IRAs 101: Get To know The Different IRAs

Let's talk about something we often overlook between our long shifts and countless patient encounters: our financial well-being. Think of it as the pulse of our dreams—the same way our physical health holds the key to living life to the fullest. For us in the medical field, managing our finances is more than just balancing the books; it’s about paving the way for a worry-free future where we can savor the rewards of our hard work.

Our path is definitely one of a kind. From the daunting mountain of student loans to the promising goals of financial opportunities that our profession offers, it’s a journey filled with its own set of hurdles and wins. Sure, tackling debt and planning for the future can seem intimidating, but let’s not forget the doors our careers can open for us to build wealth and invest in what matters most.

Imagine a future where your financial health is as robust as your medical knowledge—where planning for a vacation or your kid's college feels exciting, not stressful. That’s the destination we’re aiming for. So, let’s dive in with the same effort and care we give to our patients. It’s about making each step count on our path to financial freedom, ensuring a life rich with possibilities, both in and out of the hospital.

Types of IRAs 

Traditional IRA

Traditional IRAs offer immediate tax benefits by reducing taxable income, making them particularly attractive for high-income earners like doctors.  Contributions to a traditional IRA are typically tax-deductible, meaning they can lower a physician's taxable income in the contribution year. This tax-deferred growth allows investments within the IRA to grow tax-free until withdrawal, providing an opportunity for compounded growth over time. 

As of 2024, the annual contribution limit is $7,000 for those aged 50 and younger and $8,000 for those aged 50 and older.  For physicians, key considerations when evaluating traditional IRAs include their current tax situation, retirement goals, and long-term financial plans. 

Roth IRA

A Roth IRA provides unique tax advantages and benefits that differ from traditional IRAs. Contributions to a Roth IRA are made with after-tax dollars, meaning they are not tax-deductible in the year of contribution. However, the primary benefit of a Roth IRA is its tax-free growth and withdrawals in retirement. Qualified distributions from a Roth IRA, including contributions and earnings, are entirely tax-free, providing valuable tax diversification and flexibility in retirement planning.

Similar to the Traditional IRA, the 2024 annual contribution limit is $7,000 for those aged 50 and younger and $8,000 for those aged 50 and older. Additionally, Roth IRAs do not have Required Minimum Distribution (RMD) requirements during the account holder's lifetime, allowing for greater flexibility in managing retirement assets.

Backdoor Roth IRA (Strategy)

As of 2024, Roth IRA contributions begin to phase out for single filers with modified adjusted gross incomes (MAGIs) between $129,000 and $144,000, and for married couples filing jointly with MAGIs between $204,000 and $214,000. Beyond these income thresholds, contributions to a Roth IRA may be reduced or eliminated altogether, making it essential for physicians to consider their income levels and eligibility when planning for retirement.

For high-income earners who exceed the income limits for Roth IRA contributions, a backdoor Roth IRA can provide an alternative strategy to access the benefits of a Roth IRA. This approach involves making nondeductible contributions to a traditional IRA, and then converting those funds into a Roth IRA. Since there are no income limits for contributing to a traditional IRA, this strategy allows high-income earners to bypass the income restrictions associated with Roth IRA contributions.

Self-directed IRA

A self-directed IRA allows physicians to gain better control over their retirement investments according to their individual preferences and strategies. Unlike traditional and Roth IRAs, which typically limit investments to stocks, bonds, and mutual funds, self-directed IRAs allow for investments in alternative assets such as real estate, oil and energy, private equity, precious metals, and more. 

This flexibility enables physicians to diversify their retirement portfolios beyond conventional asset classes, potentially yielding higher returns. Additionally, self-directed IRAs provide greater autonomy and control over investment decisions, allowing doctors to leverage their expertise and knowledge in specific industries or asset classes. 

However, physicians interested in self-directed IRAs must consider several factors before putting money into alternative investments. Self-directed IRAs may involve additional administrative fees and complexities compared to traditional or Roth IRAs, requiring careful evaluation and due diligence before making investment decisions. 

Benefits of IRAs for Doctors

As a doctor, maximizing your retirement savings should be a priority. IRAs offer unique advantages in achieving this goal. Let’s recap the benefits of IRAs for doctors below: 

Tax-Advantaged Growth

Whether through traditional or Roth IRAs, physicians benefit from tax-advantaged growth. Contributions to traditional IRAs are often tax-deductible, while investments grow tax-deferred. Roth IRAs offer tax-free withdrawals in retirement, providing valuable tax diversification and flexibility. This tax advantage enables physicians to maximize retirement savings potential while potentially reducing tax burdens.

Retirement Income Diversification

By contributing to IRAs in addition to employer-sponsored plans (401k), doctors can diversify their retirement income streams. This diversification helps mitigate risk and provides greater stability in retirement, ensuring we get multiple sources of income to rely on when we stop working. With traditional and Roth IRAs, physicians can tailor their contributions to align with their retirement goals and risk tolerance, creating a well-rounded retirement income strategy.

Flexibility and Control

IRAs offer doctors greater flexibility and control over their retirement savings compared to employer-sponsored plans. Physicians can choose from a wide range of investment options, customize their portfolios, and control contribution amounts and timing. This flexibility allows doctors to adapt their strategies as their financial circumstances change over time, maximizing their retirement savings potential and ensuring their investments align with their individual preferences and goals.

Estate Planning Benefits

IRAs provide valuable estate planning benefits, allowing doctors to protect their assets and provide for their loved ones after they're gone. Through beneficiary designations, physicians can specify who will inherit their IRA assets, bypassing probate and potentially minimizing estate taxes. Certain types of IRAs, such as Roth IRAs, offer unique estate planning advantages, allowing for tax-free distributions to heirs over their lifetimes. By incorporating IRAs into their estate planning strategies, doctors can ensure their retirement savings are distributed according to their wishes and provide a lasting legacy for future generations.

Conclusion

IRAs offer valuable benefits for doctors to achieve their long-term financial goals. As healthcare professionals, it's essential to prioritize financial planning and make informed decisions about retirement savings. By understanding the different types of IRAs, rules, and benefits, you can maximize your retirement savings and secure your financial future.