Saving for Retirement as a Resident
By Alex C. Moore, D.M.D.
I know many of you are still residents, but it is never too early to start saving for retirement, even if your income is not substantial. As a recent graduate, this section is intended to answer questions that I had while in residency in the hopes that those in a similar situation can get a jump start on their financial future.
Once I received my disability insurance, as discussed in the last Finance Corner, I wanted to start investing and saving for retirement with my moonlighting income. I was in a tuition-based residency and my only income was from moonlighting. I was an independent contractor so I did not have access to my employers 401(k).
The easiest option available to me was a Traditional Individual Retirement Account (IRA) or Roth IRA.
As an independent contractor the alternative options are to set up your own retirement plan, such as a Solo 401(k) or a SEP IRA. However, as a resident my moonlighting income was not significant enough to warrant going through that process. These options can be discussed in later editions of the Finance Corner.
A Roth IRA is an individual retirement account where the money you contribute gets taxed the year you contribute it. This means that you do not have to pay taxes on it or its growth when it is withdrawn in retirement.
You can contribute to a Roth IRA if your income is under $137,000 if you are single or $203,000 if you are married filing jointly.
In a Traditional IRA, the money is contributed before taxes (meaning it is tax deductible), yet the withdrawals in retirement are taxed like ordinary income.
For 2019, the maximum contribution to an IRA is $6,000.
For a Traditional IRA, part or full portions of your contribution are tax deductible if your income is under $74,000 if you are single or $123,000 if you are married filing jointly.
If your income qualifies you for both, the decision between a Roth IRA and a Traditional IRA basically comes down to if you want to pay taxes now or in retirement.
If your income is too high to qualify you for a Roth IRA, you can contribute through a Backdoor Roth IRA option, but that can also be discussed in a later Finance Corner.
As a resident, my income was low compared to my future earnings years (and also, our tax brackets are currently favorable when looked at it historically). Because of this, a Roth IRA made sense for my situation because I was able to be putting money into a retirement account that was taxed at a low rate. The contribution will grow tax free until I retire, and then I will be able to withdraw it and its growth without having to pay taxes when I would most likely be in a higher tax bracket.
There are multiple companies where one can open a retirement account like a Roth IRA, including Vanguard, Fidelity, E-Trade, Charles Schwab, TD Ameritrade, etc. It is extremely easy and quick to do.
Once you choose where you would like to open your Roth IRA (I chose Vanguard), you sign up and make a deposit, which can be sent by check or a direct deposit from a bank account. Once the money was deposited to your account, you select that you want to contribute to your 2019 Roth IRA, and then decide how it should be invested. This decision is something that will be discussed in the next section of the Financial Corner.
Dr. Alex C. Moore is a member of the AAE’s Resident and New Practitioner Committee. He can be reached at email@example.com.