What is a 401k and an IRA? What Doctors Need to Know About Retirement Savings

retirement savings for doctors

Key takeaways: 

  • The most important part of saving for retirement is starting as early as possible.
  • 401(k)s are employer-sponsored retirement accounts that are most beneficial when the employer matches a portion of the employee’s contribution.
  • IRA accounts are individual retirement accounts that allow more freedom to invest on your own terms.
  • Speak with an experienced financial advisor to create a retirement savings plan that is right for you.

Are you financially prepared for retirement? 

As a doctor with steady, sizable paychecks, it is easy to get comfortable spending your hard-earned money without thinking long-term. In our professions, we expect above average salaries but are not taught the importance of handling income effectively.

Retirement planning is a key aspect of preparing for your future financially that you may be uncertain or uneducated about. The options can be difficult to understand, so we have shared what you need to know about two of the most common retirement savings accounts — 401(k)s and IRAs.

Whether early in your career or just years away from hanging up your white coat, actively preparing for retirement now will help you reap the benefits of your years of hard work when it comes time. 

What is a 401(k)?

A 401(k) is an employer-sponsored retirement plan that allows you to commit a portion of each paycheck to your retirement savings, benefiting you by reducing your taxable income. Investment gains realized under this plan are not taxed until they are withdrawn.

What are my investment options for my 401(k)?

Investment options for 401(k)s can vary greatly based on the plan provider. Plans typically offer a mix of mutual funds and exchange-traded funds.

Is there an annual limit on 401(k) contributions?

There is an annual limit on 401(k) contributions, but it is worth noting that it is much higher than the limit on IRAs. 

Here are the annual limits for 2022:

  • $20,500 if under 50
  • $27,000 if over 50 — This includes a catch-up contribution allowance of $6,500.

What is a 401(k) employer match? 

Many employers offer a match to your contributions, typically a percentage of your contribution, up to a certain percentage of your salary. An employer match can be incredibly beneficial to your retirement savings. We recommend taking advantage of it if offered. 

The IRS has set annual limits for total contributions of individual contributions plus employer match. Those limits for 2022 are as follows:

  • $61,000 in total contributions if you are under age 50
  • $67,500 if you are age 50 or older, including the $6,500 catch-up contribution
  • 100% of your salary (if it is less than the dollar limit)

Though uncommon, some residency programs offer 401(k) matches. If you are offered this benefit early in your career, we encourage you to take advantage of it!

What is an IRA?

IRA stands for “individual retirement account.” This retirement option is not sponsored by an employer, meaning you are able to invest on your own terms. There are two main options for IRA investments, traditional and Roth.

With Traditional IRA accounts, contributions are tax deductible on both state and federal tax returns for the year the contributions are made, which means your distributions will be taxed at your income tax rate at the time of withdrawal.

Roth IRA contributions are not tax deductible but grow within the account tax-free, meaning you won’t pay income tax on interest, dividends, or capital gains as long as you follow the withdrawal rules.

Why should I invest in a Roth IRA rather than a traditional IRA? 

The main way the IRA account types differ is in how they are taxed, but it is generally recommended that those who expect to be in a lower tax bracket in retirement utilize traditional IRAs and those expecting to be in a higher tax bracket utilize Roth IRAs.

Doctors will generally realize greater benefit from Roth IRAs.

What are my investment options for a Roth IRA?

Roth IRA funds can be invested in a number of places, including mutual funds, stocks, bonds, exchange-traded funds, certificates of deposit, money market funds and even cryptocurrency.

Is there an annual limit for Roth IRA contributions? 

There is an annual limit for IRA contributions. In 2022, the IRS limits contributions across all IRA accounts to $6,000 if under 50 and up to $7,000 for those over 50. If you contribute to both a traditional and Roth IRA, your total contributions can not exceed these values.

What should I know about withdrawing from my Roth IRA? 

Withdrawals from your Roth IRA are permitted beginning at the age of 59 ½. Withdrawing before this age will incur 10% fees, but there are some exceptions to note:

  • Education: Your IRA can provide penalty-free funding for qualified education expenses for you, your spouse or your child. 
  • Health care: You can utilize your account to pay medical expenses not covered by insurance that are above a certain percentage of your adjusted gross income. These funds can also be used to pay health insurance premiums while unemployed.
  • Buying a home: First time homebuyers can withdraw up to $10,000 to help purchase their home.
  • Permanent disability: If you become “totally and permanently disabled,” you will be able to withdraw from your account for any purpose without incurring fees.

So, should doctors invest in a 401(k) or IRA?

The best option for retirement savings depends on your unique circumstances and current place of work. We outline our recommendations below.

If your employer offers a 401(k) match:

If your employer offers a match on any 401(k) contributions, take advantage of this! We recommend investing enough to receive the full company match as it is an almost guaranteed return on your money. 

After maxing out your employer contribution, we recommend moving next to your Roth IRA and maxing that out. If you still have more to contribute, circle back to your 401(k) and add any additional funds there. 

If your employer does not offer a match:

If your employer does not offer to match your 401(k) contributions, we recommend starting your investments with a Roth IRA because it allows you to have more control over your investments. After maxing out your IRA contributions, take advantage of the tax-deferral benefits of your company’s 401(k) plan if you still have money to invest. 

Final thoughts

Financial planning can be tricky with many options and complicated language, especially when it comes to retirement. 401(k) and IRA accounts are both great options to prepare for your future. 

An experienced financial or wealth advisor can help you decide which one is best for you. If you are looking for help, we’re happy to connect you with doctor-specific wealth advisors (for free!) who can help you achieve your long-term financial goals. Visit our Build Your Team page to get connected with a trusted professional.

No matter what option(s) you decide to go with, it is important that you start now. Delaying retirement savings can prevent you from retiring when you want to or cause you to play “catch up” in your later years.

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