Retirement Accounts

All About Roths

William Roth did a great thing by creating the Roth IRA for Americans in 1997. The Roth IRA allows for tax free growth and tax free withdrawals. He also caused a lot of confusion ever since. Quite a few investment vehicles now carry the Roth name but mean different things. The unifying theme here is after tax dollars growing tax-free that remain income tax-free on withdrawal. So read on to learn all about Roths.

Roth IRA

The original OG Roth. This is a special IRA (individual retirement account) with a 2019 contribution limit of $6,000. This is preferable over a traditional IRA (pre or post tax) due to the signature Roth tax-free treatment.

In 2010 the income limit no longer posed a barrier for higher earners with the introduction of the “Backdoor Roth IRA”. This easily confused method involves a few steps: contribution to a non-deductible traditional IRA. Then converting this traditional IRA to a Roth IRA. This, like any IRA contribution, needs to be reported on form 8606 with your annual taxes.

The main caveat here is that in order to do a backdoor Roth IRA “cleanly” you must have no other IRA accounts with balances. Otherwise you are subject to the “pro rata” rule. Long story short – if you have non-zero balances in any other IRA account, you'll owe taxes on this otherwise non-taxable event.

So, what do you do if you have IRA accounts with money in it? You have two options: convert the entire amount to a Roth IRA (see below – this NOT doing a backdoor Roth IRA) or rollover the IRA into a 401(k) or 403(b) that accepts rollovers.

The good news is that many brokerage accounts make it very easy to do this “backdoor Roth IRA.“ I use Vanguard and they have an option to “Convert to Roth IRA.” Check out Physician on FIRE's step-by-step tutorial on how to do this at Vanguard.

If you’re 50 and older you can contribute an extra $1,000 into a Roth IRA. Roth IRAs require that you have enough earned income in the amount of the Roth IRA. So if you made $1,000 as a high school student babysitting you cannot contribute the full $6,000, you’re limited to $1,000. The exception to this earned income rule comes into play if you’re married. This is known as the spousal Roth IRA. As long as one spouse earns enough to fund both Roth IRAs, the non-working spouse may also open and fund his or her own Roth IRA.

Another beauty about the Roth IRA is there are no required minimum distributions or RMDs. This means that when you turn 70.5 you are not required to start taking distributions. Most other tax advantaged retirement accounts require a minimum distribution starting at age 70.5.

Roth 401(k)s

Most of us have access to a 401(k) and/or a 403(b). Most are “traditional” or pre-tax meaning that our contributions reduce our taxable account by the amount we contribute. These accounts grow tax-free and we pay taxes when we withdraw the money in retirement.

Many plans also have a Roth option. The Roth option means you can contribute after-tax dollars that grow tax-free and are tax-free on withdrawal.  Doesn’t that sound awfully like a Roth IRA in disguise? It basically is except there are RMDs on Roth 401k(s) and 403(b). To get around this simply rollover the Roth 401(k) into a Roth IRA. There are no tax consequences for this rollover.

Many people ask if they should use the Roth option or the traditional option. It depends. I favor the traditional option for those folks in high marginal tax brackets and/or high income tax states such as NY and CA otherwise most folks should consider the Roth option.

The Mega Backdoor Roth IRA

It’s a bummer that the awesome Roth IRA is limited to an annual contribution of $6,000. But, some really lucky folks have access to a way to contribute even more to a Roth IRA.

First, you need access to either a 401(k) or 403(b) that allows non-Roth after-tax contributions or NRATs. These are contributions beyond your standard $19,000 employee contribution (that may be either pre-tax or traditional, or post-tax or Roth). This is also separate from what your employer may contribute. Remember the total limit of the 401(k) is $56,000 in 2019.

So, if your plan allows for NRATs – then you’re able to do the coveted Mega Backdoor Roth IRA.

Pearl: Log on to your work 401(k) and see if there is an option for after-tax contributions.

For example: Let’s say you max your $19,000 employee contribution and your employer contributes $5,000 as a match or contribution. You’re left with $56,000-24,000 or $32,000 of available NRAT contributions. Contribute this $32,000 (after-tax) to your 401(k). Then once a year or more (depending what your plan allows) you move this NRAT money into a Roth IRA! This is completely separate from the $6,000 Roth IRA.

