Many money savvy young professionals utilize retirement accounts to invest money and minimize their yearly tax bill. While doing so is great for wealth creation, many people are unsure of what to do when they change jobs. Maybe you’ve wondered the same thing? Perhaps you’ve contributed 5-10% of your salary to your work retirement plan and now find yourself in the transition period about to work for a new employer. While you are excited about the new job, maybe you wonder what to do with the retirement account you had at your old job. Here are 5 options to consider:
Option 1: Leave it where it is. If you like the retirement plan options at your old job and the fees are low just let the money stay there and continue to grow. Unless your old employer demands that you move it, you can likely just the money you contributed in that same account. Although you can’t continue to contribute to that particular work-sponsored account if you no longer work there, you can let the money you already invested keep building over time. You can start withdrawing the money from that account at age 59.5 without incurring any early withdraw penalties but you must start withdrawing it by age 72. If you like the investment options offered by your employer, such as standard low-cost index mutual funds, then keeping the money where it is may be a good option.
Option 2: Roll it into your new job’s retirement plan. This may be a good option if you’re not particularly thrilled with the 401K options at your old employer and like the retirement plan investment options at your new job better. It may also be a good idea if you don’t want to keep track of multiple different 401Ks (or 403b’s) and would prefer to have them all at the same place. If you want to rollover the money into your new job’s retirement plan you simply contact the custodian or manager of the 401K (or 403b) plans at your old job and let them know you want to rollover the funds into the 401K (or 403b) at your new job. This a direct transfer. All you have to do is fill out some paperwork. (Some jobs may make you wait until you’ve been at the new job for a certain length of time before they let you do the rollover so contact your new job and ask). Since the money is going from one pre-tax retirement plan (at your old job) to another pre-tax retirement plan (at your new job) you won’t owe any taxes. You are simply combining 2 accounts into one. If you don’t want to do a direct transfer, you can also have the person in charge of your job’s 401K write you a check for the money and you can then deposit that check into your new job’s 401K yourself. (By law, you must make the deposit within 60 days.)
Option 3: Put the money in a traditional IRA. With this option, you call a brokerage firm like Fidelity, Vanguard, etc and let them know you want to open an individual retirement account (I.R.A) or tell them that you want to roll money from your old job’s retirement plan into your existing IRA. Putting the money into a traditional IRA may be an option for people who may not have good retirement plan options at their new job or want a bit more control over their investment plan options. The biggest advantage of opening an IRA this is that you now will have control of your retirement account and it won’t be controlled by your employer. With this control you can invest in whatever you want, whether that’s individual stocks or various mutual funds you find appealing. You also do not have pay any extra money in taxes when you transfer the funds. Through a self-directed IRA, which is a traditional IRA that you have control over, you can even invest in things like real estate, art, business partnerships, and precious metals. The downside of putting the money in a traditional IRA is that you will now be excluded from using the backdoor Roth IRA method which allows high income earners to put money into Roth IRA accounts each year.
Option 4: Convert it to a Roth IRA. Choosing to convert your work 401K (or 403b) into a Roth IRA is different from putting the money into a traditional IRA. Unlike a traditional IRA, which you contribute to with pre-tax dollars, you contribute to a Roth IRA with post-tax dollars. In other words, you contribute to a Roth IRA after taxes have already been taken out of your check and you never have to pay taxes on that money again. Why does this matter? Because with a Roth IRA you can invest in a way that allows your money to make even more money over time and you never have to pay taxes on the profits. Plus, you can take your contributions out of the Roth IRA at any time without any penalties which means it can serve as an extra emergency fund. In order to convert the money in your 401K (where you made contributions with pre-tax dollars) into a Roth IRA (which you contribute to with post tax dollars), you have to pay taxes on that money. For example, if you have $10,000 in your work 401K, and your marginal tax rate is 25%, then converting your 401K to a Roth IRA will increase the amount of taxes you owe by $10,000 x .25 = $2,500. This may seem like a lot of money now, but when you take the money out in retirement you may be paying an even higher amount in taxes since the overall amount in the amount will have grown over time. Before you decide what to do, see how much money you have in your 401K and calculate the taxes you’d have to pay if you converted it to a Roth IRA. If you can handle the increase in taxes, then converting it to a Roth IRA may be worth it.
