WCI #331: 401K and IRA Limits are Totally Separate

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. This is White Coat Investor podcast number 331. 401k and IRA limits are totally separate. Love what you hear on the podcast. Looking for more great White Coat Investor content? Head over to our YouTube channel where you can watch video recordings of our podcast, short snippets of financial tips explained succinctly by me and others, and deep dives into topics for more in depth learning. You can even learn all about real estate with webinars from our real estate partners. Check out all this and more@YouTube.com thewhitecodeinvestor you can do this and the White Coat Investor can help all right, welcome back to the podcast. It's been a little while since we recorded some Part of that is because I flaked out last week when I was supposed to record a bunch of podcasts. Turned out I had gone to the local amusement park, it's called Lagoon here in Utah, and I was standing in line for a ride when Megan texted me and said, aren't we recording today? So sorry about those of you who I was supposed to record a Milestones podcast with that day and we had to reschedule. I need to look at my calendar a little more closely before heading out. You know, it's really unfortunate too, because about 30 minutes after that call, I wished I was at home recording podcasts. I get a little bit of motion sickness on those rides and I made the mistake of riding three rides in quick succession that I probably shouldn't have been on, and I ended up laying down in the pavilion for about 45 minutes to keep from vomiting. So if you have that same experience at amusement parks, know that I have great empathy for you. This doesn't run for a while. It's July 31st and we're not running this till September 7th, so that must mean I've got some fun trips coming up. And indeed I do. Going to the Wind Rivers in the Morning, backpacking trip with my son and then the week after that. Katie and I are taking him up to the Grand Teton. It's his turn. His older sisters have both climbed it and it's his turn to go climb that. We're going to do the Middle Teton as well, so lots of fun scheduled in August for us. Hope you're having a great summer as well. Those of you who are working hard and nose to the grindstone. Know that we appreciate what you're doing. Granted, we're off in the Tetons and that's very great for us, but I know a lot of you are not there. You're on the wards, you are in clinic, you are, you know, in your law office. You are grinding with your new entrepreneurial company. Whatever. You're working a million hours. What you're doing is important. And no one said thanks. Let me be the first. Okay, let's get into the content. Today I got like six emails or blog comments left in a 48 hour period. And I said we just gotta address this on the podcast because this is confusing a lot of people. So I got this email. Let's just take the email here. George says, I heard on a Wall Street Journal podcast that The Secure Act 2.0 plans to change high income earners 401 catch up contributions, Rothify them. I read your blog post on The Secure Act 2.0 changes, but what does it mean? If you're already doing the backdoor Roth IRA and you're concerned about the pro rata rule about holding multiple Roth accounts, what's the priority? How would you go about setting up such a Roth account with your bank Vanguard or whoever? What about the Solo 401? I read somewhere this is exempt from this rule, but information is scam. I'm concerned for 2024. Some of the details are unknown, of course, until the government implements the tax code changes. This I expect will affect many of your subscribers. I'm waiting for your detailed blog post on this matter, many of which have saved me so much time and headaches. All right, there's a lot of confused stuff in that question, and a lot of them had similar amounts of confusion when I get this question. The underlying principle though, that you need to understand is that your 401 contributions are completely separate from your IRA contributions. Completely separate. They do not overlap in any way, shape or form, whether they are tax deferred, whether they are tax free, whether they are traditional, whether they are Roth, whether they are after tax, whether whatever. They are separate limits for 401s and separate limits for IRAs. 457s also have their own separate limits. Okay, I have a few kind of pillar blog posts out there that if you listen to this podcast, even if you don't like reading blog posts, you ought to go read these blog posts. Okay, here are a few of them. One of them is our backdoor Roth IRA tutorial post. It has every piece of information I could think of putting into a blog post on the backdoor Roth IRA process. And below it is like 3,000 questions from white Coat investors, mostly just wanting confirmation that their understanding of the post is correct. But for anything having to do with the backdoor Roth ira, you ought to check that out. We have another blog post on multiple 401 rules. The rules when you have more than one 401 available to you. And you ought to take a look at that as well if you've never seen it. Another important blog post I published around the beginning of 2023 is all about the Secure Act 2.0, which kind of snuck up on me a little bit. I didn't realize quite how much was in that that would change what we do here at the White Coat Investor. It had all kinds of changes. So I wrote a BL and I think I did it on like Christmas Eve or something. I mean I did this for you so you would understand it. But of course people are off doing other stuff around the end of the year holidays and so, you know, a lot of people missed that post. But it's called what yout Should Know about the Secure Act 2.0 and you really do need to go look at that post. It talks about this subject that this emailer is discussing, which is that starting in 2024, that catch up contribution, which I think the catch up is $7,500 this year if you're 50 plus in your 401 as part of the employee contribution that starting next year for high earners like most of you listening to this podcast, has to be Roth. And so all the 401s in the land are still trying to figure out how to deal with that because that's a totally new change. It used to be that all catch UP contributions for 401 s, 403 s, et cetera, were tax deferred. Well now it's going to be optional for those under, I think it's around $140,000, $145,000 in modified adjusted gross income. But certainly most of you, at least those who are done with their training, have got an income above that. And so below that you're going to have the option Roth or tax deferred. Above that it's got to be Roth. And why they did that, I don't know. They want your tax money now. Maybe for whatever reason, it's fine. It's thing it's not like this is bad that you got to have Roth. Right? It's just it's another good thing. Anyway, be aware that that change is coming. Okay, so the questioner, this emailer asked about, well, what does this mean? What does this mean for my backdoor Roth ira? Well, it doesn't mean anything for your backdoor Roth ira. It has nothing to do with it. It's a totally separate contribution limit. Your pro rata rule has nothing to do with what's in your 401 or your 403. The only things that count toward the pro rata rule have IRA in them. Sep IRA, simple IRA, traditional IRA, rollover IRA. Those ones count. Inherited IRAs don't count, Roth IRAs don't count. Everything else goes into the pro rata rule for the backdoor Roth IRA process. So this is no big deal. Now how do you set this up? Well, you don't set this up. Your employer sets this up. Their 401s problem specifically has to figure out how it's going to do Roth contributions into the 401. You don't have to go to the bank, you don't have to go to Vanguard, you don't have to do anything else to set this up. Now if you are self employed, that may not be the case. You got to pay a little more attention to it since you're in charge of your 401k and you've got to make sure you're complying with the rules. And the contributions that go in there, these catch up contributions are Roth. Okay, so there's other changes in the Secure Act 2.0 you should be aware of. And I can't go through, it's like 80 of them. I mean there's a whole bunch of changes. And so go through that act, go through that post on the Secure Act 2.0. Make sure you understand those changes. Okay, hope that's helpful. All right, let's take another question, this one off the speak pipe. This is Cody who's got a question about 401s. I love 401s. So let's hear his question. Hey, Dr. Dali, this is Cody from the Midwest. I have a question about 401 s. My specific question revolves around converting traditional 401 contributions to Roth. After graduation, a little background. Recently completed a 3 year residency program. During the first year of residency, I used exclusive traditional 401k contributions and then transitioned over to Roth contributions afterwards. I was wondering, is it possible to convert those traditional 401k contributions and the match that the employer provides, which is 5% to a Roth, Even though I am taking a attending position at the Same institution. Okay, great question, Cody. Thanks for being in the Midwest. The Midwest needs doctors too. Everybody else might call it flyover country, but those of us who have been there and spent significant time there know there's some pretty awesome people in the Midwest. All right, here's the deal. You got basically three options. One, if your current plan allows it, you can do in plan Roth conversions of that tax deferred money. The plan may not allow it though when you leave the employer, and I'm not sure if you're leaving or staying in the same place, but if you're leaving, you can take the money out of that 401 and roll it into the new 401 wherever you're going, or new 403 wherever you're going. And that plan might allow you to do a in plan Roth conversion. Finally, you have the option of taking the money out of the plan and rolling it into your Roth ira, which is probably what most people do and probably what you should do if you can afford the taxes on the conversion of that money from your intern year. Because you just roll the entire thing into your Roth ira. Everything that's already Roth you don't owe taxes on again and everything that's tax deferred you'll pay taxes on. And then you'll have this big fat Roth IRA coming out of residency, which is probably your goal and probably should be your goal because those are relatively low income years. And the rule of thumb there is when you are not in your peak earnings years, you use tax free or Roth accounts. And when you are in your peak earnings years and have a choice, you don't always have a choice, but when you have a choice, you favor tax deferred contributions. There's lots of exceptions to that rule of thumb. But that's the general rule of thumb. So I hope that's helpful to you, Cody. Alright, next speak pipe question. This one from Ankur. Some 403 and 401 accounts also leaving residency. So I think a similar question. Let's take a listen.

