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Welcome to the latest episode of the Physician Cents Podcast, where we explore complex financial topics tailored specifically for physicians. Whether you're a medical student, resident, fellow, or attending physician, you're going to find valuable insights that can help you increase your financial IQ, further your financial journey, and improve your overall well-being. Hosted by Chad Chubb and Tyler Olson, let’s dive in!
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Welcome to our comprehensive guide on Roth IRAs for physicians during their transition years. As medical professionals, you often find yourselves navigating complex financial landscapes, especially when moving from residency or fellowship into attending positions. This blog post aims to simplify Roth IRAs, making it easier for us to make informed decisions that can significantly impact our financial futures.
A Roth IRA is a type of individual retirement account that offers significant tax benefits. Unlike traditional IRAs, contributions to a Roth IRA are made with after-tax dollars, and the money grows tax-free. When we withdraw funds in retirement, we do so without paying taxes on either the contributions or the earnings. This allows for significant long-term growth potential, free from the burden of taxes during retirement.
The tax-free growth and withdrawals associated with Roth IRAs are particularly beneficial for physicians due to our high-income potential. Additionally, Roth IRAs do not require minimum distributions (RMDs), giving us more control over our retirement funds.
During residency and fellowship, your income is lower, placing us in a lower tax bracket. This makes it more cost-effective to contribute to a Roth IRA since we're taxed at a lower rate when we make the contributions. It’s an excellent way to build wealth early in our careers.
The annual contribution limit for Roth IRAs is $7,000. There are specific eligibility criteria based on income. For single filers, the phase-out range starts at $146,000, and for married filers, it starts at $230,000. (2024 Limits)
You can open a Roth IRA at multiple financial institutions, including Vanguard, Fidelity, and Schwab. Each platform offers different features and benefits, so choosing the right one depends on our individual needs and preferences.
As physicians, our income levels and filing statuses can complicate our ability to contribute to a Roth IRA. For example, if we’re married and file separately, our ability to contribute directly to a Roth IRA is significantly reduced if our income exceeds $10,000.
Managing student loans while contributing to a Roth IRA can be tricky. For those of us pursuing Public Service Loan Forgiveness (PSLF), pre-tax contributions to plans like a 403(b) may be more beneficial as they reduce our adjusted gross income, thereby lowering our monthly student loan payments.
The transition from residency or fellowship to an attending position brings a substantial increase in income. This sudden change can affect our ability to contribute to a Roth IRA directly due to income thresholds. Awareness and planning are crucial to avoid pitfalls during this period.
Income threshold planning is essential during transition years. We need to be mindful of the timing of our contributions to ensure we don’t exceed income limits, which would make us ineligible for direct Roth IRA contributions.
If we contribute to a Roth IRA when we’re ineligible, we can recharacterize the contribution, essentially moving it to a traditional IRA and then converting it back to a Roth. This process involves contacting our investment platform and filling out specific forms to correct the issue.
Consider a physician who transitions from a fellowship making $70,000 annually to an attending position with a salary over $150,000. If they contribute to a Roth IRA early in the year based on their fellowship income, they could face complications once their salary increases. Recharacterizing the contribution is the proper way to address this issue.
For those of us who exceed the income limits for direct Roth IRA contributions, a Backdoor Roth IRA is a viable option. This involves making contributions to a traditional IRA and then converting those funds to a Roth IRA. While this process can be complex, it allows high-income earners to take advantage of Roth IRA benefits.
Pre-tax contributions to plans like a 403(b) or 401(k) can be beneficial, especially if our employers offer matching contributions. These contributions lower our taxable income, which can impact our student loan repayment plans, particularly if we’re pursuing PSLF.
One common mistake is not recognizing how our filing status can impact our eligibility to contribute to a Roth IRA. For instance, married physicians who file separately face strict income limits. Proper planning and tax advice can help avoid these mistakes.
It’s easy to misjudge our income, especially during transition years. We should regularly review our income and adjust contributions accordingly to stay within the allowable limits.
The most significant benefit of Roth IRAs is the ability to withdraw funds tax-free in retirement. This advantage can lead to substantial tax savings, providing us with more spending power when we need it the most.
Roth IRAs add flexibility to our retirement plans. They can be used strategically in conjunction with other retirement accounts to optimize our tax situations. Additionally, Roth IRAs are beneficial for legacy planning, as they can be passed on to heirs tax-free.
Starting early with our investments can set the foundation for a secure financial future. Even small contributions can grow substantially over time, thanks to the power of compound interest.
There are many tools and apps available to help manage Roth IRAs effectively. Platforms like Vanguard, Fidelity, and Schwab offer useful features for tracking contributions and investment performance.
Navigating Roth IRAs as physicians, especially during transition years, can be complex. However, with proper planning and awareness, we can maximize this powerful investment tool’s benefits. From tax-free growth and withdrawals to strategic planning in retirement, Roth IRAs offer immense advantages. Start early, stay informed, and always seek professional advice when needed.
Together, we can build a financially secure future and focus on what we do best—providing excellent care to our patients.
The best of the best list is a paid sponsorship, but these are professionals/companies that Tyler and Chad collaborate with within their own practices or have been vetted to earn a spot this list. By supporting our sponsors, it allows Chad & Tyler to dedicate more time to you and the Physician Cents community. If you ever have a question (or not a great experience, which we don’t expect!) about a sponsor, please let us know. We call it the “best of the best” for a reason, and we will maintain that standard for our listeners & viewers.
This information is for general purposes only. This information is not intended to be a substitute for specific professional financial, tax, or legal advice, as individual circumstances vary. Please see a financial professional, CPA, and/or an attorney in regards to your own individual situation.
Wealthkeel’s Advisory Services and Financial Planning offered through Vicus Capital, Inc., a Federally Registered Investment Advisor. WealthKeel LLC, 615 Channelside Drive, Suite 207, Tampa, FL 33602 -- 267.590.9533.
Olson Consulting LLC, Offering Advisory Services and Financial Planning, is a State-Registered Investment Advisor.
A podcast designed specifically for physicians, offering a breakdown of complex financial topics to help you develop your financial IQ, further your financial journey, and improve your well-being. Whether you're a medical student, resident, fellow, or attending physician, you're sure to learn something new that will benefit your journey.
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