When you’re swept up in the chaos of residency, the relaxing days of retirement seem like an unreachable dream. But your golden years are closer than you think, and the investment decisions you make in the first few years out of medical school can pay out big when you’re finally out of scrubs.
We know, with everything you have to sacrifice during residency—your freedom, your time with family, and of course your sleep—directing a portion of your salary to an account you can’t access for another 40 years feels like one more hit. The good news is, most employers will help you build a solid financial foundation for your future. And with the right investment advice, you can maximize both their financial contributions and yours.
Understanding your investment vehicles
Like most working professionals, residents have three retirement plans to choose from, each with their own pros and cons regarding distributions and taxation:
- Tax-deferred accounts – Contributions are made to tax-deferred accounts with pre-tax dollars, so when you do retire, your distributions will be taxed as income. Accounts can include a company-sponsored 401(k) or 403b, a traditional IRA, or a 457 plan for governmental employees. Most hospital systems will match residents’ contributions up to a certain amount—for instance, your employer may match half what you contribute, up to 6 percent of your pre-tax salary. Tax-deferred accounts are best for investors who are in a high tax bracket today and a low tax of bracket in the future.
- Taxable accounts – Contributions to traditional investment vehicles, such as brokerage accounts, bank accounts, and stocks and bonds, are made with after-tax dollars. While the financial risk of these accounts is low, your return on investment is as well. In addition, your account growth may be taxable.
- Tax–advantaged accounts – A tax-advantaged account may be a Roth 401(k) or 403b, a Roth IRA, or permanent life insurance. Because contributions are made with after-tax dollars, the withdrawals will be tax-free upon retirement, which is especially beneficial for older adults in a high tax bracket.
Getting the most from your investments
According to researchers, 68 percent of Americans worry they won’t have enough money saved to retire. Even in a high-income industry like healthcare, many providers struggle to save, especially when trying to pay off their medical school debt.
There are two crucial steps we believe every resident should take to protect their future income and reward themselves for their hard work.
- Start contributing today! We understand the financial constraints you’re up against during residency, but the benefits of saving just a small portion of your salary to a tax-deferred account can quickly add up, especially if you contribute enough to take advantage of your employer’s matching fund program. For example, if your hospital matches up to 5 percent of your salary, but you only contribute 3 percent, you leave thousands of dollars in free money on the table. Plus, because contributions are pre-tax, it hurts a bit less in the moment. You may also consider contributing to a tax-advantaged Roth IRA in addition to your 401(k) or 403(b), but contributions are capped at $5,500 each year.
- Make your move. Your income will be at its lowest during residency compared to any other time in your professional life moving forward if you remain in healthcare. That’s why we encourage residents to convert their tax-deferred account to a tax-advantaged account, such as a Roth IRA, upon graduation (or as early as you can) with both as low of income and as low of a balance as possible. When you retire, that money you earned in residency can be distributed tax-free, providing you with thousands more in retirement income. For instance, a graduate who converts $20,000 to a Roth IRA can potentially generate $5,000 more each year in income when they retire and benefit from $100,000 in tax savings. But before you do convert, it’s best to speak with a financial advisor to avoid any possible tax repercussions.
Partner with a planner who has a focus on your future
If you haven’t started contributing to a retirement account yet, don’t panic. Saving for the future can be overwhelming when you’re struggling with caring for a family, paying a mortgage and covering bills. However, a financial advisor who specializes in working with interns and residents can help you find room in your budget to save now so you don’t miss out on the benefits of an employer-matched retirement program. Contact the financial experts at Larson Financial Group today at 314-787-7399 to learn more about investment options for residents.