Hey Dr. Dally, this is Encore from Florida. First off, I'd like to thank you for answering my anonymous question several months back about engagement rings. My now fiance loves a ring and we're happily together. So I thought you'd like to know that your advice was well received. My question today is about 403B and 401K accounts when transitioning from residency. I'm going to graduate residency in summer of 2024 and I'm currently on track to max out my Roth 403B for 2023 through my residency program. I'm looking for jobs currently, and most jobs have either a 403B or 401K option that I can invest in when I start my job in summer 2020 24. My understanding is that between 401k and 403b accounts, no matter how many of these accounts one has from different employers across all plans, the total that one can contribute over a year is still only 22,500. Based off this assumption, what I plan on doing is halting all my contributions to My Roth 403 come January in 2024 and then saving that money I otherwise would have contributed until I graduate for moving expenses, licensing fees and other expenses upon graduation and transitioning from residency to my new job. The reason why is that at my new job, I presume that I'll be able to max out my new 403B or 401K very easily within the last few months of the 2024 calendar year. And I feel like there's not much point in contributing money in early 2024 that's otherwise more valuable to me at this stage of my life as a resident, given that I should be able to easily max it out later in the year when I start my intending job. Is this a reasonable plan and is my understanding of 403s and 401k limits correct? Thank you so much.

