Personal Finance Basics for Physicians
A Primer
Learn the basics: how to develop a personal financial plan, pay back debt, invest, ensure you are prepared for retirement, and protect yourself.
While personal finance is a huge topic with lots of nuances to learn, this page outlines the basic building blocks of personal finance as a physician. We are big believers that a large percentage of basic personal finance can be learned relatively quickly. Nobody cares for your money as much as you, so investing some time (literally even a few hours) will be well worth the return on investment (ROI) and protect what you’ve worked so hard to build for yourself and your loved ones. Many members of our community choose to manage their own finances, while many others choose to utilize a financial advisor. Regardless of what you choose, you should learn these principles so that you can distinguish good advice from bad advice, as the financial services industry is ripe with conflicts of interest. Also, follow us on our Instagram page, where we regularly post pearls of personal finance, so you can learn a little a day!
*Please note, we are not licensed real estate, investment, accounting, legal or related licensed professionals, and you should do your own due diligence and confirm the information presented here before making decisions on the basis of information presented on this page. This page contains affiliate links, which support the group at no cost to you.*
-
-
High-Interest Debt
-
Student Loans
-
Mortgage
-
Basics of Personal Finance for Physicians
Personal finance can seem very intimidating at first, as it's a huge topic, and nobody taught us about it in medical school. Fortunately, as a high income professional, there are only a few basic principles that you need to know to ensure financial success. While there are nuances depending on specialty, practice setting, and geography, most physicians should be able to hit retirement goals by following these basic principles.
-
Resist the urge to live the "doctor lifestyle" too early. This doesn't mean you should never have fun or splurge, but live below your means, and try and save at least 20% of your income if possible.
-
Establish an emergency fund.
-
Insure yourself against financial catastrophe.
-
Get rid of high interest debt as soon as possible.
-
Time in the market beats timing the market. Invest early for maximal growth.
-
Fund your retirement accounts, tax advantaged accounts, and taxable brokerage accounts.
-
Consider developing alternative income streams so that you are not solely dependent on your physician income.
Budgeting/Developing a Personal Financial Plan
Yes, even doctors need budgets. Knowing what's coming in and what's going out is the key to saving. Sitting down with your bills and credit card statements and mapping out all of your necessary expenses (housing, transportation, food, utilities, insurance, and student loans), and your discretionary expenses (vacation, eating out, and clothing, for example) is a good place to start. This will also help you determine how much you need in your emergency fund.
Your budget is going to change, and your first budget won’t be perfect. Track your planned spending versus your actual spending each month and notice over the months what items you overlooked or under planned. Tweak your budget as you go.
When you are in survival mode (ahem, residency), having a financial plan doesn’t always seem necessary. Depending on the cost of living, you may have found yourself in a place where your expenses equaled or even exceeded your earnings. However, once you finish training, having a financial plan becomes much more important, as it will guide your financial decisions. You should sit down, alongside any major decision makers in your life like your spouse, and think about when you want to retire, how much money you think you'll need to retire, how important it is to have cash flowing investments, how important it is to be debt free, and more. This will help you answer questions about what to do with extra money like bonuses or money left over after expenses have been paid, whether you should invest in real estate, what your asset allocation should look like in the market, and more.
We will walk you through the fundamentals in this guide, but you'll likely want to dig deeper. There is lots of free information out there on our groups and on the internet. You could also consider reading some books or taking a course. Any investment in time you make in knowing more about personal finance will pay itself off with dividends.
Resources
- Budgeting: YNAB (You Need A Budget) - Impressive app that's laser focused on budgets and very customizable. They have a REALLY loyal following, and people swear by it. It's not free (but also not expensive) - there's a free trial if you want to try it out and play with it.
- Tracking Your Progress: Personal Capital - free way to aggregate your accounts and get a comprehensive overview of your finances. Lots of retirement tools/trackers/long term financial tools that address questions often asked on the group in terms of tracking net worth, a savings tracker that shows you if you’re on track towards retirement goals, budgeting, cash flow, and fancier things like a retirement planner that will calculate your projected monthly income by your desired retirement date, planning for your kids’ education costs, portfolio allocations, and even analyzing the fees in your investments to make sure you’re aware of hidden fees.
- Personal Finance Course - Includes options that are CME eligible! An easy way to have your hand held through an excellent and comprehensive overview of all things personal finance, without having to spend the time compiling the information yourself.
- Financial Advisors: Zoe Financial
These resources are affiliates, which support the group at no cost to you, but we'd recommend them regardless.
Financial Advisors
While many of us are big fans of DIY, many people prefer the comfort of having an additional set of eyes on their investments. Advantages to this include making sure you stay disciplined about your approach, educating you, helping with things like rebalancing your portfolio, and providing backup if something happens to you. Make sure you only purchase what you need, because fees can add up quickly, and often times you’re better off buying some services a la carte from relevant expertise (accounting, law).
Even if you use a financial advisor, be involved and learn. That way you can be an active participant in discussions and decisions (and maybe eventually cut out fees and DIY).
How to Choose a FA
Fiduciary Duty
Signed statement that they are willing to commit to you that they will do what’s in your best interest. Make sure they actually sign it, regardless of their certification.