$19,000 employee contribution
$5,000 employer contribution/match
$32,000 non-Roth after-tax contribution —> Roth IRA
—————————————–
Total: $56,000

With the ability to contribute NRATs and rollover to a Roth IRA, you’re contributing not just $6,000 but a total $38,000 (using the above illustration) into a Roth IRA. Money that will never be taxed ever again. This is way better than a traditional brokerage account. But alas not many plans allow NRATs and even the plans that do may not let you actually move the money out of the plan unless you leave the employer or limit you to annual withdrawals. It’s still worth it to use it in these cases but you will owe taxes on the growth of the NRAT money.

Roth Conversions

Finally, we have Roth conversions. The term itself is confusing since the backdoor Roth IRA involves a conversion. Roth conversions refer to converting pre-tax accounts such as rollover IRAs, 401(k)s, etc into a Roth IRA. You’re changing from a pre-tax account (where you saved taxes when you contributed) to a Roth IRA. You will owe taxes on the amount converted at your current marginal tax rate.

Current marginal tax rate is the key thing here. This is why Roth conversions are often done in low income years such as a year where job loss occurred or the first few years of retirement.

For example let’s say you were in the 35% married marginal tax bracket during your peak earning years. The year after you retire you’re in the 12% marginal tax bracket. The strategy is to convert some pre-tax dollars into a Roth IRA since you will only pay 12% on this conversion vs. 35% if you converted during your peak earning years (and any applicable state and local taxes).

Often retirees will plan to institute a “Roth Conversion Ladder” to migrate pre-tax assets into Roth IRAs so that the money will never be taxed again.

Note that the word rollover is usually used in the context of moving from like to like such as rolling over a traditional (pre-tax) 401(k) to an a pre-tax IRA.

Phew! That’s probably more than you wanted to know about all of Mr. Roth’s accounts.

Were you aware of all the possible Roth accounts besides the Roth IRA?

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Our 2018 Savings & Investing Plan

2018 is well underway. Last year, M and I had a good amount of tax advantaged retirement “pots” available to us along with some employer match and contributions:

  • My 403(b) + generous employer match + contribution
  • My 457(b)
  • My cash balance plan
  • My backdoor Roth IRA
  • My solo-401(k)
  • His 403(b)
  • His Roth IRA
  • His solo-401(k)
The pots totaled close to $90,000 of tax advantaged space – not bad! With our move I lost some unvested money in the 403(b) and completely lost the cash balance plan. At the same time, I took advantage of the ability to contribute to a Mega-Backdoor Roth IRA and was able to contribute about $8,000 into that. Now we have new jobs and slightly different available pots this year:
  • My 401(k) + employer match
  • My solo-401(k)
  • My backdoor Roth IRA
  • My HSA
  • His 401(k) + employer match
  • His Roth IRA (may need to backdoor it this year)
  • His family HSA
  • Our taxable account
Our pots this year total around $80,000 + additional into a taxable account this year. We hope to bring our total 2018 savings to > $100,000. You'll notice that we now have access to a health savings account (HSA) plan via a high deductible health plan (HDHP). M's job allows unmarried partners to hop onto benefits at very affordable premiums. It was a no brainer to sign up our whole family. Since we are not married, we are able to take advantage of two HSAs – individual ($3,450) for me and family ($6,900) for him. We do not intend to actually use it for deductibles. We will be using it as a Stealth IRA or use it for medical expenses in “retirement.” Our asset allocation will remain the same as last year:
  • 68% US stocks
    • 17% Large cap growth, 17% Large cap value
    • 17% Small cap growth, 17% Small cap value
  • 24% International stocks
    • 12% Large cap developed countries
    • 12% Diversified emerging markets
  • 8% US REITs
Most of our accounts are with TD Ameritrade. You may have heard that they updated their commision-free ETF list and removed all the Vanguard ETFs. Bummer. So our FA has developed this new portfolio that closely mirrors the prior portfolio: We will be opening our taxable account at Vanguard. What do you think? Comment below!]]>

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Moving & Mega Backdoor Roth IRAs

Before any big change in your life (hello, moving!), it's important to get your finances in order. We consider the cost of a move, and we compare our current salary with our future position. But what about saving for your future? It's probably not on your mind when you're thinking about moving. But for my recent move, a Mega Backdoor Roth IRA was something important to consider.

our move to a MCOL. I had less than 2 months before my planned maternity leave to figure out how to make sure I was maximizing benefits, particularly my work-sponsored retirement accounts.

