Can I contribute or convert money to a Roth IRA?
Roth accounts are a powerful way to grow your wealth due to their tax-free growth and withdrawals. However, many dentists don’t know if they can get money into a Roth account. If they can, is it the right move for their situation? Are there other strategies worth considering that may benefit dentists wanting to plan for retirement more? Let’s go through a case study with Dr. Ashley to see when it could make sense for a dentist to use a Roth account and examine if other strategies such as a pre-tax account may be worth considering.
For this case study with Dr. Ashley, here is some background information:
Married
44 years old
Practice owner
$350,000 per year of W-2 income
Her Husband (Michael) also works at the practice and earns $30,000 per year
Eligibility to Contribute to a Roth IRA
To be eligible to contribute directly to a Roth IRA, you need to have earned income, and your modified adjusted gross income (MAGI) must fall within certain limits. For 2025, if you're single, your MAGI must be less than $150,000 to contribute the full amount, which is $7,000 if you're under 50 and $8,000 if you're 50 or older.
For married couples filing jointly, the limit is $236,000. If your income exceeds these limits, you can still contribute a reduced amount until you hit the top of the phase-out range. In our case study, Dr. Ashley and Michael make too much money to contribute directly to Roth IRAs.
The Backdoor Roth IRA
If your income is too high to contribute directly to a Roth IRA, there is another strategy called the backdoor Roth IRA. This involves making a non-deductible (after-tax) contribution to a Traditional IRA and then converting those funds to a Roth IRA. Since the contribution was non-deductible, the only taxable income on the conversion to the Roth IRA is any growth on the contribution.
One trick for this strategy to work effectively is that there should be no other pre-tax IRAs funded (i.e., SIMPLE IRAs, SEP IRAs, Traditional IRAs). If you have a 401(k) plan, you can roll funds from these IRA accounts into your 401(k). Due to the pro-rata rule, if you have money in other IRAs and attempt a backdoor Roth IRA, a much higher percentage of the conversion may be taxable than intended.
Roth 401(k) vs. Pre-Tax 401(k) Accounts: A Quick Comparison
Roth accounts are amazing, but it may be wise not to use them exclusively during your working years. The example below will illustrate why dentists may benefit by considering a pre-tax option during their working years.
Dr. Ashley & Michael would each like to make a full 401(k) deferral for 2025 ($23,500 each, or $47,000 total) and are wondering whether they should do Pre-tax or Roth. They are in the 35% federal income tax bracket now and expect to be in the 12% bracket since they will have no employment income except some rental income since they own their building once they retire. In the 21 years from the time they contribute at age 44 until when they retire at age 65, they expect their account balance to grow by an average of 7% per year. Lastly, for this illustration, let’s assume that contributions are net of taxes. The table below summarizes the life cycle of these contributions as Pre-tax vs. Roth:
In this scenario, using a pre-tax account instead of a Roth account results in a 35% increase in their after-tax wealth!
Roth Conversions: Timing is Everything
The benefits of using a pre-tax account during your working years (as illustrated in the example above) can be magnified when with well-timed Roth conversions. How does a Roth Conversion work and what does “well-timed” mean? A Roth conversion is moving money from a Pre-tax account (i.e., IRA or 401(k)) to a Roth account. The conversion amount is considered taxable in the year of execution.
“Well-timed” takes into account a common situation of a practice owner, when income usually dips substantially once they sell the practice and live off the proceeds for several years. Income increases again when payments from Social Security start up and further increases once they begin taking required minimum distributions (RMDs) from their Pre-tax accounts. If we fast forward to Ashley’s retirement at age 65, her tax bracket situation may look something like this:
There is an opportunity during the years of low income to convert money to a Roth account, pay some taxes now (at a lower rate), and save on taxes in the future, thus lowering her lifetime tax bill. If Roth conversions were incorporated, the chart would look something like this:
This situation is a win for Dr. Ashley because she was able to get money into the Roth account after paying taxes at the 12%- or 24%-income tax rate in retirement instead of the 35% tax rate like she would have if she had been making Roth contributions while they were working. In addition, RMDs from Pre-tax accounts will be lowered in the future since the Pre-tax accounts will be smaller.
Moral of the story-- take the tax deduction when you are in the higher brackets and convert to Roth when you are in the lower brackets!
Navigating the complexities of Roth IRAs and conversions can be daunting. To ensure you're making the best decisions for your financial future, schedule a Complimentary Consultation with a Financial Advisor from Financial Freedom for Dentists, LLC. They can help you develop a personalized Roth strategy that minimizes your lifetime tax bill and maximizes your retirement savings.
All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. The information provided is not based on actual current or past clients. All situations are unique, and results will differ depending on individual situation.