Types of Certifications
CFP: Have to complete 200 hours of course work, have 3 years of experience, and have to pass a test
ChFC (chartered financial consultant): Have to complete CFP type coursework but without the test
CPA (certified public accountant) + PFS (personal financial specialist)
CFA (Chartered financial analyst): This is the hardest one to get. Requires 750 hours of coursework and 3 exams over 18 months
Questions to Ask
-
Ask about their investing strategy and make sure it’s reasonable.
-
Are they buying individual stocks and do they believe in active management?
-
Are they using low cost funds? Avoid advisors that use high cost mutual funds as they eat into your returns.
-
Are they advocating for whole life insurance or do they sell insurance? Be careful about conflict of interest.
Assets Under Management (AUM) vs. Flat Fee
Make sure the fees are clearly defined and that you ask them every way that they make money from you.
AUM: Many charge as high as 1% or above of your total net worth. This may not seem like a lot when you’re first starting out, but it will add up quickly and significantly eat into your returns. It also creates a conflict of interest because they want the most money under management to make max money, so they may tell you not to pay off debt or contribute fully to tax advantaged options. These fees can be negotiated, so do that!
Flat fee: You pay an annual retainer. You know the costs upfront. The potential conflict of interest is that since they’re getting paid the same regardless, they may not want to spend as much time on things.
Hourly: Nice in that you only pay for what you use, but may disincentivize you from asking questions when you have them.
Other options: These can include Roboadvisors, Fidelity or Vanguard (can use their people for free or low fee)
Resources from our Sponsors/Advertisers
Emergency Fund
You want an emergency fund to be very liquid and immediately accessible (i.e. you shouldn’t have to sell stock or otherwise go through any major hoops to use this money). The reason for this is that you don’t want to have to take out high interest debt, sell stocks while they are down, or touch your retirement accounts if you have a sudden need for money. This is the money that will allow you to have some breathing room if an unexpected job change or major expense arises, or if you are unexpectedly disabled, it will allow you to ride things out financially until your benefits kick in. It is based on your monthly expenses, not your income.
Examples of expenses to include when calculating your emergency fund:
-
Rent/mortgage
-
Insurance premiums
-
Health insurance
-
Auto insurance
-
Homeowner’s/renters insurance
-
Disability insurance
-
-
Utilities
-
Groceries/food and household supplies
-
Transportation expenses
-
Including car payment(s)
-
-
Minimum payments for outstanding debts (credit cards, student loans)
-
Home maintenance
Examples of expenses to exclude when calculating your emergency fund, as these you could pause these temporarily until your income restabilizes:
-
IRA contributions
-
Brokerage account contributions
-
Vacations
-
Large capital improvement plans, such as a new pool or roof
-
Luxury items and entertainment
It helps to keep your emergency fund in a separate account than your main checking. While you want your emergency fund to be liquid, you don’t want it to turn into a take-a-penny-leave-a-penny fund that you dip into whenever you overspend in your budget, especially early in your career when your budget is more restrictive and you don’t have a lot of excess to refill your emergency fund with once you dip into it.
Insure Against Financial Catastrophe
Insurance exists so that you don’t lose what you’ve worked so hard to build, but you also shouldn’t insure against things that won’t make you broke. Most people with their attending salaries will be able to self pay or use their emergency fund for minor expenses. Despite this, physicians generally need a lot of insurance to maintain the lifestyle that they want for themselves and their families. Below is a brief overview of the different types of insurance physicians should research and likely carry.
Malpractice Insurance
Every physician needs this to protect against malpractice judgements. You should get whatever the norm is in your state. In most states this is "$1 million/$3 million", which means they will pay $1 million per claim to a total of $3 million per year. If you are in a very litigious location or specialty, you may want more.
Claims based versus occurrence based
Occurrence based covers all events that occurred when the policy was in place, regardless of when a claim is made. Claims based is only in place during your insured period, and you have to get tail insurance afterwards (or have your current employer provide tail insurance or your new employer provide you nose coverage, both of which tend to be expensive).
Disability Insurance
Unless you yourself (not your parents, spouse, etc.) are independently wealthy and don’t need your physician income to maintain your lifestyle, this is probably one of the most important things to secure immediately. You should essentially do this the minute you graduate from medical school, as it will allow you to protect what you’ve worked so hard to build, is cheaper when you’re younger, and decreases the chances that something will happen in the interim that will preclude you from qualifying for coverage. We as physicians know better than anyone that tomorrow is never guaranteed.
You want an individual, own-occupation policy, as there are several downsides to policies through your employers or policies that are not true own occupation.
If you are young and/or in training, make sure you have a future increase rider so that you can increase coverage as your income goes up without having to requalify.
Please see our disability insurance page for more details.
Resources
Our sponsors have helped thousands of our members obtain own occupation disability insurance: Pattern and Physician Financial Services
Life Insurance
If you have dependents that count on you for their lifestyle, this is good to get ASAP. Some people elect to lock in on cheaper rates while they’re younger, knowing they’ll need it eventually and not wanting to take the chance that they won’t qualify.
