Resident Benefit Packages 401k/403b stuff

Discussion in 'General Residency Issues' started by Krafty, Mar 24, 2004.

  1. Krafty

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    Do any of the residents out there know whether they have any retirement benefit packages in their salaries during residency?

    I know the guys at Chrisiana Care in Delaware have 403b (which is the same as 401k, but for Healthcare Workers/Non-Profit Orgs).

    I'm about to start internship, and I wanted to know whether these type of benefits (which btw don't cost the hospital anything to set up or run) are COMMONLY offered.

    So anybody with the lowdown please post.
     
  2. Finally M3

    Finally M3 Senior Member
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    I know UMich, the residents don't participate in the 403K program that other full-timers at the hospital are eligible for. Instead, they get a 7-8% salary 'bonus' to 'encourage' retirement savings.

    :clap:
     
  3. Global Disrobal

    Global Disrobal Along for the ride
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    Washington Hosp Ctr does
     
  4. southerndoc

    southerndoc life is good
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    Yes, most programs will offer you a 403(b) (for-profit hospitals will offer you a 401(k)).

    Most hospitals will also match your contributions, up to a maximum of 3-8% (depending on the hospital). My hospital matches 3%.

    Here's the catch though: Many require minimum years of employment before you are "vested" into the retirement fund. The place where I matched requires 5 years of employment to become fully vested. So after my 4 years of residency, I may get only 60% of the 3% of my salary that they matched every year. If I stay on 5 years, then I would get 100% of everything they matched.

    I need to ask my hospital during orientation how much we will get after 4 years. It might not be worth it if I will only get 50% of their matched funds. Be sure to ask your hospital the same question. Some hospitals only have 3 year vestment times.

    You can transfer the money you contribute, the contributions of your hospital, plus any gains it makes into an IRA when you finish residency. Unfortunately you can't transfer it into a Roth IRA.
     
  5. Bobblehead

    Bobblehead Senior Member
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    The IRS permits either a 7 year gradual vesting schedule or no vesting for 5 years, then immediate 100% vesting. You'll have to check with your benefits department since those are only the absolute limits and most plans do something less rigorous. Without matching most people recommend investing in a Roth or traditional IRA, then diverting any remaining funds to a 401k. Tax deferred growth is always worthwhile so it is generally worthwhile to save as much as possible.

    You can't directly roll a 401k into a Roth IRA, however you can roll it over to a traditional IRA, then recharacterize (and pay taxes) on whatever amount you want to convert to a Roth IRA. Before doing so consider the additional tax implications plus where you'll be getting the money for the recharacterization.
     
  6. edmadison

    edmadison 1K Member
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    You should also note that if you have a qualified plan you can still do a Roth IRA and you should do it if you can scrape together the money. The value of that 3K in 40 years will be amazing compared to what you will spend it on today.

    Ed
     
  7. Fermi

    Fermi Senior Member
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    My last company had 100% immediate vesting, if I remember correctly. They matched 100% up to 3% of salary, and 50% on the next 3%. The immediate vesting was terrific, because I took away a lot in 401(k) after just 2.5 years even though I had to forfeit my pension and stock options because they had 5-year vesting.
     
  8. southerndoc

    southerndoc life is good
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    Sorry, what is different from what I wrote earlier?
     
  9. Krafty

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    I'm not sure I understand the vesting concept. Does it have to do with how much your institution matches your
    contributions?

    If that's the case, I wouldn't really care. If they match 3% that's peanuts anyway. All I care about is that I can invest the money tax free from inside the 403b (of course I realize I can't touch it without penalty for a while).

    Another question, if they "match" let's say the 3%, does that mean they match your contribution that year? Or match your total amount.

    I guess I should read up on 401k's. Anyway thanks to all for the info.
     
  10. southerndoc

    southerndoc life is good
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    For example:

    My PGY-1 salary is $44,600.

    Say I contribute 3% of my salary the first year. That's $1338. If my employer matches that 3%, that's an additional $1338. You're telling me you don't care about that free money? It's like a 100% return on your investment! I'm sorry, I'd rather take the $2676 as opposed to the $1338!!

