Toward the end of residency, I realized I didn’t know a lot about how to manage money. I started looking for information. Like a lot of physicians, I found The White Coat Investor and read through the archives when I had spare time. I quickly learned that I had a lot to learn.
One of the first things I learned was a forehead slapping moment, although it arrived too late to be of much use.
What I learned was a 401(k) or 403(b) has no relation at all to an IRA. Funding the former does not prevent you from funding the latter. They have separate contribution limits. You can max out both. In my ignorance, I thought you could only contribute to the 403(b) and Roth IRA up to the 403(b) contribution limit – whatever you contributed to one account would limit what you could contribute to the other. (For example: if 403(b) contribution limit was $20,000 and I contributed $15,000, I thought I could only contribute $5,000 in my Roth IRA, even if the IRA max was $6,000.) Once, when filling out my taxes, I thought I overcontributed since I had maxed out my Roth IRA and came close to filling up my 403(b) at the same time. Basically, I thought I owed a tax penalty. I don’t know if I actually ended up paying a penalty or not (and I’m not motivated enough to go back through my old tax returns to check) but I did my best to do so!
I was in the dark about the difference between 401(k)s and IRAs while I was a dietitian and as a PGY-1/PGY-2 resident. During those years, I preferentially funded my Roth IRA and didn’t max out my 403(b), even when I could have. Extra dollars went into my taxable account, instead of a tax-advantaged account.
Since I now have a 403(b) and a 457(b), for ease I’m focusing on maxing them out and not worrying about funding a backdoor Roth IRA, at least for now.
In an effort to help myself understand the different kind of retirement accounts, I’m listing some here:
Traditional IRA. This stands for Individual Retirement Arrangement. (I thought it stood for Individual Retirement Account, but this says I’m wrong.) Anyone can have one of these. As long as you don’t make too much money, you can contribute dollars to this account and then essentially get those dollars deducted from your taxes. When you take the money out in retirement, you have to pay taxes on it. If you make too much money, you don’t get to deduct the dollars from your taxes. An IRA has a contribution limit that changes with inflation. I’ve never had a traditional IRA. Instead, I’ve had…
Roth IRA. Why Roth? Apparently Mr. Roth was a senator and he started this kind of retirement arrangement/account. With a Roth IRA, you put in your dollars (after you’ve paid taxes on them) and then when it’s time to take the money out, all the money is tax free. The other thing with a Roth IRA is, you can technically take the money out before retirement without a penalty. However, if your money has MADE money, you can’t take out the extra stuff. For example, if you contributed $10,000 to your Roth IRA and it grew to be $12,000, you could take out $10,000 but you’d have to leave in the $2,000 of growth until you reached the designated retirement age. A Roth IRA has the same contribution limit that a regular IRA has. Technically, you can’t contribute to a Roth IRA if you make too much money. There is, however, a workaround, called…
Backdoor Roth IRA. This is actually not its own thing, it is a combo of the above. You use it if you make too much money to contribute tax-advantaged dollars into a regular IRA or any dollars at all to a Roth IRA. It’s some kind of IRS/legal magic where your first put your post-tax money in the regular IRA, and then transfer it to a Roth IRA. If this is legal, why can’t you just contribute to a Roth IRA directly? I have no idea. Maybe so less people do it. I certainly haven’t. (Yet.)
401(k). If you work at a for-profit company, you probably have this. You get to put pre-tax dollars into a 401(k), meaning it reduces the amount of money you have to pay taxes on, so your tax bill is lower. The contribution limit for a 401(k) is higher than the contribution limit for an IRA. Sometimes, instead of using pre-tax dollars, you can choose to contribute to a Roth 401(k), where the money that goes in is after-tax (you don’t save on taxes immediately), but you don’t have to pay taxes on it later when you pull it out in retirement.
403(b). This is the same as a 401(k), but for non-profit companies. I’ve only worked for non-profits so I’ve only ever had access to 403(b)s. Can also be Roth.
457(b). This is a “deferred compensation plan.” It’s not offered all the time. Basically, you pretend that your employer is not paying you now, but instead is paying you when you stop working for them or retire. The money they are paying you later goes into the 457(b), and you pay taxes on it when take the money out. Again, this reduces the amount of money you have to pay taxes on (for now). This can also be a Roth. I have one of these. I think it’s for high earners, typically. The money you put into a 457(b) does not affect your contribution limits for a 401(k) or a 403(b). The scary thing is that if your employer goes bankrupt and loses all its money, it will also lose your 457(b) money, which would be sad.
401(a). This is also not offered all the time. It’s a retirement account for your employer to contribute to, but they can also mandate employee contributions. One of my employers provides this account. Employees can elect to contribute 3.5% or 5% of their wages, but you have to choose one of those options, and then my employer contributes an additional 6.5% or 8%. Does not affect contribution limits for other accounts.
