Retirement Planning for Doctors

How to Maximize Retirement Contributions and Secure Your Future

Author

Victor Ani
August 08, 2023

Summary

1. Start Early. The earlier you start saving for retirement, the more time your investments have to grow.

2. If your employer offers a matching contribution to your retirement plan, contribute enough income to maximize the match.

3. As your income grows, increase your retirement contributions or set a percentage (20% or grater) to do this automatically.

4. At age 50, take advantage of catch-up contributions to contribute additional amounts beyond the regular annual limits.

As a doctor, planning for retirement is crucial in securing financial security and a livable future. Yes, you’ll pocket significant monthly cash - the medical profession pays arguably the highest in the United States and most other countries. But if you don’t plan early for your retirement, there are chances you might return to square one when you retire.

Warren Buffett has famously described compound interest as the 8th wonder of the world. To effectively plan for retirement, you must allow compounding to work in your favor. Today, we will explore the critical aspects of retirement planning for doctors and how to maximize your contributions to enjoy your retirement years.

How Much Should Doctors Save For Retirement?

Ideally, 20% of your monthly income should go towards investments and savings. That might sound like a large number, but it is possible with careful planning and budgeting, no matter how much you earn.

Please know there’s no one-size-fits-all amount for retirement savings. Your income, financial responsibilities, desired retirement lifestyle, and daily comfort level will determine how much you save/invest each month. Remember, if you have questions, there is no harm in consulting a financial planner familiar with the intracacies of being a doctor.

Types of Retirement Contribution Plans For Doctors

#1. Employer-Sponsored (401K, 403b, 457b, Solo 401K)

With employer-sponsored retirement contribution plans, you decide how much you want to contribute to your retirement account, and your employer makes the contribution from your income on your behalf.

These plans share some similarities - a contribution limit of $22,500 or 100% gross income (whichever is lesser) and pre-tax contributions. However, here are some notable peculiarities you should be aware of.

Most private employers offer the traditional 401k plan, while government agencies and non-profits often offer the 403b and 457b plans. Some government agencies and the military also provide access to the Thrift Savings Program (TSP).

The Solo 401k, or Individual 401k, is for independent contractors or self-employed doctors; hence, they make the contributions themselves. For 2023, $66,000 is the maximum annual contribution, and those aged 50 or older are allowed an additional $7,500 per year for catch-up contributions.

Often employer-sponsored retirement plans offer matching contributions up to a predetermined amount/percentage of your salary. Taking full advantage of these offers is in your best interest as it effectively doubles your monthly donations. You should contribute at least the minimum amount to obtain the employer match. Lastly, all employer-sponsored plans impose a 10% penalty if you withdraw your contribution before retirement, except the 457b, which allows you to withdraw from your account, penalty-free for medical expenses.

#2. Individual Retirement Accounts (IRA)

Individual Retirement Accounts (IRAs) allow you to contribute and invest your contributions on your terms. For 2023, the maximum annual contribution is $6,500 ($7,500 for those aged 50 or older). There are two types of IRAs - traditional and Roth, each with different tax implications.

● Traditional IRA

The traditional IRA allows you to make pre-tax contributions while reducing taxable income—contributions grow tax-free. Starting at age 59 1/2, you are eligible but are not obligated to withdraw your money penalty-free. Distributions before the age of 59 1/2 will result in being taxed at your regular income tax rate plus an added 10% for a federal penalty unless you qualify for an exception. Qualified (i.e., after age 59 1/2) withdrawals are taxable at the income tax rate at the time of your distribution.

● Roth IRA

Roth IRAs provide added tax benefits that differ from other plans. Instead of depositing pre-tax income, after-tax income is deposited and grows tax-free. You can withdraw your contributions at any time without penalty. The earnings, however, can only be removed after 59 1/2 years old to avoid a tax penalty. There are notable tax advantages of Roth IRAs; however, Doctors typically exceed the income limits.

● Backdoor Roth IRAs

Due to the IRS income limits, the average doctor cannot contribute to a Roth IRA directly but use the backdoor Roth IRA strategy to gain access to this vehicle.

The idea is simple and summarized in these steps:

  1. Contribute to a traditional IRA.

  2. Convert the IRA into a Roth IRA. Be sure to follow the IRS conversion rules to avoid complications.

  3. Repeat the process annually if/when necessary.

Conclusion

Proper knowledge and strategy will allow you to maximize your retirement contributions effectively. Being proactive, starting early, and staying consistent with your contributions, will allow you to build a solid financial foundation and enjoy a comfortable retirement.

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