Investing Basics for Physicians: Choosing the Right Types of Investment Accounts
By Jared Andreoli, CFP®, CSLP®
Congratulations on making it through residency! Now that you’re a full-fledged doctor, it’s time to start thinking about how to grow your money. As investment management is one of the fundamental financial planning services we offer at Simplicity Financial, I can clarify your understanding of the different types of investment accounts.
In this article, I break down everything you need to know, with an emphasis on choices that are especially useful for new doctors. My goal is to help you make wise investment decisions, from tax-exempt accounts that help you save for retirement, to flexible options for growing your nest egg, to transforming your money goals into reality.
To make it simple, let’s divide your choices into “qualified” and “non-qualified” types of investment accounts.
Qualified Investment Accounts
The most appropriate investment accounts for doctors are determined by specific needs, financial situation, and retirement objectives. When selecting, take into account factors like employer matching programs, tax ramifications, and contribution caps.
1. Traditional IRA (Individual Retirement Account)
Contributions: When made with pre-tax money, they lower your annual taxable income. Tax deductibility is subject to income limits. As a higher income earner, you may not be able to make tax deductible contributions.
Tax treatment: Earnings grow tax-free until they are taken out in retirement. After age 59½, qualified withdrawals are usually subject to income tax. Withdrawals prior to that date (with some exceptions) pay tax and a 10% penalty.
Contribution limits: The maximum amount you can contribute to an IRA in 2024 is now $7,000 ($8,000 for those over age 50).
2. Roth IRA
Contributions: Made with after-tax dollars, so no initial tax deduction. Contributions may be limited by income. As a higher income earner, you may need to utilize a backdoor Roth IRA contribution.
Tax treatment: Qualifying retirement withdrawals are typically exempt from taxes and penalties. This gives you more freedom to utilize your retirement funds without worrying about tax consequences.
Contribution limits: Same contribution rules as traditional IRAs, $7,000 in 2024 ($8,000 for those over 50).
3. Employer-Sponsored Plans
401(k): The most common plan offered by an employer. Pre-tax contributions are made by you, and your employer can match them, essentially giving you free money for retirement. Profits increase tax-free until they are withdrawn. Comparable tax consequences and withdrawal policies to traditional IRAs.
403(b): Similar to a 401(k) but usually provided by tax-exempt and non-profit institutions. In 2024, the most an employee can contribute to a 403(b) account is $23,000 ($7,500 catch-up contributions are available for employees age 50 or older).
457(b): Similar to a 403(k) or 403(b), a 457(b) can be offered by state or local governments or tax-exempt organizations. 457(b) plans are deferred compensation plans that allow you to put money away pre-tax, the growth is also pre-tax. 457(b) plans have more specific rules around distributions, so please investigate the rules prior to utilizing a 457(b).
Non-Qualified Investment Accounts
Non-qualified types of investment accounts are the opposite of tax-exempt accounts, such as 401(k)s and IRAs. Take a look at this summary of their characteristics:
Tax treatment: You contribute money that has already been subject to income taxes. There’s no up-front tax break for contributions.
Flexibility and control: There is greater freedom with these types of investment accounts. Generally, there are neither restrictions on withdrawals nor limits on contributions (within specific standards). You have complete control over how much and when you invest, as well as unrestricted access to your money. They’re therefore suitable for short-term goals or having readily accessible savings.
Taxes on gains: The drawback? You’ll owe capital gains taxes. That means when you sell your investments, any gains you make over what you paid for them are subject to income tax. Depending on how long you keep the investment, there are varying tax rates (short-term vs. long-term capital gains).
Here’s a condensed list of common non-qualified investment accounts:
Individual brokerage accounts: These non-qualified accounts are the most flexible, providing an extensive selection of investments.
Taxable savings accounts: Although the interest on these accounts is taxed like regular income, they provide slightly larger potential returns than standard savings accounts since they retain cash or cash equivalents.
Margin accounts: These types of investment accounts are riskier; essentially, they allow you to borrow money to invest, possibly increasing your returns (or losses).
Consult With a Professional
Selecting the right investment accounts to help meet your goals, figuring out your risk tolerance, and selecting an investment plan are all difficult tasks. When you’re feeling overwhelmed by the large amount of information and choices associated with the investing process, getting answers from a knowledgeable financial professional can help.
At Simplicity Financial LLC, each client’s investment plan is individualized to reflect their goals. Using this specific goal-based investment approach allows our new-physician clients to better track their progress.
Get started today by scheduling a free consultation, or reach out to us by emailing jared.andreoli@simplicityfinancialllc.com or calling 414-207-6473.
About Jared
Jared Andreoli, CFP®, CSLP®, is president and financial planner at Simplicity Financial, a fee-only RIA dedicated to helping early-career physicians conceptualize their financial picture and achieve their financial goals. Jared specializes in devising individualized financial road maps for clients, and he loves nothing more than a full day meeting with clients who value his partnership to solve problems—big and small.
After college, Jared spent six years working as a mutual fund administrator for a large company. While he learned an immense amount about the financial world, he was missing the personal connection of working with individual clients. Combining his passion for finance and personal connection, he established Simplicity Financial in 2017.
Jared has a degree in finance with a concentration in financial planning from Western Kentucky University, along with the CERTIFIED FINANCIAL PLANNER™ (CFP®) and a Certified Student Loan Planner (CSLP®) certifications. Outside of work Jared enjoys cooking and traveling. He played baseball in college and still coaches occasionally. He and his wife recently welcomed a daughter, who occupies most of their time. To learn more about Jared, connect with him on LinkedIn.