this a good plan?
In the meantime, I could transition to a Roth 403b during this year (my last of residency), so my tax hit will be lower? I am also unsure when you pay taxes on the rollover: is it during the year you do it, or the following year?
What do you think?
first of all great job for maxing out your 18k in 403b and 5.5k in Roth IRA, it is definitely an attainable goal during PGY and we should all at least give it a shot! i’m really glad that you shared your example so that others can see that it’s not just me, who’s doing it 🙂
now, i’m total proponent of paying taxes AS SOON AS I Can, as i know that this very moment/year I will be in my lowest tax bracket ever going forward, even compared to my mini-retirement and retirement years.
each year as I progress through PGY’s, income grew with internal moonlighting opportunities (not much but it is definitely an upward trend) so I never ever contributed to traditional. as i know the next PGY year, I’d be paying more taxes on every dollar.
David Denniston CFA, whom I highly esteemed for his professional expertise in financial analysis, will shortly present a guest post to show that nearly 99.99% of the cases Roth dominates/is better than traditional.
I’m glad that you are already anticipating the large tax burden coming up in your last year of training. and yes, if i were you, i would be doing Roth 403b now, today, no more traditional.
The usual argument of traditional over roth is to allow you to put the otherwise taxed/taken away money into the stock market to generate return, but remember the nice thing with roth is that once you pay taxes on it “once,” never again will you or even your heir pay taxes on withdrawal (at least according to current laws.)
I believe when you take a bit hit in taxes by converting traditional to roth, you can split and pay taxes in 2 years. I’ll check with David though.
Thanks again for your insightful questions and great job in inspiring our peers with your exemplary savings in 403b and Roth IRA.
Via Email,
The answer is that it depends on whether or not you’ll have the cash in the bank.
Folks have two choices:
1) Pay the taxes now out of the IRA/403b funds
2) Pay the taxes by April 15th (or if they file sooner) of the following year out of money they have in the bank and/or their return (if applicable) they would have received
So, for example, if someone converted 403b/IRA to Roth now, let’s say it is $10,000. Assuming a tax bracket of 25%, they would owe $2,500 withhold it and have it sent to the IRS and convert the remaining $7,500 now.
Alternatively, they could convert all $10,000 now with no taxes withheld, let the money compound (hopefully), and write out a check (or take it out of their refund) by April 15th of 2017.
Certainly, it makes more sense to write the check to keep more money via tax deferral/ tax free. Although, the more and more you have and the bigger and bigger the conversion, the more difficult that is for folks to do.
Warm regards,
Dave Denniston, CFA
Financial Advisor/ Managing Partner
Thanks for the clear explanation. I don’t think I would choose to take funds out of the conversion to pay for it – after all, I worked hard to save that money in the first place! Perhaps I should wait to roll over after tax day in fellowship year (so near the end of fellowship); that way, I would have to pay taxes on it the following year (on an attending salary).
On a side note, I’ve heard from word-of-mouth of some other residents who have saved a substantial amount during residency (>$50k). Obviously it’s not something that most people discuss, but I know we aren’t the only ones who have decided to sacrifice in our early training years to gain a solid financial foothold for our future!
yes, it is definitely possible to save >50k per year especially in later training years. if you know those people, ask one to write a story/post for my blog to inspire others!
thank you 🙂