Pembirdie

Tag: taxes

  • Mistakes I’ve made: IRA edition

    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.

    SDG

  • And now for one of my favorite topics, percentages

    I made $37,000 during my first year as a dietitian in 2013. Granted, this was in South Dakota so there wasn’t state income tax, although now I wonder if I would have paid much income tax at my level. As an attending physician, I paid significantly more than my starting dietitian salary in taxes this year. Taking into account Social Security, Medicare, Federal and State taxes, I’ve estimated our total tax burden comes to about 25% of our gross income. It would be a lot worse if I was filing separately or my husband made a lot more money. Taxes are automatically withheld by my employer(s) so although they are painful to contemplate it’s a painless monthly experience.

    We aim to save 20% of our gross income for retirement. This mostly gets taken out of my paychecks automatically so it’s pretty painless when you never see the money. The personal finance people call this “paying yourself first” – we are giving our future selves the ability to not have to work forever.

    We give 10% of our income as a tithe to our church. We’ve also added a category to our budget consisting of 1% of our income as designated “give away” money. (We’re still figuring out how we want to do that.)

    So, if you add that up, it comes to about 56%: taxes, retirement, and tithing, leaving 44% to live on. When it comes down to it, we’re living on less than half of my gross salary. Which is not to say we are in any way deprived! I make a good amount of money. But when you are told you make $250,000 and find you actually “only” have $110,000 to work with, it’s disorienting.

    I have heard some people say that you should live on 50% of your take-home pay. In our case, that would be $93,750. Still more money than many people make as their gross income. Less than we’re spending in a year, though. Kind of amazing how fast that adds up.

    Just as a income does not equal wealth, a paycheck does not equal what you get to spend if you hope to one day become financially independent. Crossing fingers we’ll get there some day!

    SDG