Estate Planning

  • Supercharge Your Retirement Savings With The Mega Backdoor Roth

    Saving for retirement is a critical aspect of financial planning. While traditional retirement accounts like 401(k)s, 403(b)s and IRAs offer valuable tax advantages, they come with contribution limits that may not be sufficient for physicians with substantial incomes.

    This is where the “mega backdoor Roth contribution” comes to the rescue. In this post, we’ll explore how physicians, including self-employed and locum tenens doctors, can harness this strategy to supercharge their retirement savings.

    Key Points

    • With an attending physician salary, you can fill up your tax-advantaged retirement buckets pretty quickly. This can leave you searching for other types of accounts and investments to continue saving for your retirement needs.
    • The Mega Backdoor Roth can help you contribute up to an additional $43,500 to Roth retirement accounts. Since these are Roth funds they grow tax-free and withdrawals are also tax-free.
    • The Mega Backdoor Roth is also a great option for self-employed physicians, such as practice owners or locums physicians, to save more for retirement.

    What is a Mega Backdoor Roth?

    Most physicians have heard of the backdoor Roth IRA before, but what is the Mega Backdoor Roth? With the regular backdoor Roth strategy, you make after-tax contributions to your traditional IRA and then execute a Roth conversion to convert those funds to a Roth IRA.

    With this strategy you are limited to the annual IRA contribution limit, which is $6,500 for 2023. The mega backdoor Roth allows you to execute essentially the same strategy using your 401k in place of your IRA. Since 401(k)s have much higher contribution limits and no income limits this allows you to supercharge your retirement savings.

    How the Mega Backdoor Roth Works

    1. Max Out Your Pre-Tax 401(k) Contributions: Start by contributing the maximum allowed amount to your traditional 401(k). In 2023, the annual limit for employee contributions is $22,500, with an additional $7,500 catch-up contribution for those aged 50 and older.
    2. After-Tax 401(k) Contributions: Some 401(k) plans permit after-tax contributions beyond the pre-tax limit. This provision is required for the mega backdoor Roth to work, so check with your employer to make sure your 401k allows after-tax contributions.

    In 2023, the overall contribution limit for all contributions (including employee and employer contributions) is $66,000 or 100% of your income, whichever is less. This means you can potentially contribute a significant amount of money on an after-tax basis.

    For an example, if you contribute the maximum of $22,500 to your 401k and your employer contributes a flat match of $5,000 you could make additional after-tax contributions of $38,500.

    $22,500 employee contribution + $5,000 employer match contribution + $38,500 after-tax contribution = $66,000 contribution limit

    1. In-Plan Roth Conversion: Once you’ve made your after-tax contributions, your plan may allow you to convert these funds to a Roth 401(k) within the same plan. Since these were after-tax contributions there is no tax associated with the Roth conversion. This is the critical step that turns your after-tax contributions into tax-free Roth assets.

    Some plans may not allow in-plan Roth conversions and may instead allow in-service withdrawals. In this case you would roll your after-tax contributions into a Roth IRA outside of your retirement plan.

    In the case where your 401k allows you to make after-tax contributions but does not allow in-plan conversions or in-service withdrawals you should still consider making after-tax contributions. Even though it is not as advantageous as a plan that allows in-plan Roth conversions.

    When you retire or leave your employer you can roll your after-tax 401k into an IRA at that time. Your after-tax contributions will roll into a Roth IRA, but any growth will be treated as pre-tax dollars and rolled into a traditional IRA.

    Example: You contributed $20,000 to your after-tax 401k which grew to $25,000. You decided to leave your employer and do a rollover of your 401k into an IRA. Your $20,000 of contributions would roll into a Roth IRA. The $5,000 of gains would roll into a traditional IRA.

    Benefits of a Mega Backdoor Roth Contribution

    1. Tax-Free Growth: One of the primary benefits of the mega backdoor Roth is that once your contributions are converted to Roth, they grow tax-free. This can be especially advantageous for high-income individuals who anticipate being in a higher tax bracket in retirement.
    2. No Income Limits: Unlike traditional Roth IRA contributions, there are no income limits for the mega backdoor Roth strategy, making it accessible to high-earning physicians.
    3. Higher Contribution Limits: Compared to the regular backdoor Roth you can contribute over 6 times as much to your after-tax 401k, helping to supercharge your retirement savings.
    4. Estate Planning: Roth IRAs can offer excellent estate planning benefits, as they can be passed on to heirs tax-free.

    Utilizing the Mega Backdoor Roth for Practice Owners, Self-Employed, and Locum Physicians

    Being a self-employed physician can be an outstanding career choice for many doctors, but can have the unfortunate downside of losing access to employer retirement plans such as 401(k)/403(b)/457(b) plans.

    Self-employed physicians, whether they are practice owners, 1099 emergency docs or locum tenens physicians, have a unique opportunity to implement the mega backdoor Roth strategy using a Solo 401(k). Here’s how:

    1. Open a Solo 401(k): Self-employed individuals can set up a solo 401(k), also known as an individual 401(k) or one-participant 401(k). This plan allows for both employer and employee contributions, crucially including after-tax contributions.

    * You will want to make sure your solo 401(k) plan allows for both after-tax contributions and in-plan Roth conversions to maximize the benefits of the mega backdoor Roth. *

    1. Maximize Contributions: As both the employer and employee, you can contribute up to the annual limits mentioned earlier, including after-tax contributions.
    2. In-Plan Roth Conversion: Execute your in-plan Roth conversions to maximize the benefits of your after-tax contributions.

    Wrap Up

    The mega backdoor Roth contribution is a powerful tool for physicians looking to supercharge their retirement savings and enjoy tax-free growth on their investments. For self-employed physicians, such as practice owners, emergency doctors, and locum tenens physicians, the solo 401(k) offers an excellent platform to implement this strategy.