My Work-Sponsored Retirement Accounts

To recap, here are the retirement accounts I have through work:

  • 403(b) – I max out my contribution at $18,000 and receive a generous employer contribution + match. I am currently 40% vested in employer contributions.
  • Private 457(b) – I max out my contribution at $18,000. There is no employer contribution.
  • Cash Balance Plan (aka small pension) – Unfortunately, I am 0% vested, so I will lose it all.

In addition to these work retirement accounts, my Roth IRA for 2017 was funded in January.

Planning Ahead for a Move

Since the leave was planned well before our move to a MCOL, I had already increased contributions to my work's 403(b) and 457(b) so that my contributions would be maxed out by the end of September.

I was unable to get a straight answer from HR if I can continue to make contributions when short term disability pay kicked in for my maternity pay, so I played it safe. I also could not get a straight answer if I would continue to get employer contributions plus the match match if I front loaded the 403(b) and 457(b).

Thankfully, the employer contributions + match have continued!

Now, I will be separating from my job (I am employed until the end of December), some things will change. I am starting a new job in 2018 that only offers a 401(k). That means I'm losing my 457(b) and cash pension plan.

Because of that, I decided to take advantage of the Mega Backdoor Roth IRA (linked to excellent article by Mad Fientist).

What is a Mega Backdoor Roth IRA?

You might be wondering what exactly is a Mega Backdoor Roth IRA?

It is the ability to contribute an additional $36,000 a year into a Roth IRA. This is in addition to the regular or backdoor Roth IRA of $5,500 annually.

I knew this was an option through my work's 403(b) since they allow non-Roth after-tax contributions (aka NRATs). This is not the same as being able to contribute to a Roth 403(b) or 401(k). These contributions are in addition to my $18,000 employee contribution. You can contribute NRATs up to the total limit of $54,000 (for 2017).

Obviously, I want the free employer contribution + match, so I am limited to contributing an extra ~ $15,000 in after-tax contributions. But if you have no employer contribution then you can contribute the difference of $54,000 less $18,000, or up to $36,000.

Understanding Mega Backdoor Roths and Taxes

One caveat is that you want your plan to allow in-service distributions, meaning that you can move the NRAT portion of your 403(b) or 401(k) out of the account and into your Roth IRA. Some plans let you do this quarterly or annually. Mine only allows this upon job separation.

This is not a deal breaker, but this means that I will owe taxes on the gains only. One will still owe taxes on the gains with a quarterly or annual in-service distribution, but it will have less time to make gains, so they should be minimal.

Why This Money Move Was Right Before Our Move

I did not contribute to this in the past since I'm still paying down student loans. But now that I am leaving and losing a good amount of tax-advantaged space with the new job. It made sense to “fill up” this bucket before my move.

Final Thoughts on Mega Backdoor Roth IRAs

To summarize, here is how to tell if you are eligible for a Mega Backdoor Roth IRA. Ask yourself these questions:

  • Does your plan allow non-Roth after-tax contributions?
  • Does your plan allow in-service distributions? How often?
  • If yes to both – you are lucky! And have an additional potential $36,000 to contribute to your Roth IRA

If you're eligible to contribute or you want more information about a Mega Backdoor Roth, make sure you swing by the Mad Fientist's article. Whether a Mega Backdoor Roth is the right financial move for you or not, before you move to a new city or simply change jobs, make sure that you think about your future money situation, too.

Have you heard of the Mega Backdoor Roth IRA? Comment below!]]>

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Surviving $350,000 of My Biggest Financial Mistakes

I've estimated that these mistakes have cost me at least $350,000. Meaning that if I didn't make them, I'd have at least that much more money saved. Big sigh.