At the beginning of your career you want term life insurance, not whole life insurance (or any other variant of permanent life insurance). This will likely continue to be the case for the vast majority of physicians.
Please see our life insurance page for more details.
Resources from our sponsors
PolicyGenius and Physician Financial Services
Home, Auto, and Renters Insurance
You will need these as applicable and should be generous with your coverage. Once the opposing lawyer finds out you are a physician, they will likely sue for a larger amount.
Resources from our sponsors
Umbrella Insurance
Wraps around your personal home and auto insurance to cover amounts that exceed the policy limits on those policies and is relatively very cheap (starts at a few hundred dollars a year even for a 1 million dollar policy). Every high income professional likely needs a 7 figure umbrella policy once capping out their coverage limits on their home and auto policies, usually ranging between 1-5 million. You usually buy it from whoever does your home/auto insurance, but it’s worth shopping around for the best deal.
Health Insurance
As a physician, hopefully it’s obvious to you why you need this! Medical bills can add up fast with certain diagnoses, and you just never know what will happen. If you are young and healthy and a high-deductible (HDHP) plan is available, most offer a HSA, which is a great tax-advantaged savings plan you can use as part of your investment strategy (it grows triple tax deferred!) Learn more about HSAs below.
Paying Down Debt
High-Interest Debt
At the beginning of your financial journey, your relationship with debt should be fairly straightforward. If you have student loans, you’ve likely seen the effects of compounding interest, which can make it difficult to decrease your balance because of how much money is going towards interest. Additionally, monthly interest payments significantly impact how much money you have left over to do the things you want, and limit your ability to make decisions like working less or retiring early because of the need for monthly cashflow.
You should pay down all high interest debt (credit card debt, personal loans, potentially student loans), as the amount that you are paying in interest is likely to outweigh what you can make on that money by investing it.
People vary on what they refer to as the bottom limit of what’s considered high interest debt, with some saying as low as 5% and some saying as high as 10%. Remember that you pay interest in post tax dollars, so you actually have to earn significantly more than the interest rate to come out ahead. If you have very high interest credit card debt, you may want to consider getting a personal loan to pay this off. Transferring the debt doesn’t solve the problem, but it will lower your interest rate, allowing you to tackle more of the principal to get the debt paid off sooner.
Low-Interest Debt
What you do with lower interest debt such as a mortgage or student loans is a very personal decision. The first decision you should make is whether you are going for PSLF (Public Student Loan Forgiveness) or another forgiveness program. If you are and work for a qualifying employer, you should strategize accordingly which repayment programs you enter. If you are not, you should consider refinancing your student loans to a lower interest rate. More about student loans and student loan refinancing here. If your mortgage rates are high, you should also see whether refinancing your mortgage makes sense.
Resources from our sponsors
Housing
Don't be house poor
Housing is difficult from a financial perspective, because in some ways it is an investment, and in other ways it’s not.
You need to like where you live, but you don’t want to be house poor. Having too much of your overall net worth tied up in your house can make it more difficult to accumulate wealth, as you won’t have that money working for you in other ways, such as paying down expensive debt or investing in other entities that generate cashflow or increase in value over time. Also, while houses generally appreciate in value over time, housing markets are fickle, and certain markets appreciate more than others. The appreciation in your house’s value can mirror growth in your retirement and taxable accounts, but it’s best not to buy a house with that assumption in place. Home values can change quite significantly due to factors beyond your control (interest rates, recessions, new development in the area, school district ratings, etc.), but you will always need a place to live, so consider your primary house as a fixed and illiquid part of your overall assets, rather than a tool to steadily grow your net worth. Also keep in mind that the decision to sell at an optimal time may not be in your control (need to move, divorce, need to lower expenses, etc.).
Avoid buying too early
Transaction costs for houses are high (including inspection costs, closing costs on a mortgage, furnishing a house and making necessary changes, and 6% realtor fees when you sell) so you shouldn’t buy until you’re sure you’re going to be there a while (in the current market, at least 5 years is a good estimate because you don’t want to buy high and then sell low).
Renting until you’re sure you have partnership or you like your job is probably financially smart. Also, as you become more financially secure, what you want in a house is going to change.
The default option for residents and fellows should usually be to rent. You don’t know where you are going to end up as an attending. Getting trapped in a housing market where you can’t sell or are underwater is a nightmare you don’t want to be dealing with as you’re just starting out your career.
A mortgage payment is not the same as rent
We hear a lot that renting is throwing money away, especially if the mortgage payment is less than rent.
But mortgage payments and rent are not a one-on-one comparison. Here are expenses people often overlook in their rush to get into the housing market:
-
Homeowners insurance
-
Property taxes
-
Maintenance costs
-
PMI (private mortgage insurance) costs if you don’t have a physician loan
-
HOA fees
-
Furniture and decor
How much to spend
Some general rules of thumb:
-
Do NOT spend the maximum amount a bank will lend you. As a physician, the amount you ‘can’ afford is generally pretty high, but you want to avoid being house poor.
-
Housing-related expenses should be less than 20% of your total income. Remember, this is not just your mortgage payment, but all the expenses included above.
