Written By Jared Costigan, CFP®
Although saving for retirement might not give the same thrill or satisfaction as a surgical procedure, coaching a family on healthy habits for a newborn, or researching cutting-edge medical treatment, retirement savings offers a seriously thrilling impact on your finances and long-term goals.
There is a landscape of account options, each with its own tax implications to consider. We have a lineup of heavy hitters in the retirement planning world. Some accounts can only be used by business owners, others only by public hospital employees and some apply to everyone!
Below is a ranking of the best retirement accounts for physicians, who they’re best for, tax benefits they provide, and how much money you can save for each one.
First things first: Essential retirement account terms
Before getting straight into the ranking, here’s a brief pre-game introduction to some terminology used in our lineup.
Pre-tax
A pre-tax contribution isn’t taxed in the current year, saving you money come tax-filing time. Assets in pre-tax accounts — your contribution and its earnings — are taxed at the applicable tax rate during the distribution year. There are limitations on how early you can withdraw these funds, and at a certain age, you’re required to start making withdrawals.
The IRS wants their taxes and won’t let you delay that tax forever!
After-tax
An after-tax contribution is taxed in the current year. You’ll pay taxes at your current tax rate now and when you decide to withdraw your funds, distributions are tax-free. This means that the investment growth that your contributions earned grows tax-free as well.
Roth IRA retirement accounts are a popular after-tax retirement fund, for example. There are limitations on how early you can make withdrawals from these funds, but there’s no mandatory distribution timeframe.
Employer plan
An employer plan must be administered by a business. There are detailed rules around how much the employer can contribute to each employee’s retirement plan to dissuade highly compensated employees from receiving an unfair share of employer contributions.
Ranked: Best retirement accounts for physicians
Now that you have a sense of those key retirement savings concepts, let’s explore how these accounts stack up to build your nest egg!
1. Solo 401(k)
- Who it’s for: Self-employed business owners with no employees.
- Tax treatment: Pre-tax or after-tax (Roth IRA).
- 2024 maximum annual contribution: Total maximum combined contribution of $69,000 (includes employee maximum of $23,000, plus $6,500 if over age 50; and employer contribution at 25% of your earned income).
If you’re not employed by a hospital but have a 1099 arrangement, working for yourself and don’t have access to a traditional 401(k) plan, the contribution limits in a solo 401(k) are the best of both worlds. You get to do the standard employee contribution, plus contribute the employer side of the equation.
Imagine a psychiatrist that contracts with multiple hospitals in the area, but isn’t employed by any of them. They earn $500,000 annually in their business and don't have any employees. They can contribute up to $69,000 to a solo 401(k), saving the highest marginal income tax bracket on those dollars.
2. 401(k)/ 403(b)
- Who it’s for: Employees at private [401(k)] and public [403(b)] institutions.
- Tax treatment: Pre-tax or after-tax.
- 2024 maximum annual contribution: Total maximum combined contribution of $69,000 (includes employee maximum of $23,000, plus $6,500 if over age 50; employers may contribute a percentage of your salary or match your contributions).
NOTE: Due to non-discrimination testing, even for highly compensated employees, it’s expensive to get near the maximum employer contribution. Your taxable income is only reduced by the employee contribution, not the employer contribution. 403(b)’s have a special provision that might allow up to an additional $3,000 contribution for employees that have served 15 years at their employer (subject to limitations).
A 401(k)/ 403(b) account secured the second-best option on our ranking because it’s easy to do. Employers sponsor the plan, and many offer an “employer match” to make your contributions go further. You can enroll in a new plan while onboarding as a new employer.
Many plans now offer both pre-tax and Roth contribution options, meaning $23,000 can be saved in the tax-advantaged account of your choice with minimal administrative burden. Be aware of how your funds within these accounts are invested, as the investment options are limited and can include some high-expense mutual funds. Be intentional about your asset allocation and fund choices in your 401(k)/ 403(b).
Related: What Physicians Should Do With Retirement Accounts From an Old Employer
3. Health savings account (HSA)
- Who it’s for: Anyone who’s covered by a high-deductible health care plan (HDHP).
