As a young professional who is trying to build wealth, I invest money. Although there is a myriad of different investment accounts and strategies, I invest in index mutual funds through my employer-sponsored retirement plan and my own Roth IRA. Yes, I have both types of accounts. Let me tell you why.
I invest in my employer-sponsored retirement plan (which is a 403(b), which is very similar to a 401(k) because:
1. I get a match from my employer to invest in their plan. Back in the day, many jobs offered their employees a “pension” when they retired. This pension would guarantee an employee a certain percentage of their salary even after they retired and stopped working. Although these pension plans were great for the employees, they were extremely expensive for many companies. Thus, most jobs today no longer offer pensions. They instead want to encourage their employees to save for their own retirement and give them an incentive (in the form of a retirement match) to do so. Through this retirement match, your employer will match what you contribute to your retirement plan. Like many other employers, my employer offers a retirement match if I contribute to my work-sponsored retirement account (a.k.a. a 403(b)). Since I don’t want to forgo free money, I contribute to my work retirement plan to get their “match.”
2. It saves me money in taxes. As an unmarried physician with no children, I pay quite a bit in taxes. Although I don’t mind contributing money to ensure that our government can run smoothly and fund things like education, infrastructure, and national defense, there are certain incentives in the tax code that can help reduce the amount of taxes I’m expected to pay. One of the incentives is contributing to a retirement plan. By contributing money to my employer-sponsored retirement plan, I can defer paying taxes on the money I contribute, decreasing my tax rate. I also have the option of contributing to my work retirement plan via a 403(b) Roth, in which I can choose to pay taxes now and shield the income and profits from taxes when I withdraw the money later. So, whether I choose the pre-tax 403(b) (to help me save money in taxes now) or the 403(b) Roth (to help me save money in taxes later), either way, I get to save money in taxes. Thus, either option is a win-win.
3. It decreases my student loan payments. Like many college graduates, I have student loans. In fact, the amount of student loans I acquired from medical school is so high that I had to consolidate my loans and enroll in an income-based repayment plan to make the payments more affordable. This plan, called REPAYE (revised-pay-as-you-earn), caps my student loan payments at 10 percent of my discretionary income, making my monthly student loan payments much more affordable. As a resident physician who works for a non-profit hospital, I am also considered a “public servant.” Through a program called Public Service Loan Forgiveness (PSLF), after making 10 years of student loan payments, public servants who work for non-profit companies can get the remaining balance of their student loans forgiven, tax-free. Since the student loan payments I need to make are based on my taxable income, the more I lower my taxable income, the less money I have to pay in my student loans. One way I lower my taxable income and lower my monthly student payment is by contributing to my work-sponsored retirement account.
In addition to my work 403(b), I also invest in a Roth IRA because:
1. I can make other types of investments that I can’t make in my employer’s retirement plan. Unlike my 403(b) or 401(k), a Roth IRA is not set up through my employer. Because it is not connected to my employer, I have more options in the way I want to invest my money. Instead of being limited to certain mutual funds or index funds, I can expand my options. Through my Roth IRA, I invest in REITs (real estate investment trusts). By investing in REITs, I can make money via real estate since these REITs invest in various real estate deals and syndications. Adding real estate to my investments helps diversify my portfolio to make me even more money overall.
2. It gives me more flexibility whenever I want to withdraw the money. I really like the Roth IRA because I contribute to it with “after-tax” dollars; there are fewer restrictions on when I can take the money out of the account. Although it is supposed to stay in the account until I retire, I can withdraw my contributions at any time, with no penalty (as long as I keep all the earnings/profits in the account). Thus, if I contributed $5,000 and made $500 in profits, I can take out the $5,000 I contributed at any time as long as the $500 I made in profit stays in the account. This means that if I ever run into an emergency or decide to use some of the money to pay off student loans or purchase a home, I can withdraw some of the money from this account when I need it. A Roth IRA is like a retirement account that I can technically use as a backup emergency fund if I absolutely needed to.
3. I don’t have to pay taxes on the money in retirement when I take it out. Unlike my employer-sponsored retirement plan, I contributed to this Roth account with after-tax dollars. This means, when I withdraw the money in retirement, I don’t have to pay taxes on the earnings I made or the money I contributed. Because of this fact, a Roth IRA helps me keep more money! For example, if I retire with $1,000,000 in a pre-tax 401(k) and $1,000,000 in a Roth IRA. I will have to pay 20 to 30 percent in taxes on the money in the pre-tax 401(k). So even though there is $1 million in the account, I will have to pay $200,000 to $300,000 in taxes on that money. With a Roth IRA, I will owe no taxes and will get to keep it all.
My point? Both my employer-sponsored retirement plan and my Roth IRA have advantages. Instead of choosing one over the other, I contribute to both accounts to maximize the benefits. Tell me, do you contribute to your work-sponsored retirement plan and a Roth IRA?
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