-
Your mortgage should also be less than 2x your gross income (may not be possible in high cost-of-living areas, but it is a good target to remember even there).
Mortgages
When looking at different lenders, shop around and negotiate - use one against the other. They expect you to negotiate.
Physician mortgages
Physician mortgages are good for when you don’t have a down payment or when you have other places the money should go to (high-interest debt, funding retirement accounts, buying into a practice).
These types of loans allow you to put down less than 20% without paying PMI (you’re paying to protect the lender from you defaulting on your loan, essentially throwing money away). They also only require a contract, instead of looking at past W-2s for income verification, and look at student loan payments instead of total loan burdens.
While a physician mortgage has some benefits, don’t use a physician loan to buy more house than you should or just because it’s an option not to put down a down payment. Remember even if the interest rates are the same, you’ll be paying more interest because it’s on a higher amount. You also want to make sure you aren’t leaving yourself in a position where you are too over leveraged with your debt-to-income ratio.
Paying off your mortgage early
Conventional loans typically come in fifteen year or thirty year options, but you aren’t required to follow those timelines. The faster you pay off your mortgage, the more financial freedom you will feel to not have to earn a certain amount to pay your monthly mortgage. Consider whether having that additional freedom to cut back on your hours is worth more or less to you than having a bigger house.
Generally, selecting a fifteen year mortgage will result in lower interest rates (but higher monthly payments). We like to have people do a gut check at this point - not being comfortable with the payments associated with a fifteen year mortgage may be an indication that you’re buying too much house for your income level and are in danger of feeling house poor.
If you decide you have to do a thirty year mortgage to start, especially with today’s interest rates, consider expediting your payment schedule if you have extra room in your budget. You don’t need to refinance a thirty year mortgage to a fifteen year to pay it off in fifteen years, or less. Paying extra on your mortgage helps tackle your principal faster, which lowers your total amount of payment going to interest every month, and importantly, expedites your path to financial freedom.
Fixed rate versus adjustable
Fixed-rate mortgages have a set interest rate over the life of the loan. The interest rate and mortgage payment you sign up for at the beginning of your mortgage will remain the same over the fifteen or thirty year life of the loan (or until you pay it off). Unless you have PMI, and then your mortgage payment will drop once the PMI is removed.
Adjustable-rate mortgages (ARMs) often start with a fixed interest rate for a set period of time (typically ranging from three to seven years). Then the mortgage lender can change the interest rate on you each set time period. For example, a 5/6 ARM mortgage would have a fixed interest rate for the first five years, then the interest rate adjusts every six months after.
With interest rates increasing over the past year, an ARM may be enticing if you think interest rates will fall. Historically over the past 30-40 years, however, interest rates have been close to 8% for thirty-year mortgages. The 2.5% rates in the early 2020s were historical lows. Having an ARM can leave you open to continually increasing interest rates, with interesting housing costs that you have no control over.
A fixed-rate mortgage is almost always the better option.
Learn more about mortgages here.
Retirement Accounts
Retirement accounts are a cornerstone of your financial plan in many ways. Not only do you set aside money for retirement, this is tax advantaged money that (assuming you don’t do the Roth option) reduces your taxable income for the year. Retirement accounts also carry the benefits of asset protection, as many retirement accounts are ERISA protected, which means they can't be seized by creditors.
Most physicians start off saving for retirement much later than others, given the length of training and the inability to maximize retirement account contributions (or even contribute) with their resident and fellow salaries. Therefore, as soon as you’re able, most physicians should try and maximize their retirement contributions, especially if there is an employer match (that is free money!).
Signing up to have these automatically withdrawn from your paychecks in regular increment is a good idea, as it ensures a set amount of money is going towards securing your financial future and removes the urge to cut into that budget for discretionary spending.
Sometimes, physicians are tempted to dip into that money for things like investing in real estate. As a general rule, we’d advise against that, as it could leave you in a very vulnerable position if the investments go bad.
Every physician’s situation is different, and your definition of what retirement means and what it looks like can make a huge difference in your savings goal. Some people fear “over saving” for retirement at the expense of enjoying their lifestyle now. While ideally you would be able to do both, if you are in this position, figuring out how much you think you’ll need for retirement and then back calculating your needs for retirement contributions may be helpful.
How much do I need to retire?
The more expensive your lifestyle, the more money you will need to maintain it once your primary source of income is gone. This is where income diversification can be a huge help. There are, however, general guidelines people tend to use as benchmarks when figuring out how much they need to feel financially stable and able to retire.
The rule of 4% comes from looking at historical growth rates across a balanced asset portfolio and historical inflation. The idea is that you can withdraw 4% from your invested assets annually without touching the principle balance, so ideally 4% of your retirement number reflects your projected annual expenditures. This ensures that, on average, you will have enough to live off of. By leaving the principle amount largely untouched, you have it to dip into for emergencies such as unexpected home repairs or long-term care requirements towards the end of you or your spouse’s life.
For example, if you have $3 million in assets when you’re ready to retire (careful counting your house here; remember, you have to have somewhere to live), you could withdraw $120,000 a year and live comfortably knowing you will be covered in retirement through death. If you have other income generation through real estate or side gigs you still plan to work during retirement, then you don’t need as much saved up as you will still have income generating outside of withdrawals during your retirement years.