All right, good question. But let's talk more about engagement rings because that's a lot more interesting subject to all of you. It turns out we just had a staff meeting and our like most significant post on social media last month was a survey about engagement rings. People were very interested in the cost of engagement rings. So we had this survey. We surveyed white coat investors what they spent on engagement rings. And the interesting thing is almost exactly the same data across all the platforms. You know, Twitter, Facebook, Reddit, whatever. It was almost exactly the same. But there are plenty of you that are not spending that much on an engagement ring. I don't remember the exact percentages, but I think it was 20% ish or so. We're spending less than three grand on an engagement ring, which is What I spent 24 years ago was like 2,500 bucks. And so there's lots of you out there if you're feeling like you don't want to spend a lot. There's plenty of white coat investors that are not spending a lot of time on engagement rings. Now some of those might be older and as many decades ago that they Bought that engagement ring and haven't adjusted for inflation. But just so you're aware, there's plenty of people not spending that much. The majority seem to be in the 3 to 10,000 range, though, and only about 25% had spent more than $10,000, and an even smaller percent had spent over $20,000. So for those of you interested in what people actually spend on engagement rings in this community, that's what they spent. All right, now, what were we talking about? We were talking about 401 s and 403 s. Let's see if I can remember what the question was here. Oh, yeah. Oh, yeah, yeah. I remember the question now. Okay, so here's the deal. You got this great plan, but the plan's not going to work. And the reason why your plan is not going to work is because there's a very good Chance your new 401 or new 403 at this new place you're going is not going to let you contribute to it for six to 12 months after you get there. And so you're planning to defer all your contributions for the year and then you get to the new job and they won't let you contribute. So you better make sure before you put this plan in place that you can actually contribute in this calendar year to the new jobs, 401 or 403, because most won't let you. So be aware of that. Sometimes they just don't give you a match that first year. But a lot of times they won't let you use the 401 at all. So if you're going to use one in a year that you change jobs, you almost surely want to max out the one from the job you're leaving because you might not have a new one at the new place. Now, as a resident, that's hard because you don't have any money. And so you got to do the best you can, right? I mean, honestly, if people are saving something in residency, I'm happy, you know, and most people's retirement savings in residency is going to be less than a Roth IRA contribution. So the fact that you're getting into a 401k or 403 at all, kudos to you and great job. You know, I certainly was not saving that sort of money as a resident, and I turned out okay. And I think that's the case for most white coat investors. I'm amazed when I meet these people that are maxing out his and her Roth IRA and a 457B and a 401K. And they're living off one resident's salary and they have two kids at home. And I'm like, how are you eating? But, you know, some people are very, very good savers, better savers than I am. But keep in mind, this plan of yours may not work. So you need to call HR at the new job and find out what the rules are on their new 401. This is also a good moment to talk about that pillar post I mentioned earlier. Right? Multiple 401 rules. Go to the blog and read it. Understand those rules. Because, yes, while a 401 and 403S, et cetera, share the employee contribution for those under 50, that's $22,500 this year, they share that contribution. The total contribution into the 401 is different for unrelated employers. This is the $66,000 if you're under 50 this year. And so theoretically, you could max it out at your current employer, go to a new employer later in the year, and they could put a bunch of employer money in there up to $66,000, even though you maxed out your 401 at the other job. Now, they may not be willing to. Most big employer 401 s won't do that. But be aware that that is an option. And how this usually works out is if you have some 1099 income on the side and you have a solo 401k, then you can really start taking advantage of that. All right, it's scholarship time. It's a little late to apply now. By the time you hear this, it'll be September 7th. We are in the judging process. So thanks to those of you who volunteered to judge this year, thanks to all of you who sent in an application essay, without you, there wouldn't be a WCI scholarship. You know who else is necessary, though, are our sponsors, our contributors, our advertisers that support this scholarship. And 100% of the money they give to this scholarship goes to the winners. None of it goes to us. And then Katie and I, via the White Coat investor, throw a big chunk in as well. And that's basically where the money comes from. It's not like there's an endowment fund for the scholarship. It's just money that people put in every year. And a few White coat investors usually contribute a little bit as well. But we should recognize our platinum level contributors. These folks donated $8,000 apiece to this White Coat Investor scholarship this year. And they are Larry Keller with Physician Financial Services. He's been with us for a long, long time helping white coat investors to get particularly disability insurance. Another one who's been with us even longer than Larry is Michael Relig at Mr. Insurance. And I think he might have been top first two or three advertisers on the blog. And so thank you to Larry and Michael for continuing to sponsor that. They have sponsored the scholarship for many years, and we appreciate that. SOFI has also been a longtime sponsor of the White Coat Investor Scholarship. They do a lot of things in the financial services realm, probably most significantly for you folks, student loan refinancing. So thank you for supporting those who support what we're trying to do here. All right, let's take a question from Maria, who wants to talk about taxes and Roth conversions. Hello.

