For most physicians, if they’ve ever received good advice about saving for retirement, it’s probably that they should fund a Roth IRA. And the benefits of funding a Roth IRA are many:
- Funds in a Roth IRA grow tax-free.
- Contributions made to a Roth IRA can be taken out tax-free and penalty-free at any point.
- If the Roth IRA has been open for 5 years or more, and the account holder is 59 ½ years old or more, contributions AND growth can be taken out tax-free.
- Roth IRAs have no required minimum distributions – funds can grow tax-free for the duration of the account holder’s life, and beneficiaries keep some of the same valuable tax benefits.
However, for most physicians, the prospect of funding a Roth IRA can seem to disappear as soon as they finish their training and have the necessary income to contribute! This is because the IRS Iimits those who can contribute to Roth IRAs based on income. For 2025, if you are a single taxpayer making $165,000 or more, or a married filing jointly household making $246,000 or more, you can’t contribute to a Roth IRA. That’s a problem for nearly every attending physician – just when you have enough income to be able to start saving money, one of your best strategies is off the table.
This is where the back door Roth IRA strategy comes in, and is vitally important for a physician to be able to take advantage of this tax-favored saving strategy, among others. A back door Roth IRA is not a different kind of Roth IRA, but rather, it’s a strategy where a physician can still make the maximum contribution (for 2025, $7,000 if you are under age 50) to a Roth IRA. Here’s how it works:
- Open a traditional IRA and make a *non-deductible* contribution to the IRA – non-deductible is only denoted on your tax return.
- Open a Roth IRA and convert the funds from the traditional IRA to the Roth IRA.
- Properly record these transactions (non-deductible IRA contribution, and subsequent Roth conversion) on your tax return.
Pitfalls to avoid:
- Keep in mind that you’ll owe taxes, on a pro-rata basis, on earnings, previously deducted contributions and other taxable amounts in any of your SEP, SIMPLE and traditional IRA(s) when converting to a Roth IRA. This could put you in a higher tax bracket, so be sure to consult your tax professional.
- Incorrect reporting of steps on tax return / form 8606
- Splitting years – IRAs can be funded for the PRIOR tax year up until the tax deadline of April 15 (in other words, a physician could fund an IRA with $7,000 for 2024 as late as April 15, 2025). What’s important to note, however, is that the *contribution* to the IRA would be reflected on the 2024 tax return, but the conversion (if it occurred in 2025) would be reflected on the 2025 tax return.