Everyone’s heard of a backdoor Roth IRA, but what’s the big deal with Roth IRAs, anyway?

What is a Roth IRA

Roth IRA stands for a Roth Individual Retirement Account. Typically, there are two basic types of IRAs. There’s a traditional individual retirement account and then a Roth individual retirement account. 

The main difference is that a traditional IRA (depending on if you’re employed or not) can be contributed to with pre-tax dollars, meaning that you wouldn’t pay taxes on the money before you contributed to the account. The Roth IRA is built with post-tax dollars.

The journey goes: you get paid by your employer, your employer deducts money from your paycheck to account for taxes, and then you get what’s left over. So the amount that hits your bank account is what’s left over after taxes. Then you take some of that money to invest in a Roth IRA.

Backdoor Roth IRA

You may have heard of the backdoor IRA when it made headlines in the news not long ago. There was talk from a political standpoint about a bill to get rid of the backdoor Roth IRA so the rich would “pay their fair share.” But the bill didn’t move forward, and the back door Roth IRA remains intact.

A backdoor Roth IRA is when you start with a traditional IRA and convert it to a Roth IRA. Why would you take that route?

Once you make $130,000 (single) and $200,000 (if married), you are capped at how much you can save in your Roth IRA directly. Now while there is a limit on the contribution, not the conversations. This is where the Backdoor Roth IRA comes in. You can still contribute to a traditional IRA and then convert it to a Roth IRA, making it a Backdoor Roth IRA. 

The Benefits of a Backdoor Roth IRA

Here is a little tax history for you. From about 1941-1981, the tax bracket was as high as 70%; in the 1990s, it moved to about 39%. Who knows what the rates will be in the future, so having Roth money is a great edge against future tax changes. 

Another huge benefit comes in when we talk about laws related to required minimum distribution. There is something called required minimum distribution for retirement. The government requires you to take a certain percentage out of your retirement accounts after the age of 72. You may not want to do this depending on your income at this point in your life. And Roth IRA money does not have a minimum distribution. It is really cool, but you are not forced to take out this money, which is not the same for other accounts. These accounts will give you more freedom in retirement. 

What Makes a Roth IRA so Flexible for Physicians 

I am all about flexibility in retirement. The Roth IRA is also flexible because if you retire with a Roth IRA, the income that you receive from a Roth IRA does not count towards you adjustable gross income. 

My favorite reason to have a Roth IRA is that it is the best money to give as an inheritance. Roth IRA money is the best money to leave to your children (or heir), especially when you look at the taxes that people typically pay on inherited money. Your heirs, though won’t pay taxes on the Roth IRA! 

There is still no required minimum distribution when a Roth IRA is passed onto your spouse. If a non-spousal heir inherits it, you have to use the money within 10 years. But this is still great because you do not pay taxes on it, and you can let it grow for that 10-year period! 

Roth IRA also gives you flexibility NOW as a young person. When you invest with an employer, you don’t get to choose the accounts and your money is locked up for a long time. It is a great deal, but you have less control. A Roth IRA doesn’t have those limitations. You have more flexibility on what you want to invest in and when you want to use that money. You can take the money out of the account with a Roth IRA at any time if you need it. Let’s be honest as a resident, you might need that flexibility to access that money. 

One More Investment Recommendation for Physicians 

So here’s our recommendation. Residents should prefer Roth investments in their nonpeak earning years. And in your peak earning years, you want to prefer pre-tax investments. Based on what we know now, your taxes will be lower when you are an attending physician earning your peak income. 

As high-income earners, doctors need to know about the tax-advantaged retirement space available to them, including Roth IRAs.

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