    If my hospital allows me to keep >50% of matched funds with only 4 years of residency (since they require 5 years for 100% vesting), then I will participate in their 403(b) plan. Chances are they will probably let me keep about 80% of the matched funds, so there's a very high probability that I'll be participating in their 403(b) plan PLUS contributing the maximum amount to a Roth IRA (currently $3000 per year, but will increased to $4000 per year for 2005, and further increase to $5000 per year in 2007 I believe).
     
  11. Krafty

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    Sorry, I thought 3%, meant that the hospital matches 3% of what you have contributed, so essentially 3% of $1338...

    In that case, the matching of funds is really an advantage. Essentially it becomes 100% return on your investment.



    Now, even if they only have 50% vesting after 4 years, I still think its worth it. I'm not exactly sure why you would want to put ANY money into Roth IRA (or regular IRA) before maxing out on your 403b.

    The way we have been discussing it among my collegues, is that since the contribution is tax deductible (and hopefully - matched) it makes perfect sense to max on on it first before going to other accounts. Roth IRA is not deductible. Additionally, when you cash out on your 403b, the taxes you pay will be minimal, because your income will be much lower. So the tax benefit really is not there for a Roth. Just a thought.
     
  12. Bobblehead

    Bobblehead Senior Member
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    Several things to keep in mind:

    Your Roth contributions can be withdrawn tax-free (at least under current laws). The main argument people have with the Roth is will the government honor their promise that Roth IRA contributions 40 years down the line will be withdrawn tax free or will there be a situation similar to social security benefits being taxed..

    Additionally there are no required mandatory, age-based distributions from a Roth IRA. This means if you're at the RMD age for a 401k/rollover IRA and you don't need the money at that particular point in time you don't need to tap it and can leave it to grow.

    Additionally a Roth IRA can be transferred to your heirs with less difficulty than a 401k.

    Distributions from a 401k are taxed as ordinary income, not as long-term cap gains. This means that depending on the size of your 401k by the time you retire this may very well bump you up into the next tax bracket. 25% or 28% is still a lot higher than the 15% long-term cap gains tax rate.

    Most people argue that given any type of matching contribution (i.e. FREE MONEY) it makes sense to contribute to a 401k to reach your maximum matching. At that point in time, if you have limited resources it may make more sense to invest the balance into a Roth IRA as opposed to continuing to contribute to a 401k. No one is arguing that if you have enough money to do both that you don't fully take advantage of both opportunities.

    The other thing to keep in mind is that most physicians once they are out of training will likely hit the phase-out AGI for a Roth IRA so your window of opportunity to contributing to one may be limited to residency, fellowship and perhaps the beginning of an academic career.
     
  13. southerndoc

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    I would rather put money into a Roth IRA than a 403(b) plan for the reasons Bobblehead has already described.

    Say I put in $3,000 this year, $4,000 next 2 years, then $5,000 the 4th year of residency. That's $16,000.

    Now I keep that in a the Roth for 30 years. Given the average return on the S&P 500 for the last 30 years, I can expect an 11% return. To be modest, we'll also calculate an 8% return.

    $16,000 @ 8% x 30 years = $168,000

    $16,000 @ 11% x 30 years = $397,000

    $16,000 @ 15% x 30 years (feeling lucky) = $1.23 MILLION

    You've already paid taxes on the $16,000, so when you draw your money out when you turn 59.5 years of age, you draw your money out TAX FREE! Imagine if you could beat the S&P 500 (it's possible!) and average a 15% return for 30 years. You would be a millionaire without having to pay a single penny of tax on it!

    If your 403(b) had the same returns, when you take the money out, you pay income taxes based on how much you earn.

    Now, which is better? Pay taxes now, make it grow, and no taxes later; or tax-deductible now, make it grow, and pay taxes later (more than you would have paid on your contributions)?
     
  14. Crusher

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    The above mentioned AGI phase out is why we must hope that Bush's Retirement Savings Account (RSA) becomes a reality next year. This is essentially the same as a Roth IRA except that their is no income limits and the max contribution is 7500 with future adjustments for inflation. If that happened, we could all become quite rich at age 59.5
     
  15. Krafty

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    Everybody here seems to LOOOOOOVE the Roth. And I'm not a hater either, but I think the question we need to ask ourselves is this.

