Scenario: A Physician with Side Income and a Backdoor Roth

This page describes a composite hypothetical. It is not a real client or a real result. Amounts are assumptions, and contribution limits are indexed and change each year, so confirm current figures.

The Scenario in Brief

A hospital-employed physician earns a high salary and also picks up independent contractor shifts at an urgent care center, reported on a Form 1099. The physician already contributes to the hospital's retirement plan and wonders whether the side income allows additional retirement savings. The physician also cannot contribute directly to a Roth IRA because of income limits, and has heard about a backdoor Roth. The physician asks an advisor to sort out the possibilities.

Assumptions Used

• Salary: 350,000 dollars, with elective deferrals to the hospital's 403(b) plan already at the annual maximum.
• Side income: net self-employment profit of 60,000 dollars after expenses.
• The physician has a traditional IRA with 50,000 dollars of pre-tax funds from a prior job.
• The physician wants to make a nondeductible IRA contribution of an assumed 7,000 dollars and convert it to a Roth IRA.
• An assumed 20 percent of net self-employment earnings is the employer contribution rate for a self-employed person in a solo plan.

The Elective Deferral Limit Is Per Person

The advisor would first explain that the annual limit on elective deferrals applies to the individual across most plans, including 401(k) and 403(b) plans. Because the physician has already reached the limit in the hospital plan, additional elective deferrals in a solo 401(k) for the side income are generally not available. The physician's side business may still allow an employer-type contribution, which is calculated separately and is subject to a separate overall limit for that plan.

Worked Arithmetic: Employer Contribution on the Side Income

To find the base for a self-employed person's contribution, the advisor would subtract half of the self-employment tax from net earnings.

Because the physician already exceeds the Social Security wage base through the hospital salary, the Social Security portion of self-employment tax would generally not apply to the side income, in which case the actual self-employment tax would be lower, mostly the Medicare portion, plus the Additional Medicare Tax. The example above ignores that to keep the calculation simple, and the advisor would refine it. The contribution would reduce taxable income if made to a properly established plan by the applicable deadline.

The Backdoor Roth and the Pro Rata Rule

A backdoor Roth involves making a nondeductible traditional IRA contribution and then converting it to a Roth IRA. The pro rata rule treats all of a taxpayer's traditional, SEP, and SIMPLE IRA balances as one pool when calculating the taxable part of a conversion.

Instead of converting a mostly tax-free 7,000 dollars, the physician would owe tax on about 6,140 dollars. One way to address this, if the plan permits, is to roll the pre-tax IRA balance into a workplace or solo 401(k) before the conversion, which removes it from the pro rata calculation. The advisor would check whether the physician's plans accept such rollovers, and would mention that timing matters, since the calculation is based on balances at year end.

Estimated Taxes and Other Items

The side income is not subject to withholding, so the physician should plan estimated payments. The advisor would also consider whether the side business should be structured differently, and whether a health savings account or other benefits are available.

Scenario Variations Worth Considering

If the physician had no pre-tax IRA balance, the backdoor conversion would be almost entirely tax-free. If the side income were larger, a SEP or solo 401(k) contribution would scale. If the physician's spouse also had earned income, similar analysis could apply to that spouse. If the hospital plan had a Roth option, the physician might decide to shift some deferrals there.

Risks and Limits

• Limits and thresholds change each year.
• The pro rata rule can make a backdoor conversion largely taxable.
• Plan documents determine whether rollovers and contributions are allowed.
• The calculations here are simplified.

What This Scenario Teaches

Retirement planning for professionals depends on how limits and rules interact across plans. Understanding what applies per person, and what applies per plan, prevents both over-contribution and missed opportunities.

Questions to Bring to Your Advisor

1. Which limits are shared across my plans?
2. How much could my side income support in an employer-type contribution?
3. Does the pro rata rule affect my conversion?
4. Can I roll my IRA balance into a plan?

Educational purposes only. This page is an illustrative educational scenario, not tax, legal, or accounting advice, and it does not describe a real client or a real result. Tax laws change and outcomes depend on individual facts, so consult a qualified professional before acting. No result is guaranteed.