- Tax treatment: Pre-tax and Roth.
2024 maximum annual contribution: $4,150 for a self-only plan; $8,300 for a family plan.
NOTE: What the heck is a HDHP? If your health insurance has a deductible higher than $1,600 for a self-only policy — $3,200 for a family policy — you can utilize a health savings account. This is true whether your health insurance is through your employer or on the private market.
But wait. This is an account for health care expenses — why is it on a list of the best retirement accounts for physicians?
While you can use this account to fund qualified health care expenses, you’re not required to. If you have the cash flow to support paying for medical bills out of pocket, this account can act much like a retirement account savings plan. You’ll receive a tax deduction for your contribution. In the future, when you withdraw, you won’t be taxed on the distribution (including on the gains) when the funds are used toward a qualified medical expense.
That said, having a high deductible on your health insurance can be a downside, particularly for individuals who have high medical expenses. Tax savings are great, but they must be weighed against comparable plans that aren’t eligible for usage of an HSA.
These are generally most appropriate for families and individuals who have a comfortable emergency fund and can cover significant medical expenses when they arise. It’s also a fit for those who are generally healthy and don’t anticipate large medical events in the year of coverage.
4. Backdoor Roth IRA
- Who it’s for: Almost anyone who earned over the IRS’ income limitations for a direct contribution to a traditional IRA or Roth IRA. This includes most taxpayers who file their taxes as married, filing separately. The individual must’ve earned income of at least the contribution amount in that tax year.
- Tax treatment: After-tax.
- 2024 maximum annual contribution: $7,000, and an additional $1,000 if over age 50.
Most doctors earn a high-income above and beyond the limitations to make a direct Roth IRA contribution or a deductible contribution toward a traditional IRA. And many doctors on income-driven repayment plans file their taxes as married, filing separately to reduce their monthly student loan payments. This means they can no longer make contributions to traditional IRAs or Roth IRAs.
Enter the “backdoor” way to effectively still make a Roth contribution. Learn more about the backdoor Roth IRA strategy.
5. Roth IRA
- Who it’s for: Almost anyone who’s earned income of at least the contribution amount in that tax year. You might not be able to make contributions to a Roth IRA if your income is too high, or if you file your taxes as married, filing separately.
- Tax treatment: After-tax.
- 2024 maximum annual contribution: $7,000, and an additional $1,000 if over age 50.
It’s relatively easy to set up a Roth IRA at any financial custodian. There are no employer requirements, and the full universe of publicly traded investments are at your fingertips.
Having your investments grow tax-free is an amazing proposition for younger folks, or in years when your income is lower than usual. The power of compound interest can work in your favor unencumbered by future taxes!
6. Traditional IRA
- Who it’s for: Almost anyone who’s earned income of at least the contribution amount in that tax year. You might not be able to make contributions to an IRA if your income is too high or if filing taxes as married, filing separately.
- Tax treatment: Pre-tax.
- 2024 maximum annual contribution: $7,000, and an additional $1,000 if over age 50.
Traditional IRAs are relatively easy to set up at any financial custodian. Like Roth IRAs, they don’t have any employer requirements, and you can access an assortment of publicly traded investments.
The current year tax deduction is great, but its use is relatively limited by the income restrictions. High earners can’t deduct their contributions from this account, so it’s effective for individuals in lower tax brackets thus limiting the impact.
7. Brokerage
- Who it’s for: Everyone, regardless of income or employment.
- Tax treatment: Lower tax rates than ordinary income, but no deductions for contributions or distributions.
- 2024 maximum annual contribution: No limits — literally as much as you want.
Brokerage accounts don't have the shiny tax savings that many plans built for retirement have. However, it’s an amazing investment vehicle due to the flexibility of its varying time horizons for different goals.
Want to buy a car in three years? Renovate your home in 10 years? Purchase an investment property in seven years, or retire at 50 and can’t touch your 401(k) to fund those goals?
Capital gains tax treatment incentivizes you to utilize investment account growth toward funding your goals and your lifestyle. It also carries a cheaper tax rate than earning income as an employee. High-earning physicians might be able to max out their 403(b), HSA, backdoor Roth IRA and 457(b) and still have investment dollars looking for a place to go. A brokerage account is the ideal situation to continue saving and investing with flexibility.
