Which Physician Retirement Account is Best For You?
Preparing for retirement and planning a strategy to achieve a consistent income flow are essential tasks that should be undertaken as soon as possible. In fact, many experts agree that preparing for your retirement should be started as early as your 20s. As you consider what investment options are available, here are some key highlights of different types of physician retirement accounts.
401(k) or 403(b)
Traditional retirement accounts are retirement plans offered by employers; 401(k) accounts are offered by private, for-profit companies, while 403(b) accounts are offered by non-profit organizations and government employers. These accounts allow you to contribute a portion of your income before taxes are withdrawn. Once you retire and start receiving distributions, they will be taxed as earned income. There are also annual contribution limits and penalties for withdrawing funds before you turn age 59.5. However, there are several key benefits you can expect with these types of plans:
- The ability to lower your taxes – Contributions to your 401(k) or 403(b) account are not taxed, which means your overall annual income is decreased by the contribution amount. For example, if you earn $75,000 for the year and contribute $5,000 to your 401(k), then you are taxed on only $70,000.
- Match from your employer – Most employers typically offer a certain match to your contributions. It is entirely at the employer’s discretion, but most employer matches range anywhere from 2% to 10%. For example, if you contribute 3% of your paycheck to a 401(k) and your employer matches up to 5%, they will contribute 3% to match your contribution.
- The ability to lower your monthly student loan payment – If you lower your take-home pay, you can also lower your monthly student loan payments. The options depend on what type of loan you have, but the basic concept is that if you lower your taxable income by contributing to a 401(k) or 403(b), the loan payments are calculated using that figure instead of your overall income amount.
Roth IRAs offer you more flexibility and control, plus you can enjoy several benefits, such as:
- Withdrawals are tax-free in retirement – With a Roth IRA, you do not get a pre-tax deduction for contributions like you do with a 401(k) or 403(b), but the contributions can be withdrawn tax-free once you reach retirement.
- More investment options – 401(k) and 403(b) accounts offered by your employer generally are a mix of mutual funds and exchange-traded funds chosen by the plan’s administrator. Conversely, you or your financial advisor oversee what you invest in with a Roth IRA. This means you have more flexibility to diversify your investments across a wider range of choices.
- Greater flexibility for withdrawals – With a Roth IRA, you can withdraw money without facing a penalty for an early (before retirement) distribution. However, any withdrawals on earnings from your invested funds could be subject to income taxes, depending on certain conditions.
The key difference between Roth and traditional IRAs is the timing of their tax advantages. With traditional IRAs, you deduct contributions now and pay taxes on withdrawals later; with Roth IRAs, you pay taxes on contributions now and get tax-free withdrawals later.
The withdrawal requirements present another difference between traditional and Roth IRAs. With traditional IRAs, you have to start taking required minimum distributions when you reach age 72. Conversely, you do not ever have to take minimum distributions from a Roth IRA.
In summary, there are pros and cons to every type of physician retirement account. Consider using a professional financial advisor to help you decide what investment choices make the most sense for your situation. For more information on how PlainsCapital Bank can help you plan your retirement income strategy, please visit the Investment Management section of our website.