Traditional versus Roth
Traditional accounts
Traditional accounts are typically pre-tax investing (although you can do an after-tax traditional IRA to roll into a backdoor Roth IRA). This means the money goes in before you pay taxes on it, which lowers your taxable income and thus your taxes owed. This can be a useful strategy when you are getting close to hitting an increase in your marginal tax rate (learn more here).
You will be taxed when you take the money out, but the theory is that you will be in a lower tax bracket during retirement. Additionally, while that money is making money and creating dividends and gains, you won’t be taxed on it until you remove the money from the account. This eliminates the tax drag that you can see in your taxable accounts, as more money is making money. Just note, you will have to pay taxes on all the growth as well.
There are required minimum distributions (RMDs) on this money when you reach the IRS defined retirement age (this can change year to year but is generally in your 70s).
Roth accounts
Roth accounts are post-tax investing. This means the money goes in after you’ve paid taxes on it. The benefit to a Roth account is all growth in the account is tax free. You don’t pay taxes when you take money out. Roths also typically have the advantage of not carrying required minimum distributions (RMDs).
Some Roth investments accounts, such as the Roth IRA, have income cap limits imposed on them by the IRS.
Roth accounts can be a great tax-shelter account for high growth investments, as all the growth over the decades is tax free. The longer you leave investments in a Roth, the higher potential advantage they have.
Traditional vs Roth
Choosing between traditional and Roth can be a complicated decision for physicians that may accumulate significant wealth over the course of their careers. While most people will be in a lower tax bracket in retirement, this isn’t always the case. Because you don’t have a crystal ball to know what your tax rates will be during retirement, it’s impossible to say with certainty when it’s better to be taxed.
In general, if you have a low earning year, you may want to take advantage of the Roth option as you will be in a lower tax bracket. Since the entire growth of a Roth is tax free, time in the market also factors into your decision. The younger you are (Roth can be a great investment strategy in your 20s through 30s), the more years your money has to compound in earnings tax free. When in doubt, many elect to split the money between a Roth and a traditional.
Employer Sponsored Plans (401k, 403b, and 457s)
Employer match
At a minimum, you should always take advantage of your employer match for retirement accounts as this is free money. Another way to look at it is regardless of the fluctuations in your portfolio’s returns, it is a guaranteed return on your employee contribution. Very few investment products offer that type of guaranteed return.
How much to contribute
Most would advocate for maxing out your retirement accounts whenever possible, as this is tax advantaged money. Understand that each employer sponsored retirement plan has its own rules, and you should read the plan documents to take maximum advantage. You should make sure you understand the fees and costs associated with managing your 401k as well as the funds available when deciding how to allocate your investing. Some employer plans vastly limit your investment options and can carry significant fees.
How contributions work
Contributions to an employer or self-employed 401k or related type retirement plan work differently than with IRAs (discussed below). With IRAs, you are able to make lump sum contributions anytime throughout the year (or before you file your taxes, if the account is opened before the end of the tax year you want to contribute for).
For employment plans, you cannot write a check or deposit funds directly into your 401k plan (self-employment options can be a little different). Contributions to your employer plan are set up through your employer’s HR department or through the 401k plan website and are pulled from each paycheck in the amount you specify.
Some plans may allow you to make a lump sum contribution in the form of a transfer or rollover from another employer plan or, in some cases, an IRA, but you cannot lump sum fund your 401k yourself.
You may have an introductory period before you are able to contribute. Sometimes, this period is a few months. Other times, it’s a year (or more)! Make sure you understand the eligibility rules when accepting a new position.
Not all employers make matching contributions. When they do, it isn’t always a one-for-one match. For example, they might match 0.5% for every 1% of your contributions, up to a 10% limit or up to $10,000.
The employer may also put a vesting stipulation on their employer contributions. A certain percentage may vest every six months or year into service. If the employer contributions aren’t all vested, the part that hasn’t vested may be forfeited if you leave their employment.
Traditional and Roth
Many 401k, 403b, and 457s now offer a Roth option. While any contributions your employer makes are required to be pre-tax into a traditional account, if your employer offers a Roth option, you can contribute to both the traditional and the Roth in any proportion you choose.
Roth 401ks can be a great option because, unlike Roth IRAs, the IRS does not impose an income cap. Anyone can invest in a Roth 401k, regardless of their income. Having a balance of Roth and traditional funds in retirement can be a great way to balance withdrawals to keep your income taxes low during retirement.
Individual Retirement Accounts (IRAs)
Once you’ve taken the maximum match in your employer sponsored program, you may be looking for other retirement options. IRAs are a great option for investing. The IRS knows this, which is why they limit the amount you can invest in an IRA in any given year. For 2023, the contribution limit is $6,500 per individual under 50, $7,500 for individuals 50 and above.
IRAs, unlike taxable accounts you may hold at the same company, are individual accounts. If you are married, both you and your spouse are required to have separate accounts in your own individual names.