Further tax advantages can be generated with tax loss harvesting strategies and choosing tax-efficient investments which take advantage of capital gains and qualified dividend tax treatments. This provides the ultimate no-rules retirement account.
As always, be intentional about the level of risk you’re taking with any investment and align your asset allocation with the time horizon for your goals.
8. 457(b) plans
- Who it’s for: Employees at public institutions, typically seen at nonprofit hospitals and government employers. Particularly useful for “FIRE” or early retirees.
- Tax treatment: Pre-tax or after-tax (Roth only allowable as of 2024).
- 2024 maximum annual contribution: $23,000, plus an additional $6,500 if over age 50; employers can contribute up to $23,000, too.
NOTE: Contribution limits to 457(b) plans are in addition to 403(b) plans that are offered. You can contribute up to $23,000 to your 403(b) AND $23,000 to your 457(b) plan. For a physician who’s eligible for PSLF, this can have a huge impact on reducing your AGI and your IDR payments.
457(b) plans are offered only by nonprofit or government employers. If you have access to one of these plans you’re likely also working for a qualified employer for Public Service Loan Forgiveness, and that correlation has some amazing benefits.
There’s a key distinction within 457(b) plans, and the two plans are not created equal: governmental vs non-governmental 457(b) plans.
If you have a non-governmental 457(b) plan, the plan’s assets are subject to your employer’s creditors. We recommended contributing the maximum to your 403(b), where your assets are protected from your employer's creditors, before contributing to a 457(b) plan.
There are also differences in your options for distributions and rollovers. Unlike a 401(k), there’s no penalty for distributions prior to age 59.5. However, you must end your employment to begin taking withdrawal.
Governmental 457(b) plans may be rolled over to an IRA, but a non-governmental 457(b) plan can’t. Upon separation from your employer with a non-governmental 457(b), you might be able to roll the assets over to another non-governmental 457(b) if both plans allow for the rollover.
If that’s not an option, you might be put in a position where you’d need to take a lump sum distribution (i.e., big tax hit) or distribute your funds over a fixed period of time (e.g., over five to 10 years). This inflexibility is another reason why we suggest maxing your 403(b) before contributing to a 457(b) plan.
9. Defined benefit plan
- Who it’s for: Business owners who have steady and consistent profits. It’s particularly beneficial for owners closer to retirement with younger employees.
- Tax treatment: Pre-tax.
- 2024 maximum annual contribution: $275,000 (but most businesses are unlikely to reach this limit).
NOTE: Remember the antiquated idea that your employer would take care of you in retirement with a pension to show you how much they appreciated your work during your career? The growth of the 401(k) was driven by the demise of the pension, but some of these accounts are still hanging around.
A pension is a “defined benefit” account, meaning that the employer is responsible for the resulting performance and income generated to the employee in retirement. The employer directs the investments choices and takes on the risk of underperforming or over performing targeted performance.
By comparison, a 401(k) is a “defined contribution” account, meaning that the employer commits to contributing a defined amount to the account. But the investment choices, performance of investments, and the ultimate ending balance and income derived from a 401(k) lies fully with the employee.
Government employees or those who were grandfathered into the plans at a private business might still benefit from a defined benefit plan.
Establishing a defined benefit plan is still an option for business owners today, and can provide opportunities to contribute HUGE amounts to a pre-tax retirement account. As the business owner approaches retirement, the full maximum contribution is $275,000 a year! Wow, that could be an amazing tax benefit for the right scenario.
When starting a defined benefit plan, you must hire an actuary who analyzes the age, tenure, earnings and other demographics of your employees, and determines a fixed schedule of employer contributions. Starting it up is expensive, there’s limited flexibility for changes, and the cost for other employees can be huge. That said, in the right situation, this can be a powerful plan!
It doesn't apply to many physicians, only private practice groups with minimal employees. It’s inflexible and requires a commitment to make large outlays regardless of annual performance. But, if used appropriately can defer huge portions of your taxable income from high-earning years during your career to low-earning years in retirement.