Here are the biggest financial mistakes I've made and survived to date:

#1. Cashing out my old work's 401(k) plan & selling company stock

I started a coveted job at Morgan Stanley in 1999 right after college. It was the height of the tech boom. My starting salary was $50,000 + a small guaranteed bonus. (I made the same as a resident in 2012!) My first 6 months was in London with all expenses paid.

I was an ex-pat there – meaning I was paid my U.S. salary but received free housing (picture beautiful 2 bedroom, 2 bath furnished apartment with marble bathtub, heated towel stand across the street from Hyde Park, neighboring the Grosvenor House) and a generous cash per diem. I did not have to spend any of my actual salary to live in London.

Now I don't totally regret this part – I was able to explore Europe on the weekends – weekend trips to Paris, Spain, Amsterdam. Priceless. Back then, friends and family from NYC could visit me in London for less than $400 roundtrip.

Plus, I had access to a 401(k) plan for the four years I worked there. I'm pretty sure I didn't max it out, but I still had a nice chunk in that account.

Still, I cashed it out in 2004. Yup, it gets worse. In addition to a company match, we also got free stock as part of our retirement plan. I sold it.

#2. Barely saving despite high earnings as a 22 year old

I listed my starting salary in mistake #1. About 1 year later, I got a $22,000 raise and a $25,000 bonus. This meant I hit 6 figures at the tender age of 23.

My only wish is that I had some savings to show for that! I lived paycheck to paycheck despite a high income. I guess I can blame NYC.

#3. Racking up $20,000 in credit card debt before starting dermatology residency

Yeah …. someone went a little nuts during intern year in NYC. I had awesome clothes, though. I paid it all off before graduating residency. Thankfully, I no longer carry any credit card debt and pay off cards in full every month.

#4. Not funding a Roth IRA until 2014

The Roth IRA was enacted in 1997. I've been earning money since at least 1992, so I'm not even counting opportunities to fund a regular IRA prior to that!

I actually never heard of the Roth IRA until sometime during residency so I feign ignorance prior to that. I couldn't imagine forking over $5,500 a year as a resident, but I totally could have.  This is especially true because I moonlighted most of residency.

#5. Not paying off student loans during residency

Every year during internship and residency I meticulously applied for deferment or forbearance on my student loans. Isn't that what everyone does? Apparently not.

By the end of residency in 2015, I had almost $50,000 of interest capitalized onto my loans.

Surviving My Biggest Financial Mistakes

You can always earn more income, but you can't create more time. That's why some of these financial mistakes really sting.

Despite these awesome mistakes, I should be able to reach Financial Independence within 15-20 years and pre-Financial Independence within 10 years or less.

Feel free to share your mistakes below!]]>

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The Solo 401(k)

Starting a Solo 401(k): The Solo(K) Series Continues

the many benefits of a solo 401(k) and the necessary conditions for opening one. So now you're convinced you need to open one. Here are answers to some common questions you might have about starting a solo 401(k).

What about the SEP-IRA?

Before you decide on starting a solo 401(K), let's discuss another retirement account.

You may have heard about the SEP-IRA (or just SEP) as another retirement account option for the very small business. The SEP-IRA has the same contribution limits as the solo-K, but contributions are made by the employER only. Additionally, SEP-IRAs do not allow for Roth contributions.

While you can contribute the same amount to a SEP as you can to a solo-K, having a SEP-IRA (since it is a pre-tax IRA) will prevent you from contributing, tax free, to a backdoor Roth IRA.

So, why would you open a SEP-IRA instead of a solo-K?

The main reason is that a SEP can be opened after the calendar year for which it applies. You can wait until your tax due date, including extensions (around October 15th), to open and fund a SEP-IRA.

For example, you have until 10/15/19 (with an extension!) to open and fund a SEP for 2018. (Even if you have already filed your 2017 return and didn’t know this rule, you still have time to amend your return and open a SEP for 2017!)

By contrast, you must open a solo-k by the end of the calendar year it is for. A very minor reason to open a SEP over a solo-K is that the paperwork to open a SEP is simpler. But don't do it just because you're lazy!

