How to maximize your Roth savings as a resident or fellow

Do I earn enough as a resident?

You’re only “resident poor” for so long. Roth IRA’s have income maximums and let’s be real, you’ll be making more money soon. Soon you’ll exceed the income limits and will not be able to contribute to a Roth. Make lemonade from lemons. Put cash in a Roth now and watch it grow. You’ll never be taxed on it1. Established in 1998, Congress wanted to encourage people to save early. Take them up on the favorable terms of that offer! 

Roth IRA’s make a compelling case on the surface to earn a prominent part in your future plans, however, there are other often overlooked benefits that are particularly useful to physicians:

Tax diversification

Roth IRA’s, in conjunction with other qualified retirement plans, such as a 401(k) or 403(b), allow physicians to vary the taxability of the various streams of income they will utilize during retirement which provides for very powerful techniques in optimizing their taxes and managing their marginal tax bracket.  This is a substantial benefit to physicians who often find that their tax bracket has not gone down significantly in retirement.   

If the last decade has taught us anything, it is that Congress reserves the right to change the playing field whenever it has the ability to enact legislation.  Having accounts with varying taxability characteristics allows physicians to retain some measure of control and influence on how legislative changes impact their financial future. See our Infographic: Tax Diversification for more information.

When $1,000 isn’t $1,000

It is hard to understate just how big a benefit it is to have an account that is not taxed at all.  When a physician needs income or capital in retirement and is evaluating from where to pull those funds, it’s important to realize the tax consequences of that withdrawal.  Pulling $1,000 from a Roth IRA will net $1,000 after tax.  Pulling $1,000 from a 401(k) or Traditional IRA actually requires a larger withdrawal to net $1,000.  Why?  Taxes, of course.

Consider the following table illustrating the withdrawal needed to net $1,000 after-tax:

This also means that if you are in the 35% tax bracket and you have $1,000,000 in a Roth IRA, you would need over $1,500,000 in a 401(k) to have the same purchasing power after taxes in retirement.

Withdrawal Rates and Portfolio Longevity Risk

Conventional wisdom states that, depending on your assumptions, withdrawal rates in the 3-4% range of the overall portfolio balance may be where to start when setting income expectations.  Poorly managed tax optimization can take a withdrawal rate that may be sustainable for a physician’s lifetime and inflate it to a withdrawal rate that puts a physician in the position of possibly outlasting their portfolio.  Rather than leave this an unaddressed risk, financially successful physicians take advantage of Roth IRA’s and other strategies to maximize their tax flexibility and reduce the strain those taxes can have on the sustainability of the overall portfolio.‍‍

What should you do now?

Roth IRA’s are an indispensable part of planning for better financial outcomes for physicians. Whether you are a resident, fellow, or practicing physician, there are ways to make a Roth IRA work for you. Click one of the links below to learn more, to start today, or to contact us to discuss your specific circumstances.

Learn More

• Infographic: Traditional IRA vs. Roth IRA
• Infographic: Tax Diversification
• Infographic: Rule of 72
• Infographic: In for a Penny