No matter how old you are or where you may be in your career, it’s never too early to begin thinking about and saving for your retirement.
Most people are familiar with the basic types of retirement savings accounts, but retirement plans for physicians offered through a hospital can be much different than those offered in other professions. For doctors thinking about retirement, it’s essential to understand how your doctor retirement benefits might require a different strategy.
Here’s a quick breakdown of some retirement accounts that can benefit doctors later in life.
403(b)
A 403(b) account is offered by non-profit entities, meaning that some hospitals and certain state and local government positions may fall into this category.
In many ways, you will find that this type of retirement savings account is similar to the better-known 401(k).
Physicians will make contributions to this account directly from payroll deductions and will see relatively high rates of contribution limits ($22,500 for 2023). If you are over the age of 50, you can also make catch-up contributions of $7,500 during the 2023 tax year.
The good news is that your earnings from a 403(b) plan are tax-deferred until withdrawal if you have a traditional 403(b). Roth 403(b)s may not be available from all non-profit employers, but if you do have access to one, your withdrawals will be tax-free after age 59 1/2.
Benefits:
Low administrative costs
Comes in both traditional and Roth at some employers
Catch-up contributions of $7,500 per year after age 50
Additional catchup contributions of $3,000 per year ($15,000 total) for long service terms of 15 years
401(k)
A 401(k) is a tax-advantaged retirement savings account sponsored by your employer that gives you the freedom to choose where and how your money is invested. You will be presented with a number of investment methods, typically a variety of mutual funds.
Oftentimes, your employer will offer a match for what you invest based on a percentage of your salary and how much you personally contribute to the 401(k). You will find that there is quite a bit of crossover between the 401(k) and the 403(b). The major difference is that a 401(k) is offered by for-profit hospitals and other organizations as opposed to non-profits.
Like the 403(b), this type of retirement savings account comes with a $22,500 pre-tax limit in 2023 with a $7,500 catch-up amount for individuals over age 50. Contributions cannot go over $66,000 per year ($73,500 for those over age 50) when combining pre-tax contributions, company match, and after-tax contributions.
You may opt for a traditional 401(k) where funds are taxed upon withdrawal or a Roth 401(k) where funds are taxed upon the initial investment.
Benefits:
Can take loans against 401(k)
Freedom to select your own investment vehicle to some extent
Employer matching
Ability to take withdrawals starting at age 55 for those who leave the workforce
457(b)
Doctors who would like to save enough to retire early may want to consider using a 457(b) if their non-profit employer offers this type of account. Oftentimes, you will resort to this retirement savings account once you have maxed out contributions to a 403(b) but still want to save more for retirement. These accounts have the same pre-tax contribution limits as a 403(b), at $22,500 annually.
The major benefit of choosing a 457(b) account is that you can access your funds earlier. As soon as you leave your position at the company, you can make withdrawals – regardless of your age. If you think that you may be in a position to retire early, then this is the retirement savings that you will want on your side.
The only downsides to a 457(b) relate to what to do if you leave your position. This account tends to be more challenging to transfer if you switch employers. You may have to liquidate the account if you leave your position.
Benefits:
No 10% penalty for early withdrawals
May be able to take out a loan against the balance
Can be rolled into a Traditional IRA
401(a)
This is a lesser-known type of retirement savings account, but many hospitals will put it on the table for physicians. If you have this type of account available to you, contributions to it are less flexible than others like the 401(k).
Your employer will set mandatory contribution rules where they contribute a set percentage into your account. They may require employees to contribute a percentage of their pay as well, though this depends on the employer. No matter what the situation may be, these rules are fixed until the employer dictates otherwise.
Unlike many of the other retirement savings accounts utilized by doctors, you will not have a Roth option. While you do have flexibility when it comes to selecting investments, you will not be able to withdraw money until you reach the age of 59 1/2, regardless of whether you decide to leave your position early.
Benefits:
Reduces your taxes on current income
May be funded entirely by the employer or require contributions from both
Control over how the money will be invested
Withdrawal possible via a rollover or a lump-sum withdrawal
Health Savings Account
A health savings account (better known as an HSA) is another effective means of saving for the future for doctors. These are designed to be used to cover healthcare costs, but they can be great retirement savings accounts as well – especially since individuals often face additional health expenses as they age.
The benefits of HSAs are that you can make contributions based on pre-tax dollars, your earnings grow without taxes, and paying for medical expenses with this type of account is tax-free. You can also invest the money in this account in a similar manner to a retirement account.
In the upcoming tax year, HSA contribution limits have increased as they have with many of the other types of retirement savings accounts. If you intend to use the HSA for yourself only, you can contribute $3,850 per year or $7,750 for family coverage. Doctors over the age of 55 can make a catch-up contribution of $1,000.
Not to mention, employers can make contributions too – and these do not count toward your income for the year.
Benefits:
Money compounds tax-free for future use
Reduces taxes in retirement
Ability to write a check to pay yourself back for medical expenses in retirement
As a word of caution, HSAs are only available if you have an HSA qualified health insurance plan.
Plan Your Retirement with Confidence
No matter what retirement savings accounts are offered to you, you need the right support and expertise to know how to take advantage of them. Covenant Wealth Advisors specializes in retirement planning and advice for physicians. Work with our experts to get on track to retire early and on your own terms!
Wondering if you’re on track to retire early? Download the Financial Planning Kit for Doctors Considering Early Retirement – a complete toolkit to help you gauge how far your retirement nest egg will go and the feasibility of early retirement.
The Early Retirement Planning Kit includes:
Your Cheat Sheet to Early Retirement
The Physician’s Roadmap to Planning Early Retirement
Checklist For Early Retirement & Retirement
Retirement Lifestyle Goals Worksheet
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Author: Mark Fonville, CFP®
Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors specializing in helping individuals aged 50 plus plan, invest, and enjoy retirement without the stress of money.
Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.
Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.