Understanding Retirement Accounts
With all the types of investments for retirement, it can be daunting to choose a plan. Let’s explore the pros and cons of different types of retirement accounts.
The Pros and Cons of Retirement Plans
With contribution limits up to $20,500 (or $27,000 if you’re 50 or older), it’s easy to start saving for the future with a 401(k). The money in your plan is tax-free until you choose to withdraw it. However, you must be 59½ or older to withdraw money without penalty and are required to begin withdrawing at age 72. A 401(k) also has limited investment options and may take several years to own your employer’s matching contributions.
An IRA (Individual Retirement Arrangement) is a tax-favored savings plan that offers many of the same benefits as a 401(k), such as reducing your taxable income and allowing your money to grow tax-free until you withdraw it. However, there are some key differences between the two, including lower contribution limits, more investment options, and additional restrictions on tax deductions. If you’re looking for an alternative retirement savings option, a traditional IRA may be worth considering. With this plan, you get to choose from a variety of financial-services companies and investment options, including stocks or bonds and mutual funds.
With a traditional IRA, you pay no income tax on your contributions, but you pay tax when you withdraw the money. With a Roth IRA, it’s the opposite: you pay taxes on the money that you contribute, but you can withdraw money tax-free at retirement, so every dollar in your account goes into your pocket. Choosing a Roth or traditional IRA depends on your individual circumstances. One factor to consider is whether you expect to be taxed at a higher or lower rate when you retire. Many people expect a lower tax rate after retirement because their income is lower. If you fall under that category, you might be better off with a traditional IRA. If not, you could pay less income tax overall with a Roth IRA.
SEP IRAs offer the same benefits as traditional IRAs, with the added bonus of being able to contribute more money each year. For example, an employer can contribute up to 25% of your income up to a maximum of $61,000 in 2022. Self-employed people can contribute up to 25% of their net income up to the same limit. Employees are always immediately 100% vested in employer contributions with SEP IRAs. Unlike with a 401(k), employees are immediately 100% vested in employer contributions, which could be seen as an advantage to you, but a disadvantage if your employer is trying to maximize loyalty. SEP IRAs give you employees to save more than you would with a traditional IRA. They’re also easier and cheaper to operate than a 401(k) plan.
A simple IRA, or a Savings Incentive Match Plan for Employees, is a retirement plan that can provide employer and employee contributions. With this type of plan, employers must either match employee contributions up to 3% of their salary, or contribute 2% of their salary regardless of any contribution from the employee. Employees are always fully vested, so you can keep your employer’s contributions even if you leave the company. With a simple IRA, you can contribute up to $14,000 from your salary or $17,000 if you’re over age 50. However, simple IRA contribution limits are lower than SEP IRAs and 401(k) plans.
Solo 401(k) plans are specifically designed to help businesses with no employees. In this type of retirement plan, you contribute as the employer and employee, meaning you can increase your savings more than with other retirement plans, such as SEP IRAs. As an employee, you can contribute up to 100% of self-employment income, with a maximum of $20,500 or $27,000 if you’re age 50 or over. You can also put on your employer hat and chip in up to an additional 25% of your business’s income. Depending on your income level, the solo 401(k)’s contribution formula can help you save more than other retirement plans. However, solo 401(k) plans have limited investment options and are typically more complex to set up than IRAs.
Physician Retirement Planning Tips
As a physician, retirement planning isn’t a luxury—it’s a necessity. Before you retire, you not only need to think about your personal future, but you also need to consider the impact of retirement on your practice. Here are some tips to help you plan for a successful retirement:
- Consider your investment timeline: It’s important to think about how long you plan to put money away. The earlier you start saving, the greater your investment potential.
- Think about your retirement years: You should also make a rough estimation of how long you’ll be in retirement. That way, you can save accordingly to sustain your lifestyle with your retirement funds.
- Make a plan for your practice: As you plan to leave your practice, create a succession plan that includes how you’ll transfer your patients to another provider and who you’ll hand over administrative duties and responsibilities.
Life as a medical professional is fulfilling, but it eventually comes to an end. Learn how to exit responsibly with our retirement checklist.
Take the Stress Out of Physician Retirement Planning
Saving money for retirement can be a daunting task, especially for medical professionals. That’s where Physicians Resource Services comes in—we help you understand your retirement planning options and make the process less stressful for you and your family. Contact us today to learn more about our financial planning services.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.
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