Option 5: Cash it out. Technically speaking, you can cash out your 401K at your old job and have them write you a check for you to spend on whatever you want. This may be something to consider if you need the money to buy a home, pay off debt, or use for some other reason. While it may be nice to get an influx of cash, understand that the amount you get may be much less than you think. Since you did not have to pay taxes on money that went into the 401K, if you decide to cash it out, you will have to pay taxes on that money. Plus, if you are under age 55, you will also incur a 10% early withdrawal penalty. For example, if you have $15,000 in your work 401K and you want to cash it out, realize you will not get a $15,000 check. If your marginal tax rate is say 22% and you are under age 55, then you will only get a check for around $10,000 (only 2/3 of the money you had in the account) once you account for taxes and the early withdrawal penalty.
My point? You have 5 options of what to do with your 401K (or 403b) when you change jobs. In order to avoid paying a lot in taxes, some people tend to leave the money where it is or roll it into their new job’s 401K. If they can afford the taxes, then they may try to convert it to a Roth IRA to save themselves money in taxes later in life. Other options are to put it into a traditional IRA or cash it out. The choice is yours.
Dispelling Myths about Building Wealth Through Retirement Accounts
Many people should prioritize using retirement accounts to build wealth even if they don’t plan to stop working any time soon. The benefits of these accounts are too good to pass up. If you’re still skeptical of using retirement accounts, let me clarify some common critiques:
Critique #1: With retirement accounts you are limited to what you can invest in
Truth #1: Anyone can open an individual retirement account (IRA) and invest in almost anything they’d like. With a self-directed IRA, you can even invest in cryptocurrency and real estate. The few limitations that do exist are in work-sponsored retirement accounts because in those types of retirement accounts people can only invest in the funds that are offered through their employer. This means it is highly unlikely you’ll be able to buy shares of bitcoin through your work 401K or 403b. However, most jobs offer a variety of index funds and mutual funds that you can invest in.
Many jobs also offer target-date retirement funds (or lifecycle funds) which put your investing on autopilot. Index funds in these target date retirement funds offer a return of about 8-10% each year on your money which is more than you’d get from most actively managed mutual funds on wall street. My point? Most people have very good investment options inside of retirement accounts.
Critique #2: There’s a limit to how much you can invest
Truth #2: This is actually true. Contributing to retirement accounts offers various tax and asset protection benefits. It makes sense that the government would try to limit how much of those benefits each person can take advantage of each year. That being said, you can still invest thousands of dollars per year in these accounts before you hit the annual limit.
With your work-sponsored retirement accounts, you can contribute up to $19,000 per year. With a traditional IRA or Roth IRA, you can contribute another $6,000 per year. If you are self-employed or work as an independent contractor, you can open your own retirement account and put up to 20% of your income (up to a max of $58,000) per year. Some people even have access to another pre-tax retirement account called a 457b that allows them to contribute even more money. My point? Although there is a limit to how much you can invest in retirement accounts, that yearly limit is quite high and most people have access to more than one type of retirement account.
Critique #3: You can’t take the money out when you want to
Truth #3: The purpose of retirement accounts is to invest money for retirement. The government gives you tax and asset protection benefits to do so. If you take the money out of the account before you retire there is a penalty. So no, you can’t investment money in retirement accounts, make a profit, then withdraw the money to take a fancy international vacation or buy a new car. The money must be used for retirement. That being said, the government understands that there are many reasons you may need the money you invested before retirement. In fact, there are a list of qualified expenses for which you can withdraw money from retirement accounts.
