Which retirement account is best for physicians?

Whether you are starting a new job, like me, or extending the contract at your current one, part of the process may involve signing up for retirement accounts. Most people have heard of a 401(k), but you may have other options available to you such as a 403(b) and Roth IRA. Let me breakdown the pros and cons of each account, so you can better determine which one is best for you.

What is a 403(b)? A 403(b) is a type of employer-sponsored retirement plan offered to people who work at nonprofit organizations. It functions very similarly to a 401(k), which is a type of employer-sponsored retirement plan offered to people who work at for-profit organizations.

Pros of a 403(b) (or 401(k))?

1. You can lower your taxes.

As of 2019, you can contribute up to $19,000 a year in these accounts, pre-tax. That means that you don’t have to pay yearly income taxes on the portion of your paycheck you allocate to retirement. For high-income earners with tax rate near 30%, contributing to this 403(b) plan can save them nearly $6,000 a year in taxes.

2. You may get a “match” from your employer.

This is when the company places an equal amount of their money into your account to “match” the contribution you made. If you contribute $6,000, they will “match” your contribution with an additional $6,000. At the end of the year, you will have a total of $12,000 in the account, plus interest.

3. You can lower your monthly student loan payment.

The income-driven student loan repayment plans are based on a percentage of your discretionary income. Your discretionary income is your “taxable” income minus 150% of the poverty line (the minimum amount of money needed to cover living expenses). When you contribute to employer-sponsored plans, like a 403(b) or 401(k), you lower your taxable income.

Lowering your taxable income, reduces your discretionary income, which then lowers your monthly student loan payment. Although interest will still accrue on your loans, lowering your monthly payment is beneficial if you are enrolled in public service loan forgiveness.

Cons of a 403(b) (or 401(k))?

1. You are limited in the type of investments you can make.

When you contribute to a 403(b), you are simply putting money into an account. In order for the money to grow over time, you must actually invest the money in that account. Employer-sponsored plans can be limited in the types of investment options they allow you to make. Most employer-sponsored plans allow you to invest in index mutual funds, which purchase a variety of stocks or bonds in different industries. However, they usually do not allow you to make other types of investments in things like real estate.

2. You will have to pay taxes on the money you withdraw in retirement.

Since you contribute to this account with “pre-tax” dollars, you did not pay taxes on the money before it went into the account. Thus, you will have to pay taxes when you take the money out of the account in retirement. Since the money in these accounts will have been invested in a way that will hopefully make you even more money, when you withdraw money in retirement you’ll also be paying taxes on the profit you made from these investments.

What is a Roth IRA? A Roth IRA is a type of individual retirement account (IRA). Unlike a 403(b) (or 401(k)), this account does not go through your employer. You can contribute to a Roth IRA (or a traditional IRA) with any type of earned income you get from your main job or any side job.

Pros of a Roth IRA?

1. You don’t have to pay taxes on the profit in retirement. You contribute to a Roth IRA account with post-tax dollars. Since you’ve already paid income taxes on the money, you will not have to pay taxes on that money (or any profits you made) when you take it out in retirement.

2. You have more investment options. Unlike employer-sponsored plans, you can make a variety of different investments through a Roth IRA. You can invest in index mutual funds, buy individual stocks, or even invest in real estate.

3. You can withdraw money from the account easier. Although the goal is to leave money in the account until you retire, if you need to take the money out earlier (to cover the down payment on your home or pay off your student loans), it is easier to do that from a Roth IRA without incurring as many penalties or being charged extra fees.

Cons of a Roth IRA?

1. You can’t put as much money into the account each year. Unlike a 403(b) (or 401(k)) that allow you to contribute up to $19,000 a year, you can only put $6,000 a year into a Roth IRA. Since the contribution limit is so low, there’s a good chance you’ll max out this account and need to use other types of retirement accounts after you hit the contribution limit.

2. You won’t save as much money in taxes in the short-term. Since you contribute with post-tax dollars, you will pay income taxes on this money before you contribute to the account. This raises your tax bill in the short-term and could decrease the amount of cash in your pocket after each paycheck.

Which account am I contributing to?

Both. Since I’m a first-year resident physician, I plan to start off-putting about 10% of my income into the 403(b). Even though my job doesn’t offer a “match,” the tax savings and lower student loan payments that come with this account will leave more cash in my pocket each month. Any additional earned income I make from blogging or moonlighting shifts, I’ll put into a Roth IRA. Once I finish residency training, I’ll convert some of the money I saved in my 403(b) to a Roth IRA so I can have a decent chunk of money in both accounts.

Altelisha Taylor is a family medicine resident and can be reached at Career Money Moves.

Image credit: Shutterstock.com

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