As a medical professional, planning for retirement can be frustrating. Sure, you make good money but you have a lot of debt to pay off and after getting through all your schooling, you’re about 10 years behind. If you understand how compound interest works, that 10 years is a lot bigger than it sounds. What can you do?
Benefits of Roth IRAs
One of the greatest retirement saving vehicles out there right now is the Roth IRA. With it, you can save up to $5,500 ($6,500 if you’re over age 50) a year, and your spouse can do the same even if he or she isn’t working. You make the contributions with after-tax money and all distributions are tax-free.
In addition to tax-free growth, Roth IRAs are great because they don’t require you to start taking distributions when you’re 70 like all the other retirement plans out there. In fact, instead of taking money out, you can keep putting money in. Also, they have favorable rules for your heirs, so your account can keep growing tax-free for years after you are gone.
Limits of Roth IRAs
Unfortunately, you probably make too much money to contribute to a Roth IRA. In 2018, single tax filers can only contribute to a Roth IRA if their modified adjusted gross income is under $135,000 and can only contribute the maximum if it is under $120,000. If you are married and filing jointly, you must make under $199,000 to contribute at all, and the phaseout begins at $189,000.
So why did I tell you how great Roth IRAs are if you aren’t eligible to use one? No, I’m not sadistic. There is another way to get your money into a Roth IRA even if you aren’t eligible to contribute directly to one. You can get your money in through the back door.
Getting in The Back Door
While you may not be able to put your money directly into a Roth IRA, that doesn’t mean the option is totally off the table for you. Nondeductible contributions to traditional IRAs can be converted to Roth accounts. And everyone is eligible to make nondeductible contributions to traditional IRAs. So, a “backdoor Roth” is simply putting your money into a nondeductible traditional IRA and subsequently converting it into a Roth account.
While it sounds fairly simple and straightforward, if you have other traditional pretax IRA accounts, it can get complicated. You see, the IRS takes into consideration all pretax holdings when figuring the tax liability of a conversion. So, if you have $20,000 in pretax contributions and $5,000 in nondeductible contributions in your IRA, you will have to pay tax on 80% of your conversion, since that is the percentage of your total account that has yet to be taxed.
How I Can Help
A backdoor Roth is a great way for high-income earners like medical professionals to gain access to the great benefits of a Roth IRA. However, because of the tax implications, you need to be careful. As they say on TV, “Don’t try this at home.” It’s important to work with an experienced financial advisor or competent CPA when doing a Roth conversion.
If you’re a busy medical professional that wants to get a leg up on retirement planning, I can help. Together, we can determine if a backdoor Roth is a good fit for you and strategize proper implementation that will limit your tax liability. Send me an email at email@example.com or call my office at 985-605-7185 to find out if a backdoor Roth IRA is right for you.
About Jeremy Smith
With nearly two decades of experience in the financial services industry, Jeremy Smith serves as a LPL Financial Advisor and the Wealth Advisor of Harbor Wealth Management. He specializes in serving retirees, pre-retirees, small business owners, and widows, providing a comprehensive array of investment management and financial planning services. Jeremy aims to serve his clients as a financial guide who is here for their every need, helping families find lasting plans so they can focus on what matters most to them. To learn more about Jeremy, visitwww.myharborwm.com or connect with him onLinkedIn. You can reach Jeremy directly at firstname.lastname@example.org or by calling his office at 985-605-7185.
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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. You should discuss your specific situation with the appropriate professional.