Contributions to either a Solo-K or a SEP are based on net profits adjusted by FICA taxes (Social Security + Medicare taxes). The contributions to a Solo-K and a SEP are the same if you have already made your $19k employee contribution at work. Otherwise, you can add what remains of your employee contribution, up to $19k/$25k to the maximum Solo-K contribution.

What should I consider before starting a solo 401(k)?

There are a few good solo 401(k) choices with low to no fee plan options. They differ mainly in:

  • Fees: Some are free, some are not.
  • Traditional vs. Roth employee contributions: Not all will offer the Roth option.
  • Rollovers: Not all will accept rollovers from old IRAs, 403(b)s, 401(k)s. This is a deal breaker, in my opinion, since the ability to do this is one of the great reasons to have one.

Thankfully, someone else already did a great and thorough review on the most popular solo-K options.

Where should I open my solo-K?

Here are my top 3 picks:

  • TD Ameritrade: Offers a Roth option. Has a good list of commission-free ETFs including many Vanguard ones. M has his solo-K here and I plan to open one here too.
  • E-trade: Offers a Roth option. Lots of free funds.
  • Fidelity: No Roth option. Lots of free funds and ETFs.

All of these accept rollovers of old IRAs, 401(k)s. Some offer loans (which I don't recommend ever doing), too.

At this time, I do not recommend opening a solo-K at Vanguard for two main reasons: they do not accept rollovers (deal breaker) and you can only invest in their investor share class funds. These funds have a higher expense ratio than their admiral class fund or ETF equivalents. They also charge a $20 fee per fund in the account annually until you reach a balance of $50K.

Final Thoughts on Starting a Solo 401(k)

For many of us, starting a solo 401(k) is the right money move.

If you're still not sure, review the impressive benefits of a solo 401(K) and determine if you qualify. But maybe you're already wanting to get started. Today is the perfect day to create that investment account.

Follow the steps outlined above and then drop us a note below to let us know how the process went. Your future self will thank you for not putting this off any longer!

Do you have a SEP or a solo-K? Are you planning on starting a solo 401(k)? Comment below!]]>

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4 Amazing Solo 401(k) Benefits

why I love the Roth IRA. I also love the Solo 401(k). If you're looking for another way to save for retirement, you want to check out these Solo 401(k) benefits.

What is a Solo 401(k)?

But first, it's important to understand what a Solo 401(k) is. Also known as an individual 401(k) or solo-K, a Solo 401(k) is a tax-sheltered retirement account for really small businesses–just you in fact. This two-part series will discuss the solo-K in the context of having a main job (w2) and having a side job with 1099 income, such as moonlighting, a blog, completing medical surveys, etc. Although, the benefits will also apply if you have 1099 income alone as well. With a really small business, you are considered to be both the employEE and employER.

What Are The Solo 401(k) Benefits?

Like all retirement accounts, it pays to really understand what you're signing up for. If you found yourself nodding along to the criteria above, you're in luck. You could start reaping all the benefits of a Solo 401(k) right away. Here's what to love about them:

Benefit 1: Ability to contribute up to $56K*

You're limited to a maximum $19K employEE contribution through your work-sponsored 401(k)/403(b). The IRS allows your employer to make additional “profit-sharing” contributions of $37k for a total of $56k. Unfortunately, while many of us have employer “matches”, we don’t work for employers with profit-sharing plans. But if you open a solo-k for your small business, you can make both employEE and employER contributions up to the current max of $56K. Keep in mind that if you have multiple work 401(k)s, you're limited to one $19K employee contribution across all accounts. But you can make “profit-sharing” contributions of 20% of net income to your solo-K even if you’ve contributed $19k as an employEE. Like regular 401(k)s you can elect pre-tax (or traditional) employee contributions or after-tax, or Roth contributions. Employer contributions are always pre-tax.

