Money Minutes for Doctors #4 - The Roth IRA

Welcome to this month's edition of Money Minutes for Doctors where we take a detailed look at the advantages of the Roth IRA. The Roth is a often mentioned financial product but the understanding of its pearls goes a lot deeper than just the name...it is more than just a retirement account! It is our pleasure to welcome back Katherine Vessenes, JD, CFP®, RFC, Founder and President of MD Financial Advisors for another glimpse into the world of personal financial wellness for physicians and their families.

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About Ms. Vessenes:

Ms. Vessenes works with over 300 physicians and dentists from Hawaii to Cape Cod. Her firm uses a team of experts to provide comprehensive financial planning to help doctors build their wealth and protect their wealth while reducing taxes now and in the future. Katherine is a longtime advocate for ethics in the financial services industry; and has written three books on the subject of investment strategies. She has received many honors and awards including: numerous tributes from Medical Economics as a top advisor for doctors, multiple 5-Star Advisor Awards, honored as a Top Woman in Finance, in addition to being selected to be on the CFP® Board of Ethics. Katherine can be reached at: Katherine@mdfinancialadvisors.com or 952-388-6317. Her website: www.mdfinancialadvisors.com.

Quick Summary:

Learn how using these different retirement accounts can help save you tax payments now and in the future...

Even if you have a 401k/403 you are most likely still eligible for a Roth 401k/403b – ask HR! If your employer does not offer it and you have 1099 income you can set up an independent Roth IRA.

  • BOTH a 401k/403b and a Roth 401k/403b will help you accumulate funds for retirement.
  • BOTH a 401k/403b and a Roth 401k/403b have penalties that apply if you withdraw funds before the age of 59 ½. 
  • The total contribution is $18, 500 (with some exceptions) that can be 401K/ROTH 401k/or some combination of both

Contributing to your 401k/403 (max contribution $18,500 with some exceptions) leads to less taxable income and therefor overall lowers the taxes that you have to pay today. If you live in a High tax sate (CA, NY, MN) then likely want to prioritize the “pre-tax” bucket i.e. the 401k/403b as this will help you lower the taxes you currently pay. If your employer has matching contribution then employer’s contribution always goes to the 401k.

How much you contribute to any retirement vehicle is a function of your debt load (mortgage, student loans, credit card balances, etc), your emergency fund, your savings, where you are in your career path and many other factors.  This decision changes year to year and should always be made keeping in mind your employer’s match so you benefit from this “free money”

Things to know about your 401K/403B...

  • Don’t be surprised by the forced withdrawals (Required Minimal Distributions – RMD) invoked by the IRS at age 70.5 on the traditional 401k/403b accounts that do not apply to Roth 401k/403b accounts
  • The IRS has a formula individualized for each account holder that is based on your life expectancy that determines the amount of RMD
  • Penalties apply if you do not take RMD
  • Can often convert 401K/403B funds to a ROTH 401k/403B before you reach 70 ½ in an effort to work around RMD – this can be done with your financial advisor on a yearly basis to help mitigate tax payments and avoid RMD (ROTh 401k/403B).

Please note gifting 401K or ROTH 401k funds can be subject to state estate tax depending on the state on which you live in. 

Follow up from Money Minutes #3...
Q: If I were to have a “Side gig” and 1099 income, what liability does that open physicians up to ? 

  • Forensic Medicine – get an Errors and Omissions plicy (can be obtained privately)
  • Medical Director – usually the contracts call for your employer to cover medical malpractice insurance for you.  If not covered then take that into consideration when you are setting your fees.  Also note that obtaining your own medical malpractice insurances is a tax deductable expense
  • Education – MCAT teaching, lecturing etc. carries minimal to no liability and no additional insurance required.