I'm an internal medicine doctor and I didn't, you know, put in the money in my traditional ira, you know, last year and converted how it's supposed to do. I kind of deleted and put in the 6000 together on December 30th of 2022 in my traditional Iraq. And then I wasn't able to convert it the same day or the next day because it was the weekend. So it wasn't like showing up on Fidelity. So I ended up converting from the traditional to Roth IRA, like down in January, like on I think 12th or 13th January. And now I'm doing taxes on TurboTax. And I'm not sure how to answer the questions there. When I put in some ways that I'm answering questions there, it deducts a lot of money because it shows how much federal tax I will refund, I will get. And there's like a difference of a couple of hundred of dollars. So I don't know what to do about this.

Okay, Maria, thanks for calling in. This is a very common issue among white coat investors. I'm going to use you a little bit as an example here for everybody else listening, mostly because I think you probably resolved this already, given where we are in the year by the time this comes on the podcast first week of September. I mean, even if you filed an extension, your personal taxes are due by September 15th. So I suspect you've already filed your taxes and gotten this question answered somewhere else. But it's a good question to talk about. Here's the deal. Don't do your backdoor Roth IRA the last week of the year, okay? Just don't do it. It's fine to do it in the new year, but it makes things really complicated when you try to squeeze it in before the end of the year. There is only one deadline in the backdoor Roth IRA process, and that deadline is for contribution to the traditional ira, Right? The deadline for that is when you file your taxes, typically April 15th. But if you file an extension September 15th of the next year, so you don't have to get it in on December 30, or you won't be able to make it, you can do it the next year, all right? That's the only deadline, the only true deadline in the whole process. Now, if you want to keep your paperwork simple, I recommend you do your traditional IRA contribution and your Roth IRA conversion, right? So you're contributing to the traditional IRA and you are converting it to a Roth IRA during the calendar year. So I do mine now in January, like the first or second week of January, we put money in the traditional ira takes a couple days to settle, maybe, and then we move it into the Roth ira and then it's done for the year. And it keeps the paperwork really simple. Every year I'm reporting a contribution. Every year I'm reporting a conversion. There's very little growth on the money in between those two events. It makes for really simple paperwork. When you don't do that, you get complicated paperwork. And that's what you're dealing with now, Maria, is you are dealing with complicated paperwork. Now, it sounds like this may be the first time you did this. And so when you fill out your Form 8606 for the current year, which sounds like it would have been 2022, you just report the contribution because the conversion was not done in that year. And then the conversion goes on your 2023 taxes because you did it in 2020. You're probably also reporting another contribution and another conversion for the 2023 tax year when you do that. But that's okay. If you wait a while between those two time periods, your money may grow. You might lose money, too. If you've got it invested, which you shouldn't do in between the contribution and the conversion, you should just leave it in cash. And then you don't have to deal with but $2 or $3 or $5 in gains between the contribution and the conversion, you should just roll that $5 in afterward into the Roth IRA and pay to convert that $5 as well. So you owe taxes on $5. No big deal. And then you just make sure you report exactly the amount you contributed and the exact amount that you converted, work your way down the form. Now, as far as the pro rata rule goes, they care about the amount in a traditional IRA, SEP, IRA, simple IRA, rollover IRA, et cetera. On December 31st of the year, you do the conversion. In your case, Maria, this does not apply to you because you didn't do a conversion in 2022. So you get off from getting prorated, no problem. You just take care of it in 2023. It's not the end of the world to be prorated. It's not illegal to be prorated. Often you can just clean it up with your next year's tax return if you do get prorated. But it does make your paperwork kind of complicated where you have a few hundred dollars here and a few hundred dollars there. But as far as helping you with why your Form 8606 is off, I do help a number of people with this every year. Typically they post on that backdoor Roth IRA tutorial comment and we try to work through their particular 8606 issue. But read that post first. It should answer all your questions about how to fill out form 8606. All right, our quote of the day today comes from Morgan Housel who said doing well with money isn't necessarily about what you know. It's about how you behave and behavior is hard to teach even to really smart people. Isn't that the truth? You know, I talked to our student loan advice folks who are absolutely swamped right now, giving advice to people as we come out of this student loan holiday we've been in for the last three and a half years and heard a story of a doc who had many hundreds of thousands of dollars of student loans. You know, and it was, you know, if you go back through it all, it's kind of accumulation of bad financial decision after bad financial decision after bad financial decision. Basically when you are wanting to be a doctor above anything else and there is no price too high to do that, you can end up with terrible, terrible, you know, student loan situations that the only way to get out of is to get a portion of those forgiveness via public service loan forgiveness, which requires full time work and then working full time to pay off the rest of the student loans, the private ones, the ones that don't qualify for public service loan forgiveness. But it's not an option to decide you want to be a doctor no matter what the cost, spend many years doing so, rack up all kinds of student loans doing so, and then decide to go part time. It just doesn't work. You don't get a pass up on math. And so behavior matters. And it matters a lot in personal finance and we need to be smart with our decisions from the beginning and that's why I've tried to write books and material for students, reach people as pre meds so we can be making smart financial decisions from the beginning of our career and not end up in those sorts of situations. If you are in that sort of a situation, highly Recommend Our service studentloanadvice.com yes, they're booked out a little ways right now, but the truth is if you're in that bad of a situation, your student loans aren't going anywhere anytime soon. And even if you got to wait a month or two for advice, it's still going to be well worth it if those volumes, of course stay high. We'll have to figure out how to hire more people to help you folks, but I think it might just be a big influx due to the change in the student loan holiday. We'll find out soon. All right, next question. This one from Jeff on the speak pipe.