    When is the tax break going to benefit you...Today...or when you retire (with heaps of gold under your bed)?

    It's really a personal choice, and depends what you're into, but myself...I think I would rather get the deduction now and here's why. By the time I retire, I won't be working anymore (obviously) so I will be back down to the 15% tax bracked, or even less. So when I cash out on the 401k/3b annuity the taxes will be minimal.

    What is our greatest friend in investing? TIME. The power of compound interest OVER TIME is what really makes a difference. Those years of (possibly matched/vested) retirement account income can really make a difference.

    the $4000 Roth amount talked about before is taxed at least at 15% ($600) NOW which is a significant amount (at least as a part of our measly 40k salary). And that's assuming that you put a WHOPPING 10% of your income 'bones into tha' ROTH

    I really think it's a tough call, but I think I'm gonna go and max out my 403b.
     
  16. southerndoc

    southerndoc life is good
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    Krafty, paying 35% of taxes on $3,000 per year is a lot lower than paying 15% taxes on $25,000/yr.

    If you accumulate enough wealth in your traditional IRA, then you will NOT be in a 15% tax bracket when you withdraw your money. Your traditional IRA payouts are reported as income, so if you draw out $200,000 in one year so you can take a vacation, well guess what... you're no longer in a 15% tax bracket.

    Paying now definitely translates into paying less later!
     
  17. doctim

    doctim physiatrist-in-training
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    i am maxing out my roth ira. as stated above, once you make >90k, you can't put money into it anymore. i'll put about $11k into it during my residency (actually more after they increase the max you can contribute) and when i turn 59.5, it'll be worth $300-400k (most likely, but hopefully more). i assume when i'm done w/ residency i'll make more than 90k and it's over!!! can't contribute anymore. when i get to emory, i'll also make max contributions to my 403b.
     
  18. Bobblehead

    Bobblehead Senior Member
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    As a resident you will likely not see the 28% tax bracket (at least based on 2003 tax tables) unless you moonlight a lot and have a lot of investment income already. That means your highest marginal tax rate currently will be 25%.

    Your assumption is that in retirement you will be in the 15% tax bracket. That means your AGI will be limited to 29,050 per year. This makes the assumption that you are willing and able to live on that amount per year. While this lifestyle may be feasible for you now, it's much harder to go back to a lower AGI than it is to go from paying to be a student to getting paid as a resident.

    That's not to say investing in a 403b over the Roth is a bad choice. A 401k/403b carries the immediate advantage of reducing your taxable income which will reduce your tax burden while your overall income is relatively low. It will also allow you to get used to "paying yourself first" (pick any number of authors who have used that cliched phrase). If you've never seen your full paycheck and put 10+% into a tax-deferred plan right off the bat you'll never know that you were ever missing anything.

    The Roth IRA does not convey this advantage as you must be disciplined enough to save up after-tax income and then actively transfer it to the Roth IRA account. If you've seen prior threads on this board, disciplined investing is the last thing on most people's minds when their thoughts turn from paying 40k a year to making 40k a year. Once you have the money in hand do you have the self-control to leave it in your checking/savings account until you're ready to invest it in a Roth?

    The bottom line is, no matter which vehicle you chose the most important lesson to be learned is to begin investing in yourself by saving some money right away. If you think based on your overall asset allocation plan the 403b makes more sense, fund that. If you have anything left over (and it is possible to fully invest in both a 403b and Roth on a resident's salary in the right city) put that into a Roth.
     
  19. beezar

    beezar Senior Member
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    So when's the deadline for investing into a Roth IRA for 2003 tax year?
     
  20. Bobblehead

    Bobblehead Senior Member
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    April 15, 2004 is the last date for Roth 2003 contributions.
     
  21. southerndoc

    southerndoc life is good
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    Keep in mind your max investment in a Roth IRA for 2003 is limited to $3,000 OR your annual income, whichever is less. If you made nothing last year, you can't contribute anything to a Roth IRA.