For example, if you are over the age of 59.5, have unreimbursed health care expenses over a certain amount, want to buy your first home, need the money for education expenses, or get disabled, you can withdraw a certain amount from your retirement account. If you want to use the money for another reason you can also “borrow” from your 401K. When you borrow from your 401K you can withdraw money from the account (up to $100,000 or 50% of the amount you have invested, whichever is less) but you have to pay it back within 5 years with interest. My point? Retirement accounts must be used for retirement but there are a list of reasons for which you can withdraw money from these accounts sooner without any penalty. If you want to use the money for something else, you can borrow money from this account as long as you pay the money back within the repayment period.
Critique #4: You can’t use the money if you retire early
Truth #4: This is not true. Many people have the desire to invest as much as they can as early as they can. They want to build wealth faster and retire at an early age. However, if they retire before age 59.5, they wonder how they will get access to their retirement money without having to pay a penalty. As mentioned above, there are lots of exceptions to the retirement account withdrawal rule like buying your first home or paying back high health care expenses.
If you can’t find an early withdrawal exception that applies to you, you can use the substantially equal periodic payment (S.E.P.P.) exemption. With this exemption, you can use IRS formulas to take out an equal amount of money from your retirement account each year based on the number of years they estimate you have left to live. You must take out the same amount for at least 5 years or until you turn age 59.5, whichever is longer. My point? The government realizes you may want to retire early (before age 59.5) so it created an exemption to allow you take out money from your retirement account for this purpose.
What do you think? Will you use retirement accounts to build wealth?
Want to invest and build wealth sooner? Use Retirement Accounts
In the last few years there has been increased interest in investing. People from all over the world have downloaded apps like Robinhood to purchase stock in various companies. Some have even used the app to put money in alternative investments like cryptocurrency. Although this desire to build wealth is well-intentioned, there may be a better way to reach this goal: Retirement accounts.
Before you roll your eyes and write me off, hear me out (or I guess read me out). Retirement accounts aren’t just for middle aged and older adults who want to stop working in the next few years. Retirement accounts are useful for everyone. Although the original purpose was to help people invest money to use when they reached their 60s and 70s, retirement accounts can be extremely useful to you now, even in your 20s and 30s. The benefits you get by using retirement accounts can help you build wealth much more efficiently. You should consider using retirement accounts to invest money and become financially independent for the following reasons:
Using retirement accounts allows you to keep more of your profits– since you pay much less in taxes. Apps like Robinhood are considered taxable accounts. The money you use to invest is taxed, the profits you make are taxed, and the revenue you get after you cash out the investment is taxed. That’s 3 types of taxes! When you invest through retirement accounts you don’t pay nearly as much in taxes. Some retirement accounts like a 401K or 403b are tax-deferred. This means you delay paying any taxes until decades later when you take the money out. With other retirement accounts like a Roth IRA, you invest with money you earned and never have to pay taxes on the profit you make. Plus, you can take out the money you contributed at any time tax-free. My point? Using retirement accounts helps you save money because you pay less in taxes.
Using retirement accounts may help you get extra “free” money to invest – since you may get a contribution “match” from your job. Another perk of using retirement accounts to build wealth is that you usually get to invest more money. Retirement accounts are usually offered through your employer in the form of a 401K, 403b, or 457. As part of a benefits package at your job, your employer may offer a retirement account “match.” This is when the job gives you extra money, in addition to your salary, to invest in a retirement account. The amount they give you usually matches the percentage of your salary you choose to invest in retirement accounts. If you invest 5% of your salary, they will “match” your contribution with an additional 5% to put in your retirement account. With this match your job is giving you extra free money to invest with. Why not take advantage of this offer?
