You spent years in medical school preparing to become a physician, so you’re no stranger to setting long-term goals. This skill will help you as you begin planning for retirement. The sooner you start investing in your future, the more secure it’s likely to be when you get there.
Still, even for someone who has mastered human anatomy, biology, physiology, and the other sciences, retirement planning can be a challenge. The various types of accounts each have advantages and disadvantages that can affect growth rate, taxes, and other factors. How you invest your funds depends on your goals, whether you want a hefty nest egg, asset protection, or something else.
In this blog, we’ll explain the most common retirement accounts and break them down to make it easier to determine which options are best for you.
1. Employer-Sponsored Plans
Of all the possible retirement plans, employer-sponsored accounts are likely the most well-known because they’re not industry-specific. If your employer offers this type of investing, it’s a simple way to build your retirement by choosing a contribution amount to be taken directly from your paycheck.
This percentage is automatically invested for you, but you have a say in where the money is allocated. Stocks and bonds, real estate investment trusts (REITs), mutual funds, and target date index funds are popular retirement accounts.
Employers may offer an employer match to contribute to these plans, which include 401(k), 403(b), and 457(b) accounts. As of 2024, the annual contribution limit is $23,000.
Summary of Employer-Sponsored Plans
What’s the difference between the plans we just mentioned? Each one is designed for a distinct purpose, and you likely fall into one of the categories, so you won’t need all of the plans at once. Here’s a quick summary to explain:
- 401(k) plans are for employees of the typical corporate business, replacing the obsolete pension. They work as a form of asset protection, as well, since they are protected under federal law from malpractice suits and other creditor claims. (For more information on asset protection, see this article by OJM Group.)
- 403(b) plans are for employees of charitable entity tax-exempt organizations, such as public schools, cooperative hospital services, and churches. These plans only offer mutual funds and annuities and have lower thresholds of asset protection. However, 403(b) plans have a unique perk of catch-up contributions for long-term (15+ years) employees.
- 457 plans can be government or nonprofit-sponsored. Government plans are structured similar to a 401(k) plan, but unlike the 401(k), there is no 10% withdrawal penalty if you take the money out early (before age 59 ½). Non-governmental 457 plans follow many of the same rules, but the funds aren’t safe from employer creditors. If your employer goes bankrupt or otherwise has financial issues, your money may be at risk.
Although you can’t control the type of plans your employer offers, you can become informed as to the risks and benefits. This information assists you as you establish a portfolio that fills in the gaps.
2. Individual Retirement Accounts (IRAs)
Employer-sponsored plans aren’t mandatory, and they don’t always provide the end goal you’re seeking. Having an individual retirement plan (IRA) is a wise way to add more to your retirement account.
An IRA has a lower contribution limit than a 401(k), maxing out at $7,000 in 2024. However, with compound growth working in your favor, even this small amount can have a significant effect over the years.
IRAs are available in traditional and Backdoor Roth versions. The traditional path has many challenges for physicians, which your financial advisor can explain in detail to you. In general, not every physician qualifies for an IRA deduction, as this is limited based on your modified adjusted gross income.
These retirement accounts are still advantageous for their tax-deferred growth. Your financial planner can provide the pros and cons of traditional and Backdoor Roth IRAs to aid you as you decide which is best for you.
3. Self-Employed/Side Gig Investments
In addition to IRAs, if you don’t have an employer, you can maximize your retirement planning with accounts structured for self-employed or side gig workers. If you file a 1099 or own a business, you may qualify for a solo 401(k) or a defined benefit plan.
Solo 401(k)s are similar to the employer-sponsored option. However, as the self-employed person contributing, you can add employer and employee amounts, lowering your taxable income. These plans may offer a Roth option for the employee contributions.
Defined benefit plans kick in when you start making more money. They work like a pension, providing higher contribution limits and a steady stream of income when you retire. The downside is that these plans have significant regulations and reporting requirements, making them time-consuming to maintain. They’re ideal for those who make six figures regularly and prefer a customizable retirement plan.
Conclusion
Retirement accounts come in various designs, and there are many more versions under each of these three umbrellas. However, the key to understanding where your investment journey will take you is to know whether you’re content with employer-sponsored accounts or whether individual and self-employed investments are better for your situation.