Last year, I prioritized contributing to my 403b. Nowadays, I use the income from some of my side gigs and other jobs to contribute to a Roth IRA as well. If you are considering doing the same thing (by contributing to your employer-sponsored retirement plan and your own Roth IRA), here are a few steps you can follow:
Step 1: Have a plan for all your retirement investing. My investment portfolio is overwhelmingly filled with stocks. As someone who is [relatively] young with plenty of work years ahead of me, I’m decades away from retirement. Since I won’t retire for a while, I can include a high percentage of stocks and take more risks with my investments. By taking more risk, I increase my chances of making a profit on my money. Even if I “lose” money intermittently by taking so much risk, I have plenty of years to make up the losses, if they occur.
The percentage of stocks you have in your investment portfolio may be different. There are various investment allocations for people of all ages and stages of life with various risk tolerances. Some younger people choose to only invest in stocks, some choose to invest in stocks and bonds, and others like to have some real estate, commodities, or other alternative options. I’ve decided on a retirement investment allocation that fits me best: 75% in stocks, 15% in real estate, and 10% in bonds.
Step 2: Determine the type and percentage of investments to add to the Roth IRA. Now that I know what percentage of my retirement portfolio I want to allocate to each category, my next step is to determine which investments and how much of each investment I need to add to my Roth. Because I already have some of my investments in my main job’s retirement plan, I now need to add the remaining investments to my Roth IRA. When adding the remaining investments to my Roth IRA, I must make sure that the total value of all of my retirement investments remains at my desired allocation of 75% stocks, 15% real estate, and 10% bonds.
In my main job’s retirement account, I am invested in a target retirement index fund that invests my money in 90% stocks and 10% bonds. This means I need to add real estate index funds to my Roth IRA and also invest in some stocks and bonds in my Roth IRA to maintain my desired investment percentage. (Side note, although I plan to invest in actual real estate through the purchase of apartment buildings and multifamily homes, I like my retirement real estate investments to be in REITs aka Real Estate Investment Trusts - which are like giant real estate index funds that invest in many different properties). Also, keep in mind that since Roth IRA investments are made with money you already paid taxes on and never have to pay taxes on again, it’s often wise to make sure that you use this Roth account to make investments in things that pay dividends so you can avoid paying taxes on the money you make from those investments.
Step 3: Have the money automatically withdrawn from your account each month. Once I know how much of each investment I want to have in my Roth IRA, I just need to make sure I actually place the money into my Roth account. Although some people like to contribute the max allotment of $6,000 per year at one time to get their money invested sooner rather than later, I invest it in small pieces each month. Doing it in small pieces instead of all at once has two benefits for me.
First, it gives me more flexibility so that I can decrease the allotment one month and make up for it the next month if I need to. Secondly, contributing periodically each month gives me a greater chance of buying stocks at a “discount.” (The prices of stocks and index funds fluctuates. If I buy all of them at one time with by investing one large sum of money in my Roth IRA at once, then I buy all the stocks (or index funds) at the same price. However, if I invest a little each month then I increase my chances of buying stocks (or index funds) when they may be a lower price. Although there is also a chance I could buy the stocks (or index funds) at a higher price, doing it a little bit at a time has been shown to save people more money overall. This is known as “dollar cost averaging”. Each person is different, but I prefer to have the money automatically withdrawn from my account each month and invested into my Roth IRA. (When my salary increases, I’ll likely have the $6,000 taken out over 3 months instead of over the entire year)
Step 4: Adjust the investment percentages periodically. The prices of stocks, bonds, and REITs can fluctuate. Sometimes the prices change by only a small amount and thus stay at around the same price. Other times the prices of the investments can change by a lot and remain at this new level for a few months or even years. For example, when the coronavirus pandemic hit, the price of many stocks decreased and stayed low for a couple months before they started to come back up. When these fluctuations occur, they can change the balance of my retirement investments.
If stocks (or index funds) decrease then that means the value of the stocks in my portfolio have decreased, which means that instead of having 75% of my money in stocks this percentage may decrease to around 70%. In order to get back to my target of 75% I will need to buy even more stocks in the future (increase the percentage of new money I have going towards stocks) to make up this difference. Although different people have different preferences for how often they plan to adjust their investments, I plan to do it once a year.
Tell me, do you have a Roth IRA? If so, how are you investing it?
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?