Using retirement accounts can lower your taxable income – which can decrease your student loan payments. Most of the retirement accounts offered through your job (like a 401K, 403b, or 457) are tax deferred. Since the money is tax-deferred, you don’t have to pay taxes on it until you take the money out years later. This means the more money you contribute to retirement accounts, the less money you owe when you file your taxes each year. It could even increase the amount of your tax refund. Since contributing to retirement accounts lowers your taxable income, it also lowers any income-based repayments that are tied to your income – like your federal student loans. The more money you contribute to tax-deferred retirement accounts, the lower your taxable income and the lower your federal student loan payments. Although interest will still accrue on your loans, this may be a good benefit for anyone currently enrolled in a student loan forgiveness program.
Using retirement accounts can help you invest on a more consistent basis – since contributions are connected to your paycheck. If you are a person seeking to invest more money to build your net worth and eventually have enough money to quit your job, pay for your kids’ college, pay off your home, or travel the world, you have to invest. You can’t merely save your way to wealth. Your money needs to make more money and grow. The only thing better than investing your money is doing so on a consistent basis. Year after year, month after month, make investing a habit. Make it routine. Make it automatic. One way to do that is to take advantage of an investment account that is already set up to help you make consistent investments – your work 401K. For some people it may be called a 403b or a 457 or perhaps they are self-employed and have an IRA or solo 401K. Either way, you have retirement accounts at your disposable and these accounts are set up to help you invest on consistent basis every time you get paid.
Using retirement accounts gives you more asset protection – since money in these accounts is protected from your creditors. Sometimes unexpected things happen in life. If for some reason you were sued, owed someone a lot of money, or happen to file for bankruptcy, your creditors could garnish your assets and take any money you have in banking accounts or in a taxable account like Robinhood. That is not the case when it comes to most retirement accounts. Retirement accounts offered through your job (like a 401K or 403b) offer much more asset protection because they are protected under the Employee Retirement Income Security Act (ERISA). This means your creditors cannot take the money you have in your work 401K to pay off your debts. If you are named in a lawsuit, the person suing you cannot go after the money you have in your 401K.
My point? As you start investing, prioritize using retirement accounts. When you use retirement accounts you get better asset protection and more money from your employer. You also pay less in taxes, keep more of your profits, and can invest on a more consistent basis.
The 5 Index Funds in my Investment Portfolio
Unlike many investors, I don’t buy or trade individual stocks. I explain in detail why I’ve bypassed this new trend in a previous blog, but the main reason I don’t buy or trade individual stocks is because the price of stocks changes too quickly. It’s hard to predict if a stock will go up or down. Since stock prices are so volatile (and change so often) there is an increased risk that I might lose money. My goal is to invest in a way that increases the chance I’ll make a profit but has a low risk that I may lose money. The main way I maximize profit and minimize risk is by investing in index funds.
Index funds are groups of many different stocks that follow a certain index. For example, one index fund may follow the S & P 500 index and purchase hundreds of stocks from American companies. Another index fund may be filled with thousands of stocks from all around the world. There are many different choices. When you purchase an index fund you are buying a fund that has purchased a percentage of all the stocks in that index. By purchasing a percentage of hundreds or thousands of stocks, you have better diversification in your investment portfolio with much lower risk of losing money.
There are many different choices of index funds to choose from. I have accounts at Vanguard and Fidelity (which are two of many different types of brokerage firms). Through these companies I have chosen 5 main index funds:
1. Total Stock Market Index Fund I invest in this fund at Vanguard through my employer-sponsored retirement account at work (called a 403b which is very similar to a 401K). I also invest in this fund through my Roth IRA at Fidelity. This index fund has a portion of over 3,600 stocks from small, medium, and large sized American companies. With this fund, I own a portion of all the stocks in the United States. The greatest percentage of money in this fund is invested in Apple, Microsoft, Amazon, Facebook, Google, and Tesla. It also has much smaller percentages of thousands of other companies. Altogether, this fund has made over 20% in profit over the last year and 15% in profit over the last 5 years.
