More than 2 years ago, I shared with you A Simple Step-wise Approach to Retirement Savings, a post which I hoped to offer residents in training an easy tried-and-true method to start building a nest egg. Well, 2 years is a long time. Today I want to revisit these steps and incorporate a few things I've learned along the way...
Step 1 - Get the Match!
This step remains unchanged. If your employer offers an employer-sponsored retirement plan such as a 401k or 403b AND matches contributions, then you should do everything in your power to contribute the amount to get the maximal match.
Example, if you make $50,000/yr and your employer matches up to 4% of your income in the 401k, you should put at least 4% x $50,000 = $2,000 into the 401k. Why? Because your employer will contribute an additional $2,000 into the account for you. That's an instantaneous 100% return on your investment!
Step 2 - Max out the IRA (ROTH Recommended)
Say you have met the employer matching limit for your 401k/403b, the next step should be to contribute to your Individual Retirement Account (IRA). It's called an individual retirement account because you (the individual) has control over managing your own investments. The best part about being a resident and getting paid like a Walmart employee is that you will likely qualify for a ROTH IRA. The benefits of a ROTH IRA are plentiful - be sure to check out my previous posts HERE and HERE. In 2017, the IRS has set the IRA contribution limit at $5,500.
Step 3 - Max out the 401k/403b
Say you've contributed enough to get the match from your employer and maxed out your IRA, you now have several options to invest more of your money. I recommend returning to your 401k/403b account and contribute as much as you can. Currently the IRS allows up to $18,000 in tax-deductible individual contributions per year to an employer sponsored plan.
STEP 4 - Start a "Stealth IRA" (HSA)
The Health Savings Account (HSA) has been called the "Stealth IRA" for good reasons. I've talked about it before, see Health Savings Account (HSA): Your Secret Retirement Plan and Health Savings Account (HSA) - Revisited. The caveat here is that if you or your family utilizes lots of healthcare services, it may be better to stick to a traditional low deductible health plan. But if you are young and healthy, like majority of residents out there, the "Stealth IRA" is worthy of your consideration. Currently the IRS allows $3,400 in tax-deductible contributions for individuals or $6,750 for a family.
Step 5 - Contribute to a 457
If your residency program is hosted by a nonprofit organization, you may have access to a 457 plan. The best way to think of a 457 is to consider it an extra 401k/403b plan. Similar to a 401k/403b, contributions to a 457 plan are tax deductible. For more information, check out my previous post - Why I Started a 457 Plan. The best part? The 457 adds an additional $18,000/year to the limit of totally legal tax-deductible contributions.
Step 6 - Execute a Mega BackDoor Roth IRA
This step can get slightly complex so I would refer you to my previous post Mega Backdoor Roth IRA Without a High Income? Yes I did! for more details. But the basic idea is that in addition to the $18,000 limit, individuals can contribute up to an additional $36,000 to their employer sponsored 401k/403b plans (if allowed) and roll that money into their Roth IRA for long term tax-free growth. Not all employers offer this great benefit. But if yours does, it could mean a significant boost to your nest egg.
There you go, 6 steps to maximizing your retirement savings in residency. If you complete all 6 steps, you would have put away $80,900 toward your retirement. While I doubt most of us will have $80,900 to invest in any given year (average resident salary is currently $57,200), it could be fun to challenge yourself and see how many steps you can get thru. For more tax-advantaged investment options, you may consider starting your own small business. But we shall leave that can of worms unopened until a later time.
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