Roth IRAs
You should absolutely max out your regular Roth IRA while you qualify on an income basis if you can (like when you are a resident or fellow; most attending physicians will not). You are likely in the lowest tax bracket you will ever be in during training, and that money will grow tax free for decades. If it’s at all possible, put it into your budget. If you receive a signing bonus during the first half of your last year of training, this is a great place to direct it assuming you don’t need it elsewhere.
Backdoor Roth IRAs
The backdoor IRA is a tax loophole that legally allows high-income earners to contribute to a Roth IRA once they’ve surpassed the income limit for a regular Roth IRA by contributing to a traditional IRA and then converting to the Roth IRA.
Learn more about Backdoor Roth IRAs here. It’s important to note that the IRS has a pro-rata rule when calculating the tax bill a backdoor Roth creates if you have a mixed of post-tax and pre-tax funds in the traditional IRA you are converting, so make sure you have a financial advisor help you understand the tax implications before setting up your backdoor Roth IRA. Your financial advisor can also help with any paperwork required, including Form 8606 for the IRS.
You can also do a spousal backdoor Roth IRA if married filing jointly (totally separate ‘individual’ accounts, two 8606s submitted each year to the IRS).
The spousal rule also applies to traditional and regular Roth IRAs. A nonworking spouse can open an IRA and contribute as well if their spouse works and has an earned income and they file their taxes jointly.
See this section for more details on individual retirement accounts and self employed retirement accounts.
Healthcare Savings Account (HSA)
As mentioned above, if you’re generally healthy and have low medical expenses, a high-deductible health plan (HDHP) might be a good way to not only save on insurance premiums, but it offers the advantage of a HSA.
We love the HSA. Why? HSAs have a feature almost no other investment options offer: they are triple-tax free. You are not taxed when you contribute to it, you aren’t taxed on the growth, and you aren’t taxed when you withdraw the funds.
This is amazing and a stealth IRA. Like an IRA, the IRS limits how much you can contribute to a HSA. The 2023 contribution limits are $3,850 for self-only coverage and $7,750 for family coverage. For those 55+, there’s an additional $1,000 catch up permitted. Limits will be increasing again in 2024, so make sure you check at the beginning of the year the current rules so you can capitalize the HSA to its highest advantage. If you aren’t covered for a full year, you can still contribute a prorated amount.
If you can't both fully fund your retirement account and your HSA, you should fund your HSA after putting in the amount necessary to get the employer match in your 401k.
HSA contributions are tax deductible. Ideally, make them through your employee to save on payroll taxes as well. However, you can also set them up on your own as long as you have a qualifying health insurance plan. The money grows in a tax deferred way, and you don’t get taxed when you take it out, as long as you spend it on healthcare.
If you take the money out prior to age 65 and spend it on something besides healthcare, you have to pay taxes on the withdrawal and a 20% penalty; after age 65 you just have to pay the taxes.
You can use your HSA to pay medical expenses as they occur. But if you keep the receipts/records of your medical expenses and pay them out of pocket while letting your HSA grow in an investment account, you can reimburse yourself for these expenses at any time without paying an early withdrawal penalty, which can help you in an early retirement situation minimize your tax burden and can help maximize your tax-free growth.
A HSA is different from a FSA (flexible spending account). FSAs are a use it or lose it within a defined time period, typically a year. HSA money rolls over indefinitely.
Taxable Accounts
Just because you’ve maxed out your retirement accounts doesn’t mean you have run out of investing options for retirement. For high-income earners, you may not even be saving 15% of your income by the time you’ve maxed out your 401k, IRA, and HSA.
Once you’ve taken advantage of the tax-advantaged accounts, it’s time to start investing in a taxable brokerage or investment account. While banks offer these types of accounts, they tend to have higher fees. Online brokerage firms (Charles Schwab, Fidelity, TD Ameritrade, etc.) and mutual fund companies (Fidelity, T. Rowe Price, Vanguard, etc.) offer much better costs and fees. Additionally, fees and costs tend to decrease as you accumulate more assets with a particular brokerage firm or mutual fund company, so it is often worth investing the time in doing a little research up front to select one and then use it as your hub for your taxable accounts. Don’t let analysis paralysis stop you here though; pick one and move on - you can always switch later if necessary. Each of these companies generally has great customer support to help you with the necessary documentation to open your account.
Basic Investment Options
Knowing what to invest in can feel so overwhelming that it feels easier to just ignore investing. Don’t rob from your future to save yourself a little research now. While we have plenty of investment resources to help teach you here. Here are a few basic investment options to get you started.
Target-date funds
Target-date funds are a type of mutual fund that adjusts its asset allocation based on the specified “target date” for retirement. For example, a Target Retirement 2065 Fund is a target-date fund that assumes you will want to retire in the year 2065. The assets within the fund shift from more growth focused (higher risk) to conservation investments (lower risk) as you approach the target retirement date. While shifting your investments to more conservative, lower risk balances as you approach retirement can limit the growth during retirement, target-date funds offer a managed fund that can help you set it and forget it with a mix of different assets with the fund to offer diversity in your investment through a single fund.