Hello Dr. Dahl, thank you for everything you do. I have been drinking from the fire hose of your books and website during the downtime of my fourth year of med school and have loved every bit of it. My question is if I want to maximally contribute to a Roth 403 and a Roth IRA, how would I go about doing so? I will start residency this July and earned around 35k, maybe a little more. When they renounce stipends for a half year of pay. My residency offers 403B contribution I assume as a withholding from my W2 paychecks after taxes. I have a Vanguard UTMA account that will become my brokerage, worth in total of about 150k and can live off of that for the half year. While most of my paycheck goes towards the Roth accounts, my state for income tax purposes will be Nebraska and I also have the option to open an HSA account, but I think that would reduce my post tax income and thus how much I can contribute to Roth accounts, at least for this year.

All right, well my first question to you Jeff, you answered which was how are you going to eat if you're maxing out these accounts and it seems you have a sum of money. So congratulations to you on that and be sure to thank whoever put together that UTMA or UGMA account for you. I know many of us white coat investors are doing that sort of thing for our kids or for nieces or nephews or grandkids or whatever and you know, here's the other end of it, right? You got this Wonderful opportunity that you can use to continue to build wealth. You've become more financially savvy than probably most people at your state, your age and your state of training. And so it's wonderful what they've done for you. Be sure to thank them for that. All right, so how would I do this if I were you? Well, exactly what you're talking about. You defer as much as you can into that Roth403 account and get as much in there as you can. And you live off your savings. You can only put in as much as you have earned income to cover. Now, let's be honest, nobody's looking very carefully at HSAs and at your taxable income. And how much went into a Roth 403 and how much went into a Roth IRA? I'm not even sure there's a rule against using the same earned income to go into a Roth 403 and a Roth IRA and an HSA. Now, they each have their rule, you have to have enough earned income to cover the contribution. But I'm not sure that it can't be the same earned income. I don't think anybody really looks at that very closely, number one, so you're not going to get caught on it. Number two, I don't think there's a rule that I know of now. There's 40,000 of you out there and someone may know about one. Please send it to me by email editorwhitecodeinvestor.com if I'm wrong on this point, but I don't think there is. So I think you could max out your HSA, max out your Roth 403 and max out your Roth IRA in one half year of intern earnings. It'll be close though, right? Because your Roth 403B contribution will be 22,500. Your Roth IRA is going to be what, seven this year? Is that what it is for people under 50? And the HSA would be 3,000 something if you're not married. And so you're right about what you're making as an intern. So you should be able to do it. I mean, because you got this $150,000, you're basically converting from a taxable account to a Roth account account, which is pretty cool, whoever put that in there. Many years ago, almost no taxes have been paid on in the meantime, and now no taxes are going to be paid on it ever again. So it's really extending that tax free growth on that money for you. So I'd try to do it all. You're in the position to do so. One problem you may run into that I mentioned earlier on the podcast is they might let you contribute to that 403 this year. Wouldn't surprise me at all. Check with HR. Okay, if that one wasn't in the weeds enough. Let's take this question from James, who wants to talk about Roth versus Traditional.

Hey Jim, this is James from Kentucky. Just want to say thanks for all that you do. I came across your stuff early in residency and it's paid significant dividends for me and my family moving forward as I've gone through residency training now as a young attending. My question is kind of an in the weeds question for the age old argument of Roth versus traditional 401k or 403b contributions. But mine specifically has to do with younger attendings like myself under the age of 40. So when considering Roth versus traditional, if you put in the maximum 22,500, even if you're at a marginal 40% tax rate, you'd be taxed effectively at $9,000 in taxes paid the year of the contribution. And that's going to grow over, let's say a 25 year period. If I retire a little bit early around age in the late 50s to 96,500 if you factor in roughly 6% interest and even if I pull that out at 10% tax rates after it's grown, you're going to end up paying $9,600 worth of taxes roughly. And if you get a better return, let's say 7% or leave it in there for a little bit longer and retire in your early 60s at a more traditional age, that tax difference grows to about $3,000. If you achieve both the 7% return and retire at a traditional age, it's more like $8,000 on taxes saved for that contribution. So to me it seems like if you're under age 40, the advantage of tax free growth with Roth are so significant that that would be the preferred landing spot for your contributions. And before you suggest that you should be investing the difference, let's say for my written financial plan, which I have, I'm contributing towards my retirement a fixed percentage of my income each year and that any tax savings would be above and beyond my contribution limit for my family's goals this year.

