As a physician, you have a lot of factors to consider as you plan for retirement. Because of your high earning potential, you and your family should take care to research all of the tax implications of your retirement plan options.
Given that physicians tend to have higher incomes, they often exceed the income limits for popular retirement accounts that allow participants to withdraw funds tax-free. This may leave you wondering how you can preserve your money for retirement without having to worry about taxes in the future.
Planners Recommend Roth Options
Jim Heisler, CFP®, EA, CASL, CDFA, of the Heisler Hughes Financial Group, strongly recommends that doctors consider taking advantage of a Roth option within their 401(k) or 403(b) plan.
“My strong suggestion is that all physicians need to consider the roth option on their retirement plans. Many doctors are regular employees. Most retirement plans offer 401(k) (in the case of for-profit organizations) or 403(b) (for nonprofits).”
Why does Heisler recommend going this route? Because choosing this option allows you to contribute to your retirement on an after-tax basis, ensuring that you won’t need to pay additional taxes on the money when you retire.
What’s the Difference Between a Traditional Plan and a Roth?
Traditional 401(k) plans offer some benefits, particularly to those who need the majority of their paychecks in order to get by. This is because traditional 401(k) contributions go in pre-tax, so participants don’t lose cash flow to tax contributions (yet).
However, those participants will need to pay taxes on that income when they retire. For physicians, who tend to have higher incomes, it makes sense to pay taxes now so that you will be able to enjoy larger amounts of cash in retirement. This is the benefit of the Roth 401(k) or 403(b).
For young physicians especially, a Roth option has the ability to greatly compound investment over the course of your career. You’ve heard it before and you’ll hear it again: investing in retirement as soon as you can allows you to grow your savings to its fullest potential.
What about Roth IRAs?
Roth IRAs also allow participants to pay taxes now rather than later – however, they’re often too income-restricted for practicing physicians. In 2016, the income cap for contributing to a Roth IRA was $132,000 for single filers, and $194,000 for married couples filing jointly. Since physicians often make more than these amounts, it usually doesn’t make sense for them to consider a Roth IRA.
Even if a doctor’s income does fall within these limits, the comparatively small contribution limit makes Roth IRAs less appealing. You’ll max out your annual contribution limit at just $5,500 ($6,500 for those 50 and over), whereas you’re able to contribute roughly $18,000 to a Roth 401(k) or 403(b) ($24,000 for those 50 and over with catchup contributions).
Takeaways for Doctors
Deciding upon a retirement plan can be hard, but it’s something you should give a lot of careful thought.
“Young physicians in particular should strongly consider the Roth 401(k)/403(b) option,” Heisler says. “Paying taxes now, when you’re in a lower income bracket than you likely will be when you reach retirement age, makes the most sense. Plus, with more people retiring than there are workers, it’s hard to imagine that taxes won’t go up.”