Hey everyone, it’s Finance Fridays again. Today will be a short post about “Revisiting the Roth 401k”.

Revisiting the Roth 401k?

Yea.

I’ve talked about it before multiple times, but in general, there aren’t that many instances (for doctors) that using a Roth 401k makes sense. One of the times that it makes a lot of sense is when you’re a resident.

However, I’ve discussed some other times when you can consider utilizing a Roth 401k:

Should I use a Roth 401k?
Another Case for a Roth 401k

That said, let’s look at another possibility for using a Roth 401k. The argument against utilizing a Roth 401k is that you are paying the taxes up front whilst you are in the highest tax bracket as a full time attending. However, after talking with my one of my colleagues, another possibility came up which is a consideration.

What is it?

In private practice groups, you can pretty much “self-match” through the corporation. What you do as that you as an employee contribute the $19k that you’re allowed per year to your 401k. Then the employer (also you) matches up to the maximum, which is $51k, so an additional $32k.

So in a normal scenario, this would be normal $401k (pretax) and the match would also be pretax. However, my particular colleague unfortunately has a very complex IRA due to multiple other jobs from his wife. I don’t know the specifics, however, their CPA has told them doing a Backdoor Roth IRA for them will be exceedingly difficult.

My hunch is that it may take a significant amount of paperwork to fix their IRA issue, and the CPA probably just doesn’t want to do it. I advised him to have his CPA fix it or get another CPA who would fix this so he can do the normal Backdoor Roth IRA.

However, because he hasn’t been doing a Backdoor Roth IRA, all of his current retirement accounts are all pretax. In this particular situation, since moving on to partner which I outlined above, he has elected to make his contribution (the $19k) be a Roth 401k. While the match will stay as a normal 401k.

This allows him to have a portion of his retirement be post-tax. Of course, in general, this is still somewhat inefficient because he will still be paying the taxes on that $19k while in the highest tax bracket (which hurts). However, because he’s a pretty frugal guy this doesn’t make a huge difference to him.

Also, there is something to be said for giving yourself more flexibility later on in retirement to have some post-tax money to pull from.

Additionally, you can’t spend money that you don’t have. So for those kinds of people, having more money in a Roth 401k might be helpful as well.

Hmmm.. I see…

In a way, this is kind of similar to what some people do — which is put away half of their retirement in 401k and the other half in Roth 401k. This is kind of a hedge on whether taxes will be higher in retirement or not. I understand the rationale, but I still don’t think it’s the most efficient way to do things.

That said, being efficient isn’t necessarily as important as being comfortable. If it makes you feel more comfortable to have more money growing in your post-tax bucket, then that’s ok. It’s kind of like wanting to pay off a student loan that is at 1.5% or 2%. To me, I would let the loan go for the full life of the repayment plan and/or die with me. However, for some (like my wife) she would rather see it gone, regardless of the interest rate.

Once again: Different Stroke for Different Folks

TL;DR

The idea of having some of your 401k be in a Roth is understandable.

There is something to be said for the peace of mine of having more money in your post-tax bucket.

Just understand it’s probably not efficient or optimal, except for very specific circumstances.

Being efficient isn’t necessarily as important as being comfortable.

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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