Advice on doing a mega backdoor roth IRA

[newbiedoc]

Hello everyone! This forum has been an awesome place to learn and I figure that you guys are the best people to clarify something.

I recently graduated medical school and I am starting residency in a week. I am pretty frugal and have worked out my budget to save around 40- 50% of my net pay (around 20-24k for the year). The thing is, for my first year I will be training in general medicine and then further training in a different hospital (in a different state) for 3 more years. This move will come with a significant pay cut (around 20k).

Anyway, my hospital's 401K plan (through Transamerica) allows for post tax contributions. I would like to put the money in post tax. That way, when my employment terminates in a year I can convert that money into my roth. My thinking is that, in a few years I will be phased out from being able to contribute to Roth due to my income. I am aware of the backdoor conversion but I am looking to really beef up my Roth now, since this an option to me.

Does this make sense to do? If so, can I make only aftertax contributions without making any pretax ones? I would likely contribute during the later half of the year to minimize any growth in the 401k (so I don't have to worry about taxes or rolling into a tIRA). Is there any easier way to do this?

TLDR: Short term employment with the option to contribute post tax money into 401k. Job will terminate in a year. Does it make sense to do mega backdoor roth IRA? Does it matter if I'm only contributing post tax money to 401k? Whats the best way to keep this simple?

Thanks so much!

[terran]

Whether you can contribute to after-tax without contributing to tax deferred will depend on your plan, so you'll have to ask HR or read the documentation, but it's probably not the best choice. If you expect your income to go down it would be better (or at least as good) to contribute to tax deferred now to get the tax deduction, then rollover to traditional IRA and convert to Roth IRA paying the tax when your income is lower.

Also, make sure when the plan documentation says post tax they literally mean after tax, not Roth and some HR departments will use them interchangeably.

[skiersailor]

Depending on the flexibility of your employer plan now and in the future, the following options may be available to you every year:

1) Traditional 401(k) contribution (pre-tax)
2) Roth 401(k) contribution (after tax)
3) Conversion of traditional 401(k) balance to Roth 401(k) (taxable)
4) Traditional IRA contribution (pre-tax)
5) Non-deductible IRA contribution (after tax)
6) Roth IRA contribution (after tax)
7) Conversion of non-deductible IRA balance to Roth IRA (taxable)

Note that only two of these options (4 and 6) phase out with higher income, and there is a "back-door Roth IRA" strategy (essentially option 5 followed by option 7) to get around the limitation on 6.  So, as long as your employer's retirement plan allows options 2 and 3 above, you don't have to worry about being prohibited from Roth contributions when you want to make them.  Instead, you can select traditional or Roth contributions each year depending on your current tax bracket and expected future tax brackets.  Even if your company match or profit sharing must be pre-tax, your retirement plan may allow you to convert it to Roth at your discretion.

EDIT: Just re-read your post and realized you will be working for two different hospitals.  In that case, it may make sense to make traditional pre-tax 401(k) contributions now to maximize your deduction.  When you leave the first hospital, you can roll the 401(k) balance into an IRA (because you may not be eligible for the second hospital's retirement plan right away).  Then, in the year when you have a low income you can convert your pre-tax IRA to a Roth IRA and realize the income in a lower tax bracket.  Just be sure to save enough money this year to pay your additional taxes next year.

A minor point is that 401(k) accounts are considered to have better protection from creditors than IRA accounts.  This can be an important consideration for doctors and may be more important to you than the small tax savings realized from timing your conversion in a low-tax year.  In that case, you may just want to make Roth 401(k) contributions now and pay the tax, then roll that money directly into the second hospital's 401(k) when you become eligible.  You can't roll money from an IRA to a 401(k), so once it leaves the 401(k) shelter you can never get it back in.