    Excess contributions are taxed at 6% annually for as long as they remain in the Roth.
     
  22. flash_gordon17

    flash_gordon17 Junior Member
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    Question: In my contract, it says " residents make employee contributions at a rate of 10% of salary."

    that makes it sound like you have to do 10% which is a decent chunk of change of my salary-3000 dollars

    or can I decide what % i want to contribute?
     
  23. southerndoc

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    AFAIK, you can always choose. I think employers can require you to participate in their retirement plan after so many months/years of employment, but I think it's limited. Not sure of the exact amount, but 10% seems very high.
     
  24. Krafty

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    Just comparing the initial investment capital of 401k vs Roth IRA. The lack of tax deduction for the Roth means that FOR EACH $1000 I would be able to invest inside a 401k, I would only have $850 to invest (15% - lowest bracket) inside a Roth.

    Meaning you're loosing 15% of your initial investment capital TO BEGIN WITH.

    Tell me those buck-fifties per grand don't add up to A LOT of money, and I might be convinced to not max out on my annuity before contributing to a Roth.

    It's not a simple question of no taxes when withdrawing. I also think it's important to think of how much more capital one has to invest with.
     
  25. edmadison

    edmadison 1K Member
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    Yes this is true. When Roth's first came out the financial gurus where looking at this because you can convert a traditional IRA to a ROTH by paying taxes. If I recall correctly the cut-off was that you should convert unless you are 50.

    You do start in a little bit in the hole, but the value of this income is all tax exempt, not tax deferred. Here's an example. I invest 2000 in a Roth IRA, having to pay 300 in taxes (using your numbers. Lets take a reasonable long term rate of return of 8% annually. By the rule of 72s, my money doubles every 9 years. When I retire 45 years later (I started at 21) my money has double 5 times to $64,000. When I take this money out, I am not taxed. If I take the same money and invest it in a traditional IRA, I save 300. So now I get 2300 doubled 5 times to $73,600. If I pay that same 15% tax rate (actually will be higher if you save well, but we'll be conservative). I walk away with 62,560. Close, but still a loss, If I'm in the 31% bracket I get my butt kicked, keeping only $43,424.

    Get it now. 401K/403B are great investments, especially if your employer kicks in a contribution. The Roth, however, is the best deal the government has ever given us. Don't pass up this opportunity. The value of little spartan living while young has a tremendous long term benefit.
     
  26. Krafty

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    Remember we're comparing the same $2000.00 --> Meaning it's a $2000 vs $1700 comparison. (You actually would have to pay a little more tax on $2300).

    So if you crunch the numbers, with initial $2000 capital a 45 year investment at 8% would yield $59,111.94

    The same $1700 would yield $50,245.15.

    $8,866.79 difference. Now of course you're not going to take out the whole 401k out at once, it will most likely be a graduated withdrawal. Anyway, this is just $2000 we're talking about.
     
  27. edmadison

    edmadison 1K Member
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    Actually, we are not comparing 1700, because if you are smart, you max out the account. I used 2000 because the math is easier than 3000. You are right, the tax on 2300 would be $45 greater. Adjusting the numbers 2350 would be 75,200 instead of 73,600.




    No matter what you do you should max out your Roth, even if you have to sell an organ (I have two livers, right?).

    Ed
     
  28. Krafty

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    This might get monotonous, and incorrect so if anybody else wants to look at hard numbers and correct us, feel free.

    Well what I was actually talking about is investing the same amount either through the 401k or a Roth. Let's take the max contribution to a Roth ($3000...is it?).

    401k
    $3000 Initial Capital @ 8% after 45 years = $88,667.91

    Roth IRA
    $2550 Initial Capital ($3000-15% tax) @ 8% after 45 years =
    $75,367.73

    Difference of $13,300.19 (443% of initial $3000 investment).
     
  29. Hercules

    Hercules Son of Zeus
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    Slight correction to your numbers. You're not accounting for the chunk that taxes will eat up when you cash out a 401k.