Three and four fund portfolios
You may have heard of the three-fund portfolios and four-fund portfolios. Like a target-date fund, this approach gives you diversification in your investment without requiring a ton of time researching individual stocks, bonds, EFTs, mutual funds, etc. Statistically, it is very hard to beat the overall average market returns, so you’ll often hear people telling you to invest in these index funds that are spread out over hundreds of companies, instead of winning at some stock picks and losing at others.
The three-fund investment approach allows you to invest in three core asset types: bonds, domestic stocks, and international stocks using a US Total Bond Market Index Fund, a US Total Stock Market Index Fund, and an International Stock Market Index Fund. A common allocation is 20% invested in bonds, 50% invested in domestic stocks, and 30% invested in international stocks, or 40% invested in bonds, 40% invested in domestic stocks, and 20% invested in international stocks.
Four-fund portfolios can get a little more complex with different strategies for diversification.
A popular four-fund approach adds REITs (real estate investment trusts) with a REIT Index Fund. REITs are a great option if you would like to get into real estate but don’t have the capital for properties yet and don’t want to deal with syndicates. Depending on how much risk you want in your portfolio (higher risk can be greater gains, but it is also subject to more market volatility), different allocations can be set based on the stock/bond allocation you desire. Stocks are more volatile than bonds.
For a 60% stock and 40% bond portfolio, a four-fund allocation may look like: 40% bonds, 35% domestic stocks, 20% international stocks, and 5% REITs.
Another four-fund approach is to add an international bond index fund to the mix instead of REITs. For the same 60% stock and 40% bond portfolio, this four-fund allocation could look like: 28% bonds, 12% international bonds, 40% domestic stocks, and 20% international stocks.
Where to put what
Your investments do not have to be equally balanced in each individual type of account. Doing a full portfolio balance can take a little more math, but is a great way to make the most use of your tax-advantaged accounts. For example, REITs typically have high yields. Putting them in a Roth IRA or Roth 401k where all the growth is tax free, is a much better idea than putting them in a taxable account and having to pay taxes on their yields every year. Putting investments that don’t churn out dividends is better in your taxable accounts.
Shorter Term or Safer Investment Options
Many times, you want to put money in a place that feels more like more of a guaranteed return, or you're holding onto more cash than you need because you know you're saving it for an upcoming expense (down payment on a house, practice buy-in, etc). Ideally, you would still make money on that money instead of having it just sit and depreciate, and there are several short term options that are good for this.
More details on each of these coming soon here, but in the meantime, consider:
College Savings Plans for Children
Once you’ve started chipping away at your student loans and mortgage and are investing in your future, many look into setting aside money for their children’s education. If you’ve felt the weight of six-figure student loan debt, it’s a burden you might want to spare your children (though not necessary!). Always make sure you are taken care of financially first, since there is no guarantee that your children will support you financially later, so always prioritize contributions to your retirement accounts over contributions to these accounts. Here are some great tax-advantaged college savings plans to explore.
529 Plans
You pay in with post-tax dollars and then it grows tax free. Therefore, if you can, it’s a good idea to fund as much as you can as early as possible, to allow for maximum growth. In 2023, you can fund up to $17,000 per parent per child before worrying about the annual gift tax. There are also superfunding options that allow each contributor to gift up to five years up front with no gift tax penalties; discuss this with your accountant for necessary paperwork.
Which 529 plan should I choose?
You can use a 529 plan to pay for eligible expenses in any state, regardless of which state it’s set up in.
Some states offer a state tax credit or matching program, so if you live in one of these states, it’s generally beneficial to pick the state plan.
If not, different states have different expenses and investment options. You don’t have to use the state you live in, so use the ones with the lowest fees (common choices on our group include Utah and New York).
Some states also offer multiple options - usually a higher fee one that brokers sell and a lower fee one for DIYers. We’d encourage you to use the DIY to avoid fees. Keep in mind though, since the plans are administered by the states, the investment options can still be limited within a DIY plan.
These plans were originally designed for college savings, but tax laws have expanded over the years, making them a great savings tool for parents. Different types of expenses you can use a 529 plan for now include:
-
College tuition and fees
-
Other college expenses (under certain limits), such as
-
Off-campus housing
-
Food and meal plans
-
Textbooks and supplies
-
Technology items required by their program of study (laptops, software, etc.)
-
-
Trade school and vocational school tuition and fees
-
Some business expenses (purchased while they’re still in school; restrictions apply)
-
Private elementary or secondary school tuition
-
Homeschooling expenses (in some states)
-
Student loans (there is a limit, so make sure you check the rules)
If you or your kids decide not to pull the funds while they are in college, you still have options. If your child receives a scholarship, you may be able to pull an equivalent amount out of the plan without paying a 10% penalty. If your child doesn't go to college, you can transfer to a sibling, other family member, or yourself. As of 2024, beneficiaries of 529 plans will be able to roll over up to $35,000 of unused funds from their 529 plans to Roth IRAs without taxes or penalties (under certain limits, such as Roth IRA annual contribution limits and age of the 529 account).
Funds can always be pulled from the plan, you just pay the 10% penalty if it isn’t a qualified expenses or disbursement.
