Physicians have a retirement planning vehicle available to them that few are aware of, the Roth IRA Conversion. The
principal difference between Roth IRAs and traditional IRAs is that, you don’t receive a tax deduction for making a contribution to a Roth IRA, but those contributions grow tax free and you don’t have to pay any tax upon withdrawal.
Originally, Congress limited who can contribute to a Roth IRA based upon income (single filers up to $120,000 and joint filers up to $177,000 in adjusted gross income). As a result, high income earners were unable to take advantage of the Roth’s benefits. However, beginning January 1, 2010, the income limits for conversions from traditional to Roth IRAs were removed. The change in the law opened an often overlooked loop hole for high income earners. Individuals who do not meet the income limitations for funding Roth IRAs may chose to fund a traditional IRA and then immediately roll those funds into a Roth IRA. Once the conversion is completed, the investments will grow tax free. Contributions are currently limited to $5,500 per individual taxpayer or $6,500 if you are age 50 or older. The deduction you can take for contributions made to your traditional IRA depends on whether you or your spouse was covered for any part of the year by an employer retirement plan, your income and your tax filing status.
Roth IRAs offer other advantages over traditional IRAs. They are not subject to the same minimum distribution requirements as traditional IRAs, so you don’t have to begin taking withdrawals from you Roth IRA at age 70 ½. In addition, from an estate planning perspective, beneficiaries will receive the money from a Roth IRA income tax free. Roth IRA conversions can be complicated and don’t make sense for everyone, but it may be worth investigating to decide whether it makes sense for you. If you are a physician who is seeking additional ways to save for retirement and reduce your income tax burden, you may want to consider the Roth IRA conversion strategy.
Brian Bush is Executive Vice President at Stephens Wealth Management and manages the Arkansas Mutual Capital Advantage Plan (AMCAP) offered exclusively to AMIC policyholders.
Neither Stephens Inc. nor its representatives provide legal or tax advice. Due to the fact that each individual’s tax status may vary, please consult your tax advisor before making any decisions.