Benefit 2: Ability to hire your spouse

This is a great perk if you have a stay at home spouse who would only have access a spousal Roth IRA. Hire your spouse and s/he will be able to contribute $18K as an employee. Win-win

Benefit 3: Ability to roll over other retirement accounts into it

This is huge. As life goes on you'll change jobs at least a few times. This often leaves a trail of “orphan” 401(k’s)/403(b’s). You may have rolled over one or more of these into an IRA or two. It can get really messy. Not to mention that you're probably paying a maintenance fee for all of the accounts. Set up a solo-K and you can roll all these orphans into it, consolidating everything into one account. Less paper, less emails, and easy to keep track of your investment plan. It's retirement account decluttering at its best.

Benefit 4: Ability to contribute to a backdoor Roth IRA without being subject to the pro-rata rule

After you move all your old accounts (namely, anything with “IRA” in the name), you now have a clean slate to begin contributing to a backdoor Roth IRA. If you have any other non-zero balances in any IRA account, you’ll be subject to the pro-rata rule if you contribute to a backdoor Roth IRA, which means you’ll pay unnecessary extra taxes. Not good. You're convinced you need one now, right? I thought so.

While the Solo 401(k) benefits probably have you ready to open an account, there are a few other questions worth addressing first.

Can I open a Solo 401(k)?

Maybe or maybe not. You need earned income, typically as an independent contractor (IC). If you own an S-corp with no employees, this would come from your W2 income. For physicians, however, this is typically IC income from moonlighting, income from surveys, speaker fees, etc. If you don't have any of these now, you can find this kind of work pretty easily.

I only made $1000 of IC income. Is it worth opening a Solo-K?

Yes and yes! You need only the minimum a custodian (aka brokerage firm) requires to open a solo-K. There are no “required minimum” contributions to make to a solo-K. It is worth opening for the ability to roll over other retirement accounts into it (see #4 above).

What else do I need to know about Solo 401(k) plans?

  • Once the balance in the solo-K reaches $250K you'll be subject to some compliance measures including filing form 5500 with the IRS annually.
  • You need to open the solo-K by 12/31 of the calendar year but you'll have until tax day, including extensions, to fund it. So the absolute latest you can fund it is by 10/15 the following year.

Final Thoughts on Solo 401(k) Benefits

If you're feeling like you haven't arrived yet with your 1099 income, remember that you don't have to make huge contributions to start a Solo 401(k). Savings and retirement are all about options. Giving yourself access to another way to save for the future is priceless.

Read on for the second part of this topic where I'll discuss why you should choose a solo-K over a SEP-IRA and where you should open your Solo-K.

*2019 limits. If you are age 50+, you can add another $6k to your employee contributions.

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How we are investing our money this year

whole start-up planning phase, but we have decided what our asset allocation will be and what our accounts are.

You'll see how I invested my money last year here, but in summary:

  • 55% US stocks:
    • VIIIX: Vanguard Institutional Index Fund Institutional Plus Shares 0.02%
    • VIEIX: Vanguard Extended Market Index Fund Institutional Shares 0.12%
  • 20% International stocks:
    • VFWSX: Vanguard FTSE All-World ex-US Index Fund Institutional Shares 0.11%
  • 10% Small cap value:
    • VISVX: Vanguard Small-Cap Value Index Fund 0.2%
  • 8% REITs:
    • VGSIX: Vanguard REIT Index Fund Investor Shares 0.26%
  • 7% Bonds:
    • VBMPX:  Vanguard Total Bond Market Index Fund Institutional Plus Shares 0.05%

Now there is a “we”, and we have decided to follow our FP's advice to go 100% equities to maximize growth. We moved all of M's 4 accounts (mix of old work IRAs, 401(k)s into one solo-401(k) at TD Ameritrade. He had 1099 income in 2016 and the solo-K was opened in December 2016. TDA allows Roth 401(k) so we opted to make his 2016 contributions Roth (small amount though since his 1099 income wasn't substantial). He had a small amount contributed to his W2 job's 401(k) in 2016 but he became unemployed relatively early in the year. He also contributed to a Roth IRA for 2016 (his first time) as well this year, and he'll do 2017 in short order.

