Informed Perspectives

Why are Roth IRAs uniquely beneficial to physicians?

Roth IRA’s represent a powerful, lucrative savings vehicle, particularly for residents, fellows, or practicing physicians.

Why are Roth IRAs uniquely beneficial to physicians?

Roth IRA’s represent a powerful, lucrative savings vehicle, particularly for residents, fellows, or practicing physicians.

“Compound interest is the 8th wonder of the world. Those who understand it, earn it. Those who don’t, pay it.” Albert Einstein 

Einstein was undoubtedly one of history's most celebrated brainiacs. However, it doesn’t require a genius to understand the “8th wonder of the world” he was referring to. “Compound interest,” at its simplest, occurs when your money, if left to sit, increases exponentially over time. The key to understanding the concept is the word “compound.” 

Let’s imagine if this “wonder” were allowed to accumulate tax-free for decades, then provide tax-free returns upon retirement, while offering the owner total flexibility as to when they, and any potential inheritors, get to enjoy those returns? Thanks to the Roth IRA - a financial vehicle created by the 1998 Taxpayer Relief Act to encourage people to save early - you don’t have to imagine! 

Why Wait? 

Consider a physician in training starting a Roth IRA at age 25, maxing out annual contributions, earning a modest 7% ROI. By the age of 65, these contributions could be worth over $1,400,000 - A first-class, tax-free retirement cushion by any measure. Conversely, had they waited until they were 35, the accumulated value could drop to under $700,000. 

That may be true. Equally true, is that your residency will fly by, and you’ll soon be making plenty of money. If you’re thinking, “If only I had the cash to get started,” we understand, and, we’re here for you.

Why You Have To Start Soon. 

Q: “That sounds like a sales pitch. What’s the urgency to start a Roth IRA?” 

A: Because soon enough, you’ll be earning too much, and the Roth IRA ship may have sailed.

  • Roth IRA contributions have income maximums, which soon enough, you’ll exceed, thus making you ineligible to contribute to a Roth. If you earn too much (which you will) the Roth IRA may no longer be available to you. 
  • Rarely if ever can the fact that “you don’t earn enough” be to your advantage. If started early, Roth IRA’s are the exception to that rule. The earlier in life that you begin your Roth IRA journey, the greater compounding potential you have. 
  • It’s simple logic. Put cash in a Roth IRA now into a well managed portfolio, sit back, and watch your lemons become tax-free lemonade that sweetens with age.

Roth IRA Highlights

A Roth IRA carries many benefits. Here are just a few reasons physicians love Roth IRAs: 

  • The contributions to a Roth IRA are non-deductible. However, the gains are tax-free. 
  • Distributions are tax-free for clients over 59 ½ years, with an account at least 5 years old. 
  • There are no minimum distribution requirements or age. Other IRA’s and 401(k)’s require distributions after reaching age 72. Roth IRA’s do not. They can continue to accumulate tax-free. 
  • Depending on the inheritor, Roth IRA’s retain many of the same benefits.
Other Benefits 

Roth IRA’s are there to benefit everyone. However, Roth IRAs carry unique tax benefits that should be of particular interest to physicians: 

Tax diversification 
  • Roth IRA’s, combined with 401(k)s, 403(b)s and other plans, allow physicians to vary the taxability of retirement income streams, optimizing tax options, and strengthening their control of their marginal tax bracket. Physicians whose tax bracket has not gone down significantly in retirement find this particularly beneficial. 
  • If the last decade has taught us anything, it is that Congress reserves the right to move the tax goalposts whenever they see fit. When this happens, Roth IRA’s unique tax characteristics give physicians greater control in regard to how legislative changes impact their financial future. 
  • See our Infographic: Tax Diversification for more information. 
When $1,000 isn’t $1,000 

It’s difficult to understate the value of having an account subject to zero tax. Imagine a physician needs income or capital in retirement. When considering from where to pull those funds, the first question is what are 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? Because taxes, of course. For example...

The following table illustrates the withdrawal amount needed to net $1,000 after-tax: 

In simple terms, this means that anyone in the 35% tax bracket with a $1,000,000 Roth IRA would need over $1,500,000 in a 401(k) to have the same purchasing power after taxes in retirement. 

Roth IRA balance of:

When setting income expectations, conventional wisdom suggests that withdrawal rates in the 3-4% range of the overall balance may be a good place to start. Poorly managed tax optimization can create withdrawal rates that may be unsustainable for a physician’s lifetime. Moreover, inflation rates may put a physician in the position of possibly outlasting their portfolio. To address this risk, smart physicians combine Roth IRA’s and other strategies to maximize tax flexibility and reduce the strain those taxes can have on the long-term success of their overall portfolio. 

What should you do now? 

In terms of financial planning, Roth IRA’s represent a powerful, lucrative savings vehicle, particularly for residents, fellows, or practicing physicians. Regardless of your status, there are many ways to make a Roth IRA work for you. Our job is to find them, and find them we will. To learn more about how you can use a Roth IRA to your advantage, contact us now to discuss your unique circumstances, and begin your journey towards future financial peace of mind. 

General Disclaimer

The information provided herein was prepared for educational purposes only and is not a solicitation to buy or sell any security or insurance product, nor an offer to provide investment advice. All examples are hypothetical and for illustrative purposes only. Nothing contained herein should be construed as legal or tax advice and is not intended to replace the advice of a qualified tax advisor or legal professional. The information contained herein may have been compiled from third-party sources we believe to be reliable but cannot guarantee its accuracy or completeness.

Forme Financial is an SEC-registered investment adviser. Additional information about Forme Financial, including its services and fees, is available online at

Past Specific Recommendations

This communication contains past specific securities recommendations for illustrative purpose only.  Forme Financial makes no assurances, nor should it be assumed, that recommendations made in the future will be profitable or will equal the performance of the securities included in this presentation. Due to various factors including changing market conditions, such recommendations may no longer be appropriate; nor should any past recommendation be taken as personalized investment advice. You may request from us free of charge a list of all securities recommendation made within the immediately preceding period of at least one year accompanied by the following disclosures: (1) the name of each security recommended; (2) the date and nature of each recommendation; (3) the market price of the security recommended at the time; (4) the price at which the recommendation was to be acted upon; (5) the market price of each such security as of the most recent practicable date. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Any presentation of the performance of such past specific securities recommendation does not reflect the deduction of an investment management fee, or any transaction costs or custodial charges, the incurrence of which would have the effect of decreasing indicated historical performance results.  It should not be assumed that your account performance of the volatility of securities held in your account will of will correspond directly to the referenced past securities recommendations.

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