Before Roth 401(k) retirement accounts were available, you had two choices within your company’s retirement plan – how much to contribute, and how to invest those contributions. A Roth 401(k) option adds a third layer. While each physician’s situation is unique, the following is a good rule of thumb for the decision.
How much of my retirement contributions should be made to a Roth 401(k)?
In your 30s
In your 40s
50 and over
- As a physician, your tax bracket will likely be higher in the future. At that point, the deduction that comes with a Traditional 401(k) contribution will be more valuable. For now (especially in residency and your early years), the Roth makes more sense.
- Tax diversification in retirement. By contributing to multiple “tax pools” (Roth, Traditional, etc.), you position yourself to better manage your taxes down the road. That is, money pulled from a Roth IRA is tax free (no tax break up front). And, money pulled from a Traditional IRA is taxed as ordinary income (tax deduction at contribution).
- The Roth option may not exist in the future as the government looks for new revenue generators. So, get the money in while you can.
While your situation is unique, every physician can benefit from their 401(k). That benefit can be greatly enhanced with strategic Roth/Traditional contribution planning.