Why are Roth IRAs uniquely beneficial to physicians?

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.