I'm still doing what I did last year – contributing the full $18,000 each to the 403(b) and 457(b) and $5,500 to a Roth IRA (already funded for 2017). I also have the option to do the “Mega Backdoor Roth IRA” (to be covered in a future post), but have not gone there yet. We don't have a taxable account (yet). Our IPS with our FP has the following asset allocation:

  • 68% US stocks
    • 17% Large cap growth, 17% Large cap value
    • 17% Small cap growth, 17% Small cap value
  • 24% International stocks
    • 12% Large cap developed countries
    • 12% Diversified emerging markets
  • 8% US REITs

You'll see that it's not that different from my original, with the subtraction of bonds. There is no mid cap category since mid caps are a fuzzy category. In M's solo-401(k), the details are:

iShare Core S&P Small-Cap 17% IJR
Vanguard Dividend Appreciation ETF 17% VIG
Vanguard FTSE Developed Markets ETF 12% VEA
Vanguard FTSE Emerging Markets ETF 12% VWO
Vanguard High Dividend Yield ETF 17% VYM
Vanguard REIT ETF 8% VNQ
Vanguard Small-Cap Growth ETF 17% VBK

This account is managed by our FP. I still manage my work's 403(b) and 457(b) and I'm still managing my Roth IRA at Vanguard, but I may let them manage the Roth IRA at some point. I also plan to open up my own solo-401(k) this year. My allocation is a little bit different than what our IPS states but not too far off:

Vanguard Institutional Index Fund (large caps) 40% VIIIX
Vanguard Extended Market Index Fund (small & mid caps) 20% VIEIX
Vanguard FTSE All-World ex-US Index Fund 12% VFWSX
Lazard Emerging Markets 12% LZEMX
Vanguard Small-Cap Value Index Fund 8% VSIAX
Vanguard REIT Index Fund 8% VGSIX

The small cap and REIT funds are in my Roth IRA. The rest are in my 403(b) and 457(b). We will rebalance the accounts once a year. We have not fully decided how much we will put away for investments this year at this time. There are some moving parts right now making it challenging to project how much we will be able to put away outside of maxing out available tax-advantaged retirement pots.

What is your asset allocation for 2017?

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Should I Use My Hospital’s? 457(b)?

If you work for a large healthcare provider, you may have access to a 457(b) retirement account in addition to a 401(k)/403(b). Are you using it? Maybe yes, maybe no. You might want to use your hospital's 457(b).

Here's why:

The Benefits of Your Hospital's 457(b)

  • Tax benefits! With your hospital's 457(b), you can invest an additional tax deferred $19,000 annually (in 2019). This escalates to $24,000 annually if you are over 50.  Why do this? This lowers your taxable income.  Like a 401(k), you pay income tax when you withdraw.  Some 457(b)s even offer a Roth option.
  • Flexibility! In addition, you can withdraw this money before age 59.5.  This is great if you are planning early retirement. Why? Unlike the 401(k)/403(b)/and most IRAs, you'll have access to your money earlier.

Understanding The Types of 457(b)s

There are 2 types of 457(b)s and it's important to know which type your employer offers.  There are governmental (or public) and non-governmental (or private) 457(b)s.

Governmental 457(b) Options

If you have a governmental 457(b), this is a “no-brainer”. You should use it if you need more tax advantaged space to save in. Of course, this also depends on if the plan costs and fund choices are agreeable. Public 457(b)s can be rolled over into an IRA or 403(b)/401K(k) when you leave the job.

Private 457(b) Options

Private 457(b)s are different story. The money you deposit technically belongs to your employer and can be used to pay off employer's creditors. This is only an issue if your hospital goes under. A good way to see if your hospital is afloat is to check their credit rating. I know this sounds scary but as far as I know, no one has lost their 457(b).

Exploring Your Hospital 457(b) Plan Options

The next step is to find out what the distribution options (if there are any) are when you leave the job.

Some plans make you take out one lump sum on separation. This is a lousy option, and I would hesitate using it.

You want multiple options. Preferably, you can defer distribution until retirement age and take money over time to control your taxable income. The main “con” of a private 457(b) is that you can only roll it into another private 457(b). Another catch is this. Your new private 457(b) would have to accept rollovers, and they don't have to.

Your best bet is to always get a copy of your employer's 457(b) plan as details can differ widely.