ESA Plans
Coverdell Educational Savings Account (ESA) is a trust or custodial account a parent can open for their child for educational purposes. Unlike the 529 plan, it has an annual contribution limit of $2,000 per child. There are also income limits associated with ESAs. As of 2023, the income limits for contribution are $110,000 (single) and $220,000 (married filing jointly).
An advantage of an ESA is that you can include almost any type of investment, where 529 plans are limited by the state administering them. Like the 529 plan, you use post-tax dollars and all the gains grow tax-free, though there is a penalty if you withdraw funds for non-qualified expenses. Also similar to the 529 plan, an ESA can be transferred to a relative of the original beneficiary.
Some people used them in the past for K-12, but now that 529s can be used for that, there may not be an advantage because they have lower contribution limits and no state tax breaks.
NOTE: You can contribute to both a 529 plan and ESA, so long as the combined annual contribution falls within gift tax rules/regulations.
UTMA
The Uniform Transfer to Minors Act (UTMA) is a type of custodial account that can hold any type of asset. Along with cash and assets like bonds and index funds, an UTMA account can also hold assets such as intellectual property and real estate. UTMA funds can be used for college, but they don’t have to. UTMA accounts do not offer the tax-free growth that 529 and ESA plans.
Since it is a custodial account under your child’s name, income generated by assets in the UTMA account are taxable, but under your child’s name and thus their tax rate (this is often referred to as “kiddie tax”) which can be advantageous for high-income earners.
Assets transferred to your child through an UTMA are irrevocable/irreversible. Once they reach legal age, the assets within the account are transferred to your child and are no longer under your direction/care or ownership. Keep this in mind when deciding to use this option, as you will be giving your children access to a sizable amount of money at a relatively young age!
Gift tax rules apply to UTMA accounts.
ABLE Accounts
ABLE accounts are tax-advantaged savings accounts for individuals with disabilities. Similar to the 529 and ESA plans, post-tax dollars are contributed and growth is tax free. And in some states, contributions can be eligible for state income tax deductions.
Disabled children are eligible for an ABLE account prior to age 26. ABLE accounts are easier to set up if your child is already receiving SSI or SSDI benefits as it makes them automatically eligible. Your child is still eligible for an ABLE account without having to receive benefits from the social security administration, but a letter of disability certification is required from a licensed physician.
ABLE account contribution limits follow the same gift tax guidelines as 529 plans and, also like 529 plans, states tend to have a max limit on the total amount of contributions you can make to an ABLE account.
Funds within an ABLE account can be withdrawn penalty and tax free any qualified expense. This can include not only education, food, and housing, similar to a 529 plan, but other expenses such as: employment training and support, transportation, personal support services, and health care expenses.
You can roll a 529 plan into an ABLE account, but the contribution limits remain the same.
Alternative Income Streams
Once you’ve capitalized on housing and retirement planning, looking at alternative income streams can be another great way to help diversify your income. Here at Physician Side Gigs, it’s no surprise that we think side gigs are a great way to generate more income to help you build wealth while doing what you love. We have several clinical and non-clinical options to explore throughout our website.
Some of the big options we discuss for alternative income streams are having your own business or investing in real estate. There are so many options within these categories that it can be overwhelming to determine the direction you are going in. Once you’ve developed your personal financial plan that states how much you feel you need to earn and save every year, when you want to retire, where you want to spend your time and your money, etc, it will become more clear which options are right for you.
Estate Planning
Once you start building wealth, you want to make sure you protect it. Consider estate planning and asset protection additional layers of insurance for your financial future and that of your family.
Depending on the complexity of your finances and the amount of wealth you have, your estate planning might be a simple will and up-to-date beneficiaries on your retirement accounts and insurance policies or as complex as wrapping your assets into LLCs and a revocable or irrevocable trust.
Everyone who has a spouse or family needs a will, but not everyone needs a trust, at least not in the early stages of their career. Find out more about estate planning here.
Taxes
Marginal Tax Rate
The marginal tax rate is the amount of additional tax paid on the next dollar of income that is earned. Under the progressive income tax method used for federal income tax in the United States, the marginal tax rate increases as income increases.
Under marginal tax rates, tax payers are divided into several brackets based on income levels. This then determines the rate applied to the taxable income of the tax filer. The first dollar earned will be taxed at the rate for the lowest tax bracket, the last dollar earned will be taxed at the rate of the highest bracket for that total income, and all the money in between is taxed at the rate for the range into which it falls.
Tax Deductions vs Tax Credits
Tax deductions and tax credits both reduce the total that you’ll pay in taxes, but they do so in different ways. A tax credit is a dollar-for-dollar reduction of the money you owe, while a tax deduction will decrease your taxable income, leading to a slightly lower tax bill.
Alternative minimum tax
Alternative minimum tax (AMT) is a tax system imposed by the US government that requires taxpayers to calculate their tax liability twice. Once, under ordinary income tax rules and then under the AMT and pay whichever amount is highest. The AMT is the excess of the tentative minimum tax over the regular tax. It is owed only if the tentative minimum tax for the year is greater than the regular tax for that year.
Learn more about taxes here.