2. Total International Stock Market Index I also invest in this fund at Vanguard through my 403b and through my Roth IRA at Fidelity. Unlike the previous index fund, this particular fund has over 7,000 stocks from all over the world. 38% of these stocks are from European countries. 24% of these stocks are from emerging markets in developing countries. 26% are from countries in the pacific and about 6% are from countries in North America. This fund has made over 11% in profit over the last 5 years.
3. Total Bond Market Index Fund I invest in this fund at Vanguard through my work 403b. This fund buys almost all of the bonds in the United States. Since these are bonds, there is much less risk that I will lose money but because of this extra caution, the returns aren’t as great. This fund has over 10,000 bonds with 63% of them being US Government bonds. It has made a return of about 5% over the last 5 years.
4. Total International Bond Market Index Fund I invest in this fund at Vanguard through my work 403b. This fund buys bonds from all around the world. This fund has over 6,000 bonds with over 57% of them from Europe. It has made a return of about 4% annually over the last 5 years.
5. Real Estate Index Fund I invest in this fund through my Roth IRA at Fidelity. This fund is filled with lots of smaller real estate funds that are full of many smaller real estate deals. I chose to invest in this fund in an effort to add some real estate investments to my portfolio. Over the last 5 years, this fund has had an average annual profit of 5%..
Overall, about 20% of my money is in real estate index funds, 5% in bond index funds, and 75% is in stock index funds. What is the makeup of your investment portfolio? Are you using index funds?
I invest in a 403b AND a Roth IRA, here's why:
As a young professional who is trying to build wealth, I invest money. Although there are a myriad of different investment accounts and strategies, I invest in index mutual funds through my employer-sponsored retirement plan and through my own Roth IRA. Yes, I have both types of accounts. Let me tell you why.
I invest in my employer-sponsored retirement plan (which is a 403b, that is very similar to a 401K) because:
1. I get a match from my employer to invest in their plan. Back in the day, many jobs offered their employees a “pension” when they retired. This pension would guarantee an employee a certain percentage of their salary even after they retired and stopped working. Although these pension plans were great for the employees, they were extremely expensive for many companies. Thus, most jobs today no longer offer pensions. They instead, want to encourage their employees to save for their own retirement and give them an incentive (in the form of a retirement match) to do so. Through this retirement match, your employer will match what you contribute to your retirement plan. My employer, similar to many other employers, offers a retirement match if I contribute to my work-sponsored retirement account (aka a 403b). Since I don’t want to forgo free money, I contribute to my work retirement plan to get their “match.”
2. It saves me money in taxes. As an unmarried physician with no children, I pay quite a bit in taxes. Although I don’t mind contributing money to ensure that our government can run smoothly and fund things like education, infrastructure, and national defense, there are certain incentives in the tax code that can help reduce the amount of taxes I’m expected to pay. One of the incentives is contributing to a retirement plan. By contributing money to my employer-sponsored retirement plan, I am able to defer paying taxes on the money I contribute which decreases my tax rate. I also have the option of contributing to my work retirement plan via a 403b Roth, in which I can choose to pay taxes now and shield the income and profits from taxes when I withdraw the money later. So, whether I choose the pre-tax 403b (to help me save money in taxes now) or the 403b Roth (to help me save money in taxes later), either way I get to save money in taxes. Thus, either option is a win-win.
3. It decreases my student loan payments. Like many college graduates, I have student loans. In fact, the amount of student loans I acquired from medical school is so high that I had to consolidate my loans and enroll into an income-based repayment plan to make the payments more affordable. This plan, called REPAYE (revised-pay-as-you-earn), caps my student loan payments at 10% of my discretionary income which makes my monthly student loan payments much more affordable. As a resident physician who works for a non-profit hospital, I am also considered a “public servant.” Through a program called Public Service Loan Forgiveness (PSLF), after making 10 years of student loan payments, public servants who work for non-profit companies can get the remaining balance of their student loans forgiven, tax-free. Since the student loan payments I need to make are based on my taxable income, the more I lower my taxable income, the less money I have to pay in my student loans. One way I lower my taxable income, and thus lower my monthly student payment, is by contributing to my work-sponsored retirement account.