    401k
    $3000 Initial Capital @ 8% after 45 years = $88,667.91
    Then subtract 15 to 30% in taxes.
    88,667.91 * .85= $75,367.72
    88,667.91 * .70= $62,067.54

    Roth IRA
    $2550 Initial Capital ($3000-15% tax) @ 8% after 45 years = $75,367.73

    By the numbers above you can see that the outcome of the Roth IRA is the same as the best-case (and also least likely) scenario for the 401k, while being much better than the worst case (and much more likeyl) scenario for the 401k.
     
  30. southerndoc

    southerndoc life is good
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    I'm still not sure I agree with the Roth calculations... It seems like you are paying taxes twice on the Roth from the way you guys are figuring it, when in fact you are not. It's money you have already paid taxes on.

    I'm in full support of maxing out a Roth before a 401(k)/403(b) plan.

    To those people who do not max out their Roth, I say the heck with them. Let them invest in their alternative plan. For I will rake in my riches of my Roth tax-free while they will be regretting their actions in the years to come.
     
  31. Krafty

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    You're not paying twice. Let's say you make $30,000 (and that's your adjusted gross income - AGI). You are in the 15% tax bracket. Now, you want to take the $3,000 of that and put it in a retirement account. This is where your choice comes in.

    If you put your money into the 401k, your AGI is now $27,000 and your tax (@ 15%) is now $4050

    If you put your money into the Roth IRA, your AGI is $30,000 and your tax (@15%) is 4500

    A total tax difference of $450 or 15% of the originally invested $3000.

    All we're saying is that you have to (Roth) versus not have to (401k) pay the tax on that money during the time of the contribution.

    What field you goin' into , anyway GeekMedic?
     
  32. Bobblehead

    Bobblehead Senior Member
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    Actually with this example the 401k will clearly yield less because at 89k by 2004 tax rates (and assuming these don't change significantly by retirement) you are well into the 28% marginal tax bracket. That makes the 15% tax calculation highly unlikely.

    On $88,667.91 based on 2004 tax rates you will actually end up paying $19,479.01 in taxes making your 401k (assuming you cash out all at once) worth $69,188.90. Clearly worse than the Roth..

    Remember, this is all "higher math". The basic principle is save as much as you can. If you want to put it into the 401k before the Roth IRA, fine. You're still far ahead of the guy that spent it rather than invested it. If you're looking for optimal returns the Roth is generally better for a resident as most us plan to retire on more than $30,000 a year (at least that's my plan).
     
  33. southerndoc

    southerndoc life is good
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    Sorry, I wasn't stating you'll have to pay taxes on it twice. I was just stating that by some of the examples here, people make it out to seem like you pay taxes twice.

    I'm already investing in a Roth fund. My funds are doing quite well now.

    I'm going into emergency medicine... and investing. :cool:
     
  34. Krafty

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    EM...way to go (Anesthes' myself).

    I have to be honest, EMRA.ORG is the best residents websites I have seen. Their money planning as well as general career advice spans across other fields. I used some of the interviewing tips myself.

    Investing/Retiring stuff tho...
    I do believe Roth is a really good program. I gotta admit when I ran the calculations, especially on the $3000 initial investment, there was no difference in net after the 401k withdrawal income tax.

    As I've said before
    401k
    $3000 Initial Capital @ 8% after 45 years = $88,667.91

    Roth IRA
    $2550 Initial Capital ($3000-15% tax) @ 8% after 45 years =
    $75,367.73

    What I didn't say, was that after taking the $88,667.91 from the 401k at 15% tax rate (assuming the smallest tax bracket) my amount would be --> anybody...anybody...?
    $75,367.73

    So my calculations themselves see no difference. The only difference I could think of is if the appreciation rate (8% as I have given) is actually different between the two. But at this point I'm confusing myself. Anybody with more 401k knowledge, please continue this discussion.

    Godspeed to everybody.
     