From the traditional James, did you hack our system? Because that is the longest speak pipe message anybody has ever left us. That was almost two and a half minutes. We're supposed to have this thing set to cut you off in a minute and a half, but you got it all in. So let's answer it and we'll figure out what happened in the background that our speak pipe was not working properly. At any rate, here's the mistake it sounds to me like you're making. Remember, it's not about the total taxes paid, it's about the tax rates. It doesn't matter if you're paying more taxes later, okay? What matters is how much you have after paying taxes. And so if you're in the 45% bracket now and you're going to be in the 15% bracket later, I assure you tax deferred is the right move. The math will work out if you calculate how much you will have left after paying taxes. Now, if you do tax deferred, you will pay more in taxes because you're paying it later. And so that money's grown in that tax deferred account over many decades. But that's okay. It's okay to pay more in taxes. That's not a bad thing. What you want to do is have the most after you pay the taxes. Now, Roth versus traditional is a very complicated discussion. Sometimes it doesn't even matter, right? Because if we're talking about an IRA contribution for high income earners, you're really your only choice most of the time is a Roth IRA via the backdoor Roth IRA process. And some employers from time to time haven't offered roth in their 401 or 403. So your only option has been tax deferred. And so you don't have to make a decision when that is the question. But when you do have a choice, the rule of thumb is peak earnings years tax deferred, other years tax free. Lots of exceptions to that. Super Saver is an exception to that. If you're going to have a lot of other income in retirement, you know, Social Security and pensions and retirement or income, property income and those sorts of things that's going to fill up your lower brackets, then you may be better off with Roth. Now, it's not like putting money in a Roth's a bad thing. It's never taxed again. There just might be a better option for you, but you got to run the numbers. And you don't have all the numbers. You need to truly run them because you don't know what your income will be later. You don't know what phase outs and the Irmaa Cliffs will be in retirement. You don't know exactly what the tax brackets will look like. And so there's a lot of guesswork involved. You have to make some assumptions when making these decisions. Here's the deal, though. If the decision is really hard for you, it probably doesn't matter much. And if it's a really easy decision, well, it will matter a lot, right? If you're obviously going to be in a much higher tax bracket later, or you're going to be in the highest tax bracket your entire life, or if you're obviously going to be in a much lower tax bracket later, it's easy decision, makes a big difference. But if you're not sure, then it probably doesn't matter all that much. So don't worry about it too much. I've got one partner, he just splits his contributions, half of them going Roth, half them going tax deferred. And he knows that one of those is wrong. He's not sure which one it is, but he'll have plenty of tax diversification when it comes time to retire. All right, thank you for the question. All right, I just got done reading a book that I don't know if it was a blog reader or a podcast listener asked me to read and actually review. I don't know if I'm going to review the book. It's a fiction book. It's by an author called Lionel Shriver. The title is the a family 2029-2047. And what it is is it's kind of in the apocalyptic fiction genre, except it's not a zombie apocalypse. It's not caused by AI, you know, a la Terminator or those sorts of post apocalyptic worlds. It's an economic apocalypse. Maybe a little bit in the tradition of Atlas Shrugged, maybe not quite as heavy of a political focus on it, but there's definitely some politics in there. If that offends you, don't read it. But it's kind of an interesting thing to think about. Basically, what happens in this book is that the dollar stops being the reserve currency of the world. It's replaced by something apparently Vladimir Putin came up, even though it shares the name of something that Keynes came up with many decades ago, the bancor. Basically a currency that's set to the price of some commodities. At any rate, the US President is so mad that the dollar has been replaced as the world's reserve currency that he causes the US to default on its debt. And so anyone who owned any Treasuries, most of which are owned by US citizens, just lost all that wealth. And then they start printing money and massive inflation ensues. And the book follows this family through the economic circumstance from 2029 to 2047 as the US kind of implodes due to this massive inflation. And it takes all kinds of funky turns. Who knows if they'll happen? The government basically takes everybody's gold and. And takes everybody's guns. And bitcoin becomes worthless, and people have piles and piles of dollars that aren't worth anything. And Nevada forms its own free state, the United States of Nevada, where they don't have any social programs, no Social Security, no Medicare, and everybody gets a chip lodged in their head that communicates with satellites that keeps your bank account balance on it. Anyway, is kind of an interesting read and a thought about what might happen if the dollar stops being the world's currency. You know, it's interesting that this comes up, you know, because lots of people worry about this. And one of the most interesting parts of the book, of course, is at the end, after the book's over, the author talks about why she wrote it. And in a lot of ways, she says, well, I see my own frailties and, you know that my body's getting older, and I just kind of transfer those to the United States and imagine what it would be like if it was wearing out like I am. And that's kind of the way it goes now. The lessons to learn there, well, bad things can happen. Inflation is bad. That ought to be a pretty good takeaway. And that when the economic system breaks down, nobody's really all that safe from society itself. For example, in one scene, the family, this is an extended family, and one of their houses burns down. And they go to live in this apartment that's already stuffed to the gills with other family members. And after they've been there for a couple of hours is all, they let in a neighbor, and the neighbor holds them up at gunpoint and throws them out of the apartment and basically takes that apartment from the family and they're homeless and go on a trek to a farm. Some family member that's acquired a farm out in the boondocks. And so, interesting read. You may want to check it out. I don't know that I would change my portfolio or anything based on this. It was very interesting. I expected something about bitcoin or something about some other crypto asset come into it. It was only mentioned once in the book, and very dismissively. And you know, what happened to bitcoin? As though it had all imploded. And I'm sure the bitcoin fanatics out there would argue, well, this is exactly what bitcoin's for. But it's interesting to Think that just like all the gold was seized, maybe something happened to all the Bitcoin as well. Interesting read. Check it out. The mandibles a family 2029-2020 all right, enough with that tangent. Let's talk about simple IRAs. This one from Alan hi Dr. Dali.