Final Thoughts on Your Hospital's 457(b) Plan

A 457(b) is a way to have access to your money before age 59.5 besides a taxable account

Your retirement savings plan should include different types of accounts to diversify. A 457(b) is a way to have access to your money before age 59.5 besides a taxable account.

I am using my hospital's private 457(b) account.  I almost maxed it out last year ($16K) and will be maxing it out this year. My 457(b) plan is low cost and has a limited fund list but does include some basic Vanguard funds. Fortunately, the distribution options are very flexible so upon leaving this job, I can defer distribution until retirement age.

Since this post went live, I left the hospital job. I chose to cash out my 457(b) despite being able to leave it there indefinitely. Why? I wanted total control over the money. Yes I paid income taxes on it. I promptly deposited the check into my Vanguard taxable brokerage account. With the changing and unstable landscape of medicine, I do not want to depend on the hospital staying afloat.

No matter where you are in your career or where you are on your retirement journey, inquire about your 457(b) plan that your hospital offers. You might be able to get your hands on some serious tax-time benefits and add more flexibility to your retirement plan.

Does your job offer a 457(b)? Do you use it? Why or why not? 

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Roth, Roth, Roth

There is a lot of confusion about Roths – Roth IRAs, Roth conversions, Roth 403(b)s and Roth 401(k)s. They are all different but share a common theme – tax-free growth and tax-free income on withdrawals. Who is this Roth person anyway??

I'm going to mainly focus on Roth IRAs here. The Roth IRA is a tax-advantaged retirement vehicle where a person can contribute $5,500 ($6,500 if age 50 and over) per year. The contribution is with after-tax dollars. Once inside the Roth IRA, the money grows tax-free and is not considered income when you withdraw the money – so it is tax-free on withdrawal.

I love the Roth IRA because:

  • No RMDs (required minimum distributions). If you die and your spouse inherits your Roth IRA, still no RMDs. All other retirement accounts, including the ones with the word Roth in it are subject to them.
  • You can open one for your spouse, even if she/he does not have earned income
  • Not part of the taxable estate
  • You can still contribute to it after age 70.5 if you're still working whereas you can't after that age to a traditional IRA.

The only major con of Roth IRAs is that you don't get an immediate tax break on the contribution. It is also possible that congress may decide to tax these accounts or place a limit on how much can be in a Roth IRA.

You may have heard that once you make over a certain amount that you can't contribute to one (in 2017 – phase out starts at $118K single, $186 married filing jointly). There is a loophole to get around this. You contribute $5,500 to a non-deductible traditional IRA (TIRA), wait 1-2 days, then “convert” it to a Roth IRA. It is legal. BUT, and this is a big but, you cannot do this without tax consequences if you have have a non-zero balance in any other IRA accounts (traditional IRA, rollover IRAs from prior 401(k)s, SEP-IRA). It's called the pro-rata rule. There are easy ways to zero out these accounts to take advantage of the backdoor Roth IRA:

  • If you have a non-deductible (after-tax) TIRA, you can convert the entire account to a Roth IRA and pay taxes on the gains only.
  • If you have a pre-tax IRA, including a SEP-IRA, you'll need to roll this into a 403(b), 401(k) or ideally a solo-401(k). You need 1099 income to open a solo-401(k).

Here is a great step-by-step tutorial on how to do the backdoor Roth IRA. If you have your Roth IRA at Vanguard, then look at this guide by PoF. My Roth IRA is at Vanguard and currently contains a REIT (VGSIX) and Small-Cap Value fund (VSIAX). Due to the tax free growth & withdrawal you'll want to put in more aggressive and/or less tax-efficient funds in here.

Backdoor Roth IRAs are often confused for Roth Conversions, especially since the backdoor Roth IRA includes a conversion from a TIRA to a Roth IRA. Roth conversions is a strategy to convert pre-tax retirement accounts (deductible TIRA, 401(k), 403(b)) to a Roth IRA. Then this money has the same benefits of being inside a Roth IRA above. The downside? You pay taxes on it at your marginal rate. You do Roth conversions in a low income year like the year you retire.

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