In addition to my work 403b, I also invest in a Roth IRA because:
1. I can make other types of investments that I can’t make in my employer retirement plan. Unlike my 403b or 401K, a Roth IRA is not set up through my employer. Because it is not connected to my employer, I have more options in the way I want to invest my money. Instead of being limited to certain mutual funds or index funds, I can expand my options. Through my Roth IRA, I invest in REITs (real estate investment trusts). By investing in REITs, I am able to make money via real estate, since these REITs invest in a variety of real estate deals and syndications. Adding real estate to my investments helps diversify my portfolio in a way that can make me even more money overall.
2. It gives me more flexibility whenever I want to withdraw the money One of the things I really like about the Roth IRA, is that because I contribute to it with “after-tax” dollars, there are fewer restrictions on when I can take the money out of the account. Although it is supposed to stay in the account until I retire, I can withdraw my contributions at any time, with no penalty (as long as I keep all the earnings/profits in the account). Thus, if I contributed $5,000 and made $500 in profits, I can take out the $5,000 I contributed at any time as long as the $500 I made in profit stays in the account. This means that if I ever run in to an emergency or decide to use some of the money to pay off student loans or purchase a home, I can withdraw some of the money from this account when I need. A Roth IRA is like a retirement account that I can technically use as a back-up emergency fund if I absolutely needed to.
3. I don’t have to pay taxes on the money in retirement when I take it out. Unlike my employer-sponsored retirement plan, I contributed to this Roth account with after-tax dollars. This means, when I withdraw the money in retirement, I don’t have to pay taxes on the earnings I made or the money I contributed. Because of this fact, a Roth IRA helps me keep more money! For example, if I retire with $1,000,000 in a pre-tax 401K and $1,000,000 in a Roth IRA. I will have to pay 20-30% in taxes on the money in the pre-tax 401K. So even though there is $1 million in the account, I will have to pay $200,000-$300,000 in taxes on that money. With a Roth IRA, I will owe no taxes and will get to keep it all.
4. I can leave all the money in my Roth IRA to my children without them having to pay taxes on it. Another thing I love about the Roth IRA is that I can give it away to my [future] kids. Instead of trying to leave them a separate inheritance, I can simply leave my Roth IRA to my kids and their kids. Doing so, will help the money keep building overtime and allow me to set future generations of my family up for financial success.
My point? Both my employer-sponsored retirement plan and my Roth IRA have advantages. Instead of choosing one over the other, I contribute to both accounts to maximize the benefits. Tell me, do you contribute to your work-sponsored retirement plan AND a Roth IRA?
Which retirement account is best for you?
Whether you are starting a new job like me or extending the contract at your current place of employment, part of the process may involve signing up for a retirement account. Most people have heard of a 401K, but you may have other options available to you such as a 403b or Roth IRA. Understanding the pros and cons of each account will help you better determine which one is best for you.
What is a 403b? A 403b is a type of employer-sponsored retirement plan offered to people who work at nonprofit organizations. It functions very similarly to a 401K, which is a type of employer-sponsored retirement plan offered to people who work at for-profit organizations.
Pros of a 403b (or 401K)?
1. You can lower your taxes. As of 2024, you can contribute up to $23,000 a year in this account, pre-tax. That means that you don’t have to pay yearly income taxes on the portion of your paycheck you allocate to retirement. For high-income earners with tax rate near 30%, contributing to this 403b plan can save them over $6,000 a year in taxes.
2. You may get a “match” from your employer. This is when the company places an equal amount of their money into your account to “match” the contribution you made. If you contribute $6,000, they will “match” your contribution with an additional $6,000, so at the end of the year you will have a total of $12,000 in the account.
