There is still time to contribute to an IRA for 2016 and 2017
I wanted to write this post because I did a workplace poll and found out that the majority of my colleagues didn’t think they could contribute to an IRA. As a matter of fact, they didn’t even do so in residency because of lack of funds. Then as attendings, they assumed that they made too much money to contribute to one.
Let’s talk about the 2 options available for us big ballers. One involves a traditional IRA contribution and the other a Roth IRA. I will also discuss why it’s worthwhile to invest in an IRA.
Roth IRA For High Income Physicians
I won’t spend much time on the Roth IRA method, please check out the Godfather’s post on this which will answer every and all the questions you have on the topic. It’s a bit of an involved process.
In summary, you contribute your regular $5,500 towards a traditional IRA, then you convert it to a Roth IRA. The advantage here being that a Roth IRA can be accessed before age 60, unlike a traditional IRA. And since doctors earn too much to contribute to a Roth IRA directly, this backdoor method might be a good option if you want a Roth IRA.
I personally don’t care for this. I’ve done it for 3 years and it’s a bit too much of a hassle. It also requires that I have no other standalone IRA accounts which can be circumvented by rolling them over into your existing 401k – again, for many reasons, this is not my jam.
Traditional IRA For Doctors
It doesn’t matter how much money you make, you can contribute the maximum limit for your calendar year to a traditional IRA. There are different kinds of IRA’s out there, which is why we call this one traditional.
For most of us who are employees, we really only need to worry about a traditional IRA and a Roth IRA. As mentioned above, your ass makes too much to contribute to the sweet, juicy Roth IRA.
What the shit is a traditional IRA? It’s another retirement vehicle that the IRS offers you. They don’t allow you to touch these contribution until age 59.5, unless you pay 10% in fines. The point is to prevent you from raiding it, so that you have something set aside when you are no longer able to work.
You are allowed to contribute $5,500 to a traditional IRA in 2017. This money is not tax-deductible. If you are over age 50 then you can contribute $6,500.
Think of an IRA like a 401k. Instead of being a retirement account offered by your employer, this is offered by the gov’t. You can invest in all the same shit as a 401k, a 457 or 403b or 401a or whatever…. it just has a different name, and for most of you it’s not tax-deductible.
How Do Your Open An IRA Account?
I’m answering questions which all popped up during my brief interrogation of my colleagues a few days ago. Opening an IRA account is really easy. You can go to any company of your choosing such as Fidelity, Betterment, Vanguard or Bank of America and open an account.
You transfer money from your own account to this and the proceed to choose what you want to invest in. For the most part, these companies will have your run of the mill mutual funds and stocks, bonds, as well as REITs or savings accounts.
Downsides To IRA Contributions
Now remember, once you contribute this money you can’t just withdraw it without paying a 10% penalty if you are <60 years of age. Plus, upon withdrawal you would have to pay income taxes on this money. Once you reach age 60, you can access it without penalty, but you would pay income taxes on it.
If you just caught this little fuck-fest, you would have noticed that the money you are contributing to this traditional IRA was after-tax money, money on which you paid taxes.
Then when you go to withdraw it at the ripe age of 60, you will have to pay income taxes on it again. Double taxation! Yeap, it’s legal and there is no easy way around it. Sure, you can keep records and fill out a special form so that 30 years from now you can create a paperwork nightmare.
The IRS incentivises you to make less income
In my opinion, if you are gonna worry about all that, then you might as well do the backdoor Roth IRA conversion as WCI talks about.
Advantages Of A Traditional IRA Contribution
The advantage is that your money will grow tax-free. It’s also protected in most states, preventing someone who sues you for your assets to gain access to it.
It’s also a nice vehicle to hold less tax-friendly assets, such as REITs. There are certain investments which have unfavorable dividends and generate a lot of short-term capital gains. All this means is that these are best held in tax-deferred accounts such as an IRA or a 401k.
Learn about investing in REITs
You can find a custodian who will allow you to invest in all sorts of non-typical investments. You can use your IRA to invest in a business, in real estate or to lend it out on a peer-to-peer basis.
If you contribute to an IRA every single year for another 30 years then you would have around $425,000 sitting in that account. That would be an average of investing $500/month for the next 30 years.
There is also a catch up for those over age 50. You can contribute an extra $1,000 every year. This also holds true for your 401k, taking you from the regular $18k to $24,000 for the year.
Save money by stopping work at age 40 and resuming at age 50
Can You Still Contribute For 2016?
Yes, you have until April for the following year to contribute. I already contributed for 2016 but will be contributing for 2017 as soon as I have the funds ready.
You cannot go back and contribute for previous years. Other countries actually allow this which makes sense but we don’t have that option available to us in the US.
In Summary
- A traditional IRA is an investment vehicle that is not tax deductible if you’re earning a high income
- Anyone, regardless of income, can contribute to it
- You can hold almost any investment in an IRA