    It’s essential to consult with a financial advisor and/or tax professional to ensure that the mega backdoor Roth contribution aligns with your financial goals and retirement plan. By taking advantage of this strategy, you can supercharge your retirement savings and secure a more comfortable financial future.

  • Estate Planning for Physicians

    Estate planning is just as important as the other financial planning topics, but most people tend to procrastinate and put it off until “later”. This is understandable, no one likes to think about what would happen after they or their loved one dies. But it’s important planning that you shouldn’t put off for too long, especially if you have young children.

    The good news is that you’ve likely already done some estate planning without even realizing it. And once you see that you’ve already made some good first steps, we’re here to give you the nudge to complete the rest of your estate plan with the 4 critical estate planning documents that every physician should have.

    Key Points

    • You’ve probably already done some estate planning by designating beneficiaries for your retirement accounts and life insurance
    • If you die without a will it is up to the state and a probate judge to decide who will receive your assets
    • The four critical estate planning documents every physician should have are: Will, Financial Power of Attorney, Healthcare Power of Attorney, Living Will
    • Physicians with minor or young adult children should consider adding a trust to their estate plan as well

    Estate Planning Decisions You’ve Already Made

    When you fill out the paperwork for your employer 401k/403b and check the box designating your spouse or another loved one as your beneficiary you completed an estate planning task. Great job! See, I knew you could do it. Those assets will pass at death to whoever you designated without going through the probate process, even if you haven’t prepared a will.

    Retirement accounts and life insurance will ask you to designate a beneficiary, but you can also designate beneficiaries on many non-retirement/insurance accounts like your savings, checking and brokerage accounts by changing the registration to “TOD” transfer on death or “POD” payable on death. Just ask your bank, broker, or advisor.

    You’ve also likely made an estate planning decision with regard to your home. If you own your home with a spouse or partner and it’s titled as JTWROS (Joint Tenants with Rights of Survivorship) your share of the ownership passes to the other owner upon your death. No trip through probate required.

    It’s important to distinguish JTWROS from TIC (Tenants in Common). With TIC your portion of ownership remains a part of your estate and could be subject to probate instead of automatically passing to the other owner.

    What is Probate?

    I mentioned probate above, but what is it? Probate is the process where they state distributes your assets based on your instructions, if you have a will, or based on state laws if you don’t have a will.

    Probate is a public process presided over by a judge which airs your financial information to the public. This could lead your surviving family members and heirs to be targets of predators and scam artists.

    Many estate planning decisions are made to avoid probate which can be time consuming and expensive. It is also a new and seemingly complex process that your executor must manage during an already stressful time.

    Your 4 Critical Estate Planning Documents

    Now that you realize you’ve already started on your estate plan there are 3 critical documents you need to complete it.

    Disclosure: I am not a lawyer and you should seek advice from a legal professional for your situation and for the documents recommended below. I think having these documents as part of your estate plan is extremely important to your overall financial plan and you should work with an expert to ensure they are created properly.

    Critical Estate Document #1: Will

    This document outlines who will receive your assets after your death, except for the assets that already have a designated beneficiary as we discussed above.

    Inside your will you would designate an executor, whose job it is to see that your instructions are carried out. It is also where you would designate guardians for your minor children.

    Depending on your situation your will still may go through the probate process, but without one your assets will be distributed based on the laws of your state, which may or may not align with your wishes.

    Critical Estate Document #2: Durable Financial Power of Attorney

    A financial power of attorney grants another person the ability to act on your behalf regarding personal, financial, and business matters. This document allows someone to make financial decisions for you if you are incapacitated or otherwise unable.

    You want to ensure it is a “Durable” financial power of attorney, otherwise in most states the power of attorney will automatically end if you later become incapacitated.

    You want to put some thought into who you designate as your financial power of attorney as while they are legally required to act in your best interest, they also will have the ability to make decisions all the way from paying bills to buying and selling property in your name.

    Critical Estate Document #3: Healthcare Power of Attorney

    This document is basically a mirror image of the financial power of attorney but for your medical decisions while you are incapacitated.

    This is another extremely important document as the person you designate as your healthcare power of attorney can make decisions about your medical care when you are physically or mentally unable.

    Critical Estate Document #4: Living Will

    A living will is a document that is typically created along with a healthcare power of attorney. While the HCPOA grants authority for someone to make medical decisions on your behalf the living will lays out your instructions for care in the event that you are terminally ill and/or in a permanently unconscious state.

    By creating a living will you make your wishes known in writing beforehand of what should be done if you should end up in this situation, and remove the burden of a loved one having to make the decision for you.

    BONUS Critical Estate Document #5: Trust

    There are many types of trusts that can be used in estate planning. For families with minor or young adult children and substantial assets a revocable trust is an important document to consider in addition to the first four documents mentioned above.

    If you have minor children and just a will in place your assets that you intend for them to inherit will likely be managed by the guardians you designated. Once your children turn 18 though, the entire inheritance is theirs to do with as they wish. No strings attached. With life insurance and other assets involved, this could be quite a lot of money. Consider what you would have done if you received a few million dollars on your eighteenth birthday.

    With a trust in place, you can specify a trustee to manage your assets for the benefit of your children or other beneficiaries. You can specify that money from the trust should be used for education, a first car, or help with a house down payment and when the balance will ultimately become theirs. An often-used recommendation would be for a child to receive half of their inheritance at age 25 and the other half at 30.

    Wrap Up

    So that’s it, four or maybe five documents that every physician should have in place as part of their estate plan. Hopefully reading this article and learning what exactly goes into each document gives you the confidence to make an appointment and finish your estate planning today!