I have a question related to the simple IRA two year rule. In September of 2021 I joined up with a startup company that only offered a Simple IRA with a match for a retirement option. I began contributing with the first employer deposit completing on November 17th of 2021. This plan was with Capital Group and only offered American funds with high fees. So I chose to open a Vanguard Frozen Simple IRA and move all the funds to that account to take advantage of lower fees. While the account was open in 2021, the first transfer into that account completed on January 10, 2022. Of course, the company was acquired in January of 2022 and now I have a 401 option with Fidelity with my employer. I'd like to roll over all of the funds in the Vanguard Simple IRA as soon as possible so I can take advantage of a backdoor Roth IRA conversion going forward without dealing with pro rata for the Simple IRA two year rule. When would I be allowed to roll over all of the remaining funds in the Simple IRA without incurring a penalty? Is it based on the first deposit in the employer sponsored account or based on the first deposit into my Vanguard Frozen simple ira?

Thanks. Wow Alan, you have stumped the chump. I don't know the answer to your question. The good news is these dates aren't very far apart, so even if you waited for the second one, it's no big deal. You're not going to pay that much more in higher expense ratios than you would. So I think to be safe, I would wait. I would wait until two years from the time you rolled all that money into the Vanguard simple and then just roll that into the 401. No big deal. Should be nice and clean and I think that's the way I would do it. Now what is the answer? I think if we look at the IRS regulations here. Okay, here it is on IRS.gov what are the tax consequences when I withdraw money from my simple ira? Generally, the same tax results apply to distributions from a Simple IRA as to distributions from a regular ira. However, a special rule applies to a distribution received from a Simple IRA during the two year period beginning on the date on which you first participated in your employer's Simple IRA plan. Under this special rule, the additional income Tax on early distributions applies to a distribution within this two year period. So and the rate of additional tax under the special rule has increased from 10% to 25%. One of the exceptions to application of the early distribution tax under section 72T applies. The exception also applies to distributions within the two year period and the 25% additional tax does not apply. Okay. So it says if the additional income tax on early distributions applies to a distribution within this two year period, then the rate of additional tax is increased. So it sounds like it starts on the date on which you first participated in your employer's simple IRA plan, but you then opened a second one at Vanguard. And so I would say the participation date is when you open that Vanguard account. I don't know. That's 100% right. But that's my interpretation of this because that's the simple IRA you're now withdrawing from. And I think that's the safest thing to do. It won't cost you a lot more to do that. So I'd just wait a few more months and do that. All right, next question. This one from Luke about the Mega backdoor Roth.

Hi Jim, this is Luke, a physician spouse from Northern California. As a University of California academic with lots of retirement savings vehicles, my wife and I use my income for retirement savings and live off of her physician income. Currently I max out my Pre tax accounts A457 and A403. There is no employer match. My wife and I are in the 24% marginal tax bracket where we will likely be for the remainder of our careers. I could alternatively use this same amount of savings through a Mega backdoor Roth IRA available through my employer. I am thinking I should switch to this mega backdoor option because if I have a full career and retire at 65, I will have an annual pension of 100% final salary. It would put us in today's 22% bracket before Social Security, pre tax account withdrawals, real estate, etc. With brackets expected to be higher in our retirement years 30 to 60 years from now. It seems like locking in the 24% marginal rate now is a good deal. Do you agree or have any cautions? Thank you.