3. You may lower your monthly student loan payment. The income-driven federal student loan repayment plans are based on a percentage of your discretionary income. Your discretionary income is your “taxable” income minus 150% to 225% of the poverty line (the minimum amount of money you need to cover living expenses). When you contribute to employer-sponsored plans, like a 403b or 401K, you lower your taxable income. Lowering your taxable income, lowers your discretionary income, which then lowers your monthly student loan payment. Although interest will still accrue on your loans, lowering your monthly payment is beneficial if you are enrolled in a student loan forgiveness program like public service loan forgiveness.
Cons of a 403b (or 401K)?
1. You are limited in the type of investments you can make. When you contribute to a 403b (or 401K), you are simply putting money into an account. In order for the money to grow over time, you must actually invest the money in that account. Employer-sponsored plans can be limited in the types of investment options they allow you to make. Most employer-sponsored plans allow you to invest in index mutual funds, which purchase a variety of stocks or bonds in different industries. However, they usually do not allow you to make other types of investments in things like real estate.
2. You will have to pay taxes on the money you withdraw in retirement. Since you contribute to this account with “pre-tax” dollars, you did not pay taxes on the money before it went into the account. Because you didn’t pay taxes at that time, you will have to pay taxes when you take the money out of the account in retirement. Since the money in these accounts will have been invested, you will ideally have profits/earnings in the account as well. The profit you made will also be taxed.
What is a Roth IRA? A Roth IRA is a type of individual retirement account (IRA). Unlike a 403b or 401K, this account does not go through your employer. You can contribute to a Roth IRA (or a traditional IRA) with any type of earned income you get from your main job or any side job.
Pros of a Roth IRA?
1. You don’t have to pay taxes on the profit in retirement. You contribute to a Roth IRA account with post-tax dollars. Since you’ve already paid income taxes on the money before you contributed to the account, you will not have to pay taxes on the money (or any profits you made) when you take it out in retirement.
2. You have more investment options. Unlike employer-sponsored plans, you can make a variety of different investments through a Roth IRA. You can invest in index mutual funds, buy individual stocks, or even invest in real estate.
3. You can withdraw money from the account easier. Although the goal is to leave money in the account until you retire, if you need to take the money out earlier (to cover the down payment on your home or pay off your student loans), it is easier to do that from a Roth IRA without incurring as many penalties or being charged extra fees.
Cons of a Roth IRA?
1. You can’t put as much money into the account each year. Unlike a 403b or 401k that allow you to contribute up to $23,000 a year, you can only put $7,000 a year into a Roth IRA. Since the contribution limit is so low, there’s a good chance you’ll max out this account and need to use other types of retirement accounts after you hit the contribution limit.
2. You won’t save as much money in taxes in the short-term. Since you put money into a Roth IRA with post-tax dollars, you will pay income taxes on this money before you contribute to the account. This raises your tax bill in the short-term and could decrease the amount of cash in your pocket after each paycheck.
Which account am I contributing to?
Both, eventually. For me, saving for retirement is about investing in different accounts during different phases of my life to maximize the benefits of each account. My goal is to have a substantial amount of money in both Roth and non-Roth retirement accounts. Contributing to my employer sponsored account will allow me to save more money for retirement since I can contribute more money in those accounts each year. Contributing to a Roth IRA will allow me to make some real estate investments and also give me the flexibility to take money out of the account, tax-free.
Since I’m a first-year resident physician, I plan to start off putting about 10% of my income into the 403b. Even though I don’t get a “match” through my job, the tax savings and lower student loan payments that come with this account will leave more cash in my pocket each month. Any additional earned income I make from passion projects, blogging, or working extra hospital shifts, I’ll put into a Roth IRA. Once, I finish residency training, I’ll convert some of the money I saved in my 403b to a Roth IRA so I can have a decent chuck of money in both accounts that will collect interest and make me a profit over time.
Tell me, what is your plan for retirement? Which account do you plan to use?