A lot of different number and letter combinations! I work at an academic medical center, and for some reason that means I technically work for two different employers. Employer 1 offers a 403(b). Employer 2 offers a 403(b), 457(b), and 401(a). Even though I have two 403(b) accounts, the contribution limit applies to both of them, meaning I can’t max out both of them. For Employer 1, I max out my 403(b). I’ve decided to made half my contribution pre-tax (reduces my current tax burden, will be taxed later), and half my contribution Roth (no tax benefits now, won’t be taxed later). For Employer 2, I max out my 457(b), and contribute 5% to the 401(a) in order to get the 8% employer contribution. Employer 2 is government-adjacent, so I’m banking (somewhat literally!) on the fact that it shouldn’t go bankrupt. If it does, I’ll probably have worse problems then worrying about my retirement savings.
What I am NOT doing yet is contributing to my IRA. If I wanted to, I could do a Backdoor Roth IRA by first putting money into a traditional IRA and then transferring it to my Roth IRA. However, I’m meeting my retirement savings target and frankly feel a little lazy about it. There’s also no doubt an anxiety component as well as I’ve never attempted a Roth IRA before, but lots of posts on The White Coat Investor say it’s not hard to do. As well as an inertia component because I’d have to open a traditional IRA although it probably takes five minutes.
That’s a future me problem.
One other account that I’ve not mentioned is a taxable account, or a brokerage account. This is not a retirement account per se, but it’s a place you can put your money if you’ve maxed out your retirement accounts and still have money left over to invest. We actually are contributing $350 to a brokerage account every month. I should be putting that into a Backdoor Roth IRA, but, again, that’s going to be something I worry about another day.
The White Coat Investor and most other reasonable personal finance blogs for physicians recommend saving 20% of gross income for retirement. (People who aren’t physicians usually do fine with saving 15% because they start the process earlier and benefit from more years of compounding.) If you are aiming to retire early, you need to increase that percentage.
With my current job, I am technically employed by two different organizations, the result being I get two salaries and can contribute to both a 403(b) and a 457(b). But wait, there’s more! One organization provides a 501(c) with a mandatory 5.5% employee contribution and 8% employer contribution, and the other organization contributes an extra 9% of my salary to a different account (I have no idea what numbers go along with that one).
All together, if I max out my 403(b) and 457(b), and all personal finance sites recommend maxing out tax-advantaged space, taking into account the forced 501(c) contribution and employer contributions, I’m saving 25% of my gross income. And we haven’t even considered the backdoor Roth IRA! We could save another $15,000!
This begs the question, do we want to do this? Would I ever consider saving less?
What if, instead of going for a 25% percent retirement savings rate, I went for 20%? This would involve me not maxing out one of my retirement funds, which would feel weird after reading so much about the importance of doing so. It seems like everyone is doing it. (This is probably not true.) Does that mean I’d fall behind? Would I be missing out?
What would we do with an extra 5%? Would we save it up for something big, like a bathroom renovation, a new business venture, adopting a child? Would we just inflate our lifestyle by eating out more, going on more trips (my husband would hate that) and upgrading our stuff? Would we give it away, as gifts, family assistance or support to organizations we believe are making difference?
I have, of course, a few thoughts. The first is that, the extra 9% from one of my employers comes with golden handcuffs, meaning if I leave my job before I’ve worked there for three years, I forfeit the money. I don’t plan on leaving my job, but life does weird things sometimes, so in the spirit of not-counting-my-chickens-before-they-hatch I’m not going to include the extra 9% in my savings calculations until I’m past the three year mark. Taking everything else together, and including a little extra that goes into a taxable account, we’re saving right at 20%. Meaning, we can kick this decision down the road for another two years.
The second thought is that there are a lot of warnings in the Bible about putting too much faith in money. A wise man in Proverbs asks God to avoid giving him too much wealth, lest he put his faith in his riches and not in God. The rich man in Jesus’ parable is foolish for building up his possessions and not putting any thought to the fact he could die any moment and that he has an eternal future on the other side of death. Jesus teaches that our hearts follow our treasure. James castigates rich people for mouthing platitudes while ignoring the poverty of their brothers and sisters. The Bible also teaches that wealth is not a bad thing, but the implication is that it comes with the responsibility to use it wisely.
I know that I am tempted to derive security from the money I’ve saved up – that’s just I am. Because of that propensity, I believe it will be wise to avoid going beyond 20% retirement savings in the future. Instead of hedging my bets by stashing away another five percent or more, I can ask God to use what we save to provide for our needs. My husband and I will need to have more discussions about it, but I’d prefer to use the money we’d otherwise be saving for the benefit of others. One can make the argument that by saving more now, there will be more to give in the future… but the future is uncertain. I don’t want to wait for a mythical tomorrow that isn’t guaranteed.
