How you can still contribute to your Roth IRA (despite what your accountant says)
Debunking the common misconception around Roth IRAs and physician income.
We’ve made another trip around the sun (and what a year it was) and I’m still getting the same call from clients who just spoke with their CPA.
Every year, right around this time, I get a call from a client that they were told they cannot make a contribution to their Roth IRA because “they made too much money”. This is a common misconception that we’re going to go ahead and debunk once and for all.
Your accountant is probably referring to your Modified Adjusted Gross Income being over a 2020 phaseout range of $124,000-139,000 ($196,000-206,000 for married couples) or a 2021 phaseout range of $125,000-140,000 ($198,000-208,000 for married couples.)
The truth is, this adjusted gross income is actually not a factor at all, and we’ll get to that in a moment, but first let’s do some quick math on what you’re leaving on the table if you don’t max out your Roth IRA.
Let’s compare a Roth IRA to a brokerage account (likely the alternative your CPA suggested)
Consider a single person contributing $6,000 a year (max allowed per year) to their Roth IRA for 34 years and achieving an annualized return of 8%. This adds up to over $1,000,000. Tax-free. Double that for a married couple.
If you were to invest that money in a brokerage account, you would be paying over $200,000 in taxes that you otherwise could have avoided.
Two of our clients, both physicians, file their taxes jointly and have W-2 Income of over $1,000,000 for last year. They funded their Roth IRA. In total, we have 42 physician clients with an average $680k household income and a $3.35M net worth. They funded their Roth IRAs.
For our client physicians, this $6,000 a year account is only a small portion of their savings plan - it’s why I probably don’t have clients questioning their CPA’s investment advice as much as I should. But here’s why these plans are still important:
An often overlooked feature of these accounts is the role they play in your estate. These accounts can be passed down to your children tax-free. Instead of growing for 34 years until their average retirement age, this can be left growing for an additional 65 years.
You might not remember that cellular immunology lecture, but you’re likely still paying for it. At your children’s retirement age, the Roth account you passed onto them can compound to be $164,901,094.23. It’s hard to say how expensive their med school tuition will be, but it’s safe to assume that will cover it. Might even be able to afford to send their grandkids. Maybe.
Now that we have that out of the way, let’s get to the practical part: How to go about doing this...
1. Open a Non-Deductible IRA
We can do this for you (reply to this email and I’ll get you set up), or you can open up an account with Schwab here.
2. Fund your non-deductible IRA
The maximum allowed for 2020 is $6,000.
3. Convert your non-deductible IRA to Roth
You can do this all online, just like moving money between your checking and savings account. We do this every year for our physician clients.
4. File Tax Form 8606 that shows that you didn’t take a deduction
Your accountant should know about this form and we are happy to send it to him/her or help with your taxes.
That’s it, you’re good to go.
As with all things that compound over time, the trick is to start early and let the account work for you.
What’s on your mind?
We’ll be sharing tidbits of wisdom like this with any subscriber every two weeks, along with deeper dives for our clients every month or so.
What questions do you have that we can answer in future posts? Reply directly to this email and let me know.
Fortress Physicians by the Numbers
🏡 42 Physician Households as Clients
💰 $680,000 Avg Household Income
👩 Average Age 44
💸 $3.25 Million Net Worth
📈 29% Average Savings Rate
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