Doctors have plenty of options when it comes to retirement savings. Not only do physicians have higher average incomes, but they also have access to several investment opportunities and account types that most working people can’t utilize. This principle comes into play when investment vehicles require large up-front expenses or high minimal buy-ins. Physicians and many other professionals who can afford to park some of their retirement cash in income-producing assets, like real estate, stand to earn outsize returns in the long run.
In addition to Roth IRAs, working doctors can leverage the power of 401(k), 457b, HSA, and other plans that allow tax-deferred treatment of invested sums. Besides standard retirement accounts, many physicians look to real estate, small businesses, special medical plans, and municipal bonds as ways to either minimize taxes or maximize current returns on capital. Here are relevant details about the top ways today’s medical professionals build up a solid retirement nest egg.
Roth IRAs & Real Estate
Roth IRAs are unique in that they use after-tax earnings instead of pre-tax money. While you won’t get a break by adding to them now, you gain two major things later. First, it’s possible to shield up to $6,500 per year in a Roth or $7,500 if you’ve reached your 50th birthday. Keep in mind that even the interest is not taxed, no matter how long the plan exists before withdrawals are made. Second, at the time of withdrawal, taxes are not imposed on the amounts taken out. While anyone can use a Roth to save for long-term goals, a physician should consider using the arrangements for non-taxation features on growth and withdrawals.
Investing in real estate is a time-honored tradition among healthcare professionals and other high-income earners. The reasons are varied, but the primary among them is the fact that real estate is a straightforward technique for accumulating wealth and building a stable financial lifestyle. However, it’s imperative to make wise decisions long before retiring. The amount you can add to a real estate-oriented portfolio, how soon you can add it, and other factors play into the effectiveness of the strategy.
Real estate investments offer steady cash flows and, if they are part of a self-directed Roth IRA, can generate tax-free growth for decades. However, everyone should review a comprehensive guide that explains how Roth IRAs work before deciding to set up an SDIRA that includes alternative assets like real estate and precious metals, both of which are not allowed in traditional Roths and other IRAs. Additionally, be sure to refer to the guide to learn about making withdrawals from a Roth, the advantages of the strategy, and other related points.
HSAs (Health Savings Accounts)
Health savings accounts, HSAs, are the result of legislation that was aimed at giving people a way to save cash for medical expenses without worrying about taxation. To date, they are the only triple-advantaged financial instruments available to individual citizens. Physicians who max out their other opportunities can use HSAs as a kind of backdoor method for protecting some of their wealth for the long haul. That’s because an HSA uses pre-tax contributions.
For investors, the upshot is that anyone can shelter $3,850 annually in such a fund. Note that the growth is also free of taxation. Then, when users pull the money out to pay for qualified medical costs, there is zero taxation on those amounts as well. Hence, the term triple-tax-free. Healthcare workers with high annual wages can take advantage of HSAs by contributing the max and using the funds to cover medical expenses whenever necessary.
For decades, those with higher-than-average incomes have used bonds issued by municipalities to get major tax benefits. There are currently thousands of offerings in the niche that incur no federal, state, or local taxation for the holders. For investors who max out their 401(k)s and IRAs, municipal bonds are one of the simplest and most effective ways to shelter as little or as much income as needed. The one catch is that the up-front minimum is usually $1,000. While interest rates tend to be relatively low compared to other kinds of bonds, investors include them in portfolios to achieve diversification and a solid, tax-free return on their capital.
Most taxpayers have never even heard of 457b’s, but there’s a reason for that. The plans are only offered by governmental and non-profit organizations. They operate pretty much the same ways as standard 401(k)’s but without the 10% penalty on early withdrawals. What’s the advantage for medical professionals? Many docs work for non-profit corporations or government agencies, which gives them a chance to contribute the $22,500 max to both their employer’s 401(k) and 457b, thus instantly doubling the annual contribution to $45,000. Note that individuals who are over the age of 50 can add even more money to the pot, meaning their total yearly limit is $60,000.
Born and raised in the UK, Will went into medicine late (31) after a career in journalism. He’s into football (soccer), learned Spanish after 5 years in Spain, and has had his work published all over the web. Read more.