Yeah, you're the classic example of people for whom Roth may be better even during peak earnings years. You got a pension coming that's going to fill up a whole bunch of brackets. And it sounds like you're kind of a super saver too. So two good reasons maybe for you to favor Roth now. 24% isn't a terrible percentage to be paying on a Roth conversion. Man, if I could do roth conversions of 24% today, I'd give serious consideration to that, given the situation I'm in now. It's funny to think back to when I was in the military. I think I was in the 15% bracket and I was doing tax deferred contributions. So obviously some of my money I have not optimized over the years. I didn't think I would be in the situation I'm in now. You couldn't do Roth TSP contributions back then anyway, so I really didn't have a choice. But I probably would have even been better off contributing to a taxable account in that year given that I only saved 15% and probably going to be paying at some higher rate later. Although maybe it doesn't matter so much if that money ends up going to charity anyway. But yeah, you're an exception. You know, there are exceptions to the rule of thumb for traditional versus Roth contributions, and you are one of them. You got a big pension coming by. Another one is military folks, right? They're generally not paying state income tax. Relatively low tax bracket, you know, probably going to have a higher income when they get out. They've got a pension coming many times. You know, it just makes sense for almost every military member to be doing Roth TSP contributions. You've got to really be an exception if you're in the military and you're doing tax deferred contributions. Hey, by the way, if you could use a little bit of extra money and you have a little bit of extra time, you ought to check out our paid surveys@whitecoatinvestor.com mdsurveys we just added a couple of new companies there. They want to pay you for your opinion. And it's possible, if you do these in any sort of a dedicated way, to make tens of thousands of dollars a year doing so. So check those out. Whitecodeinvestor.com mdsurveys we consolidated all of our recommended pages at whitecoatinvestor.com onto one page. If you go to whitecoatinvestor.com recommended you can see insurance agents, you can see financial advisors, you can see mortgage lenders, you can see these survey companies, you can see our real estate partners. You can see everything all in one place. So check that out. Whitecoatinvestor.com recommended all right, let's take a question from James about 457 accounts.

Hey Jim, this is James from Kentucky. I had a question about 457 accounts that I don't believe has been asked before on the podcast. I plan to use a 457 for my early retirement Runway in my 50s as my plan that my employer offers offers a 10 year distribution plan. My question is, since this is a deferred compensation and technically owned by the employer and I've not taken the compensation prior to that separation, can I use the income from the 457 distributions to count towards earned income in those years in my 50s to be able to do a Roth IRA or backdoor Roth IRA depending on my income amounts during those years? Let's say for the argument of this, I don't have any other sources of active or earned income during those years other than my 457 distributions. Thanks.

All right, good question. Easy one to answer. No, it's not earned income. Sorry, that earned income was counted when you earned it for retirement plan purposes. It's not counted now that you're getting it later. So the way you can tell this is because you pay the payroll taxes when the money goes in the 457, your Social Security and Medicare taxes. You pay that on your 457 contribution just like you would on a 403 or a 401. As soon as that money is yours, when you provide the services to get that money, and when that money is no longer subject to risk of forfeiture, that's when you pay the FICA taxes on it. And so that's essentially when it's earned income is in that year. When you take it out 20 years later, that's not earned income. Sorry. It'd be very convenient if it was, but it's not. Love what you hear on the podcast. Looking for more great White Coat Investor content? Head over to our YouTube channel where you can watch video recordings of our podcast, short snippets of financial tips explained succinctly by me and others and deep dives into topics for more in depth learning. You can even learn all about real estate with webinars from our Real estate partners. Check out all this and more@YouTube.com thewhitecodeinvestor you can do this and the White Coat Investor can help. Thanks again to our Scholarship Platinum sponsors. Thanks to those of you who've been leaving us five star reviews and telling your friends about the podcast. A recent one came in from Wales who said the best financial podcast for high income and future high income earners. Dr. Dali has a very clear and understandable message and provides great information for physicians and those with a high income as well as medical students and residents and those who will soon have a high income. All right, thanks for that review. Those five star reviews do help us to spread the word about this important information for you and your colleagues. Weeks, you can do this. It's not that hard. Tens of thousands, hundreds of thousands of White Coat investors have figured out this financial literacy stuff. And you can too. If all these rules about retirement accounts went over your head today, don't worry. The second or third or fifth or eighth time you hear them, they're going to gel and you're going to understand them. And occasionally you'll have to look something up like I do because you can't keep all the rules straight. But that's okay. Understanding the basics will pay dividends, quite literally in your life and give you the freedom to practice like you've always wanted to, to live your life, to take care of your family, to support your favorite charities, whatever. However you define the good life, taking care of your finances is going to help you to get there. Keep your head up and your shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor Podcast. The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.