  35. ken37

    ken37 Senior Member
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    your figures are correct, but the assumptions you make are questionable. I maxed out my Roth this year at 3k, which cost me a bit more than maxing out a Trad IRA, but in the long run I am limited by the 3k limit. Additionally, you are also assuming that you will be in the same tax bracket when you retire. I assume that I will be in the highest tax bracket when I retire, whereas I am not in the highest bracket right now. Furthermore, you can borrow money out af a Roth at any time, up to the amount of your total initial investments (ie no interest earned) without any penalty whatsoever, for any reason, and you don't face a penalty if you don't pay it back. In a traditional IRA, you can only borrow the money for a couple of circumstances (ie first house purchase), and face a penalty if you don't pay it back within a certain term.

    Just my 2 cents,

    Ken
     
  36. southerndoc

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    Now figure that up with the average stock market return of 11% and a realistic tax bracket of 25-33%.

    Roth: $2550 @ 11% x 45 years = $279,300

    401k: $3000 @ 11% x 45 years = 328,590

    Assuming disbursements of $75,000 per year to maintain a modest lifestyle, you're looking at a tax bracket of 30%. So, at a marginal rate of 30%, your total tax on $75,000 would be $17,143 per year. Your withdrawing 4.4 years worth. For simplicity, we will compute your final withdrawal as $28,590 (27% marginal tax rate). Tax on $28,590 would be $4,269. Add the previous 4 years of tax rates to the final year, and your total tax is now $72,841. $328,590 - $72,841 = $255,749.

    Personally, I would rather pay the tax before making my contribution (i.e., a Roth) -- tax on that $3,000 -- rather than paying taxes later (i.e., to the tune of $72,000).
     
  37. DrKnowItAll

    DrKnowItAll Member
    7+ Year Member

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    Ask any sane financial adviser and they'd tell you to invest in a 401K plan before thinking about IRAs.

    This is common sense. You'll get your money doubled immediately after making a 401K contribution. Plus, IRAs are new creatures and no one has any experience with how these funds are actually distributed.

    It's also very important to realize that no matter how much one invests in a 401K or IRA plan, no one can live comfortably on these funds post retirement unless they are willing to accept a big change in lifestyle.

    The truth is that if you want to live comfortably in retirement, or retire early, you must go beyond these pity plans and seek out other means of making investments.

    Being a doctor will not make anyone rich anymore, but the regular income it guarantees can support many wise investments and business ventures.
     
  38. Bobblehead

    Bobblehead Senior Member
    Physician 15+ Year Member

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    Your post contains a lot of dangerously incorrect statements that I feel it needs to be refuted point by point. IRAs are not new. What is now called a "traditional" IRA was established in 1974. The "new" IRA is also called a Roth IRA which was established in 1997. There are very clear cut rules established regarding distribution of traditional IRA monies. Since it's been over 30 years since they were established there are quite a few people who have started taking their voluntary or mandatory distributions. You can read more at the IRS website in publication 590:

    http://www.irs.gov/pub/irs-pdf/p590.pdf

    I vigorously dispute this statement. There are a number of useful calculators which you can play with at the following site that will allow you to determine the power of compound interest accruing tax advantaged against what you would consider a safe withdrawal rate in retirement.

    http://www.fool.com/calcs/calculators.htm?source=PFinAg

    4%/year is a commonly quoted figure but this withdrawal rate is highly controversial and is based on both the lifestyle one wishes to live, what one expects the rate of inflation to be, and what rate of return on investments one expects to have during retirement when asset preservation has become more important than growth.

    The foundation of anyone's retirement plan should be as many tax advantages accounts as one is entitled to. The argument of which one to fund first is an individualized decision of course but stating that these are pity plans is wrong. They are your greatest tool in addition to compounding time for a blissful retirement.
     
  39. southerndoc

    southerndoc life is good
    Physician Moderator Emeritus Lifetime Donor Classifieds Approved 10+ Year Member

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    I learned something new the other day during our financial aid exit interview. We had a financial advisor come speak to us.

    His take:

    Roth IRA all the way (nothing unexpected there).

    Of interest:

    401(k) and IRA's are untoucheable if a patient sues you. However, 403(b)'s are viewed differently by the legal system and you could lose it if you lose a lawsuit.

    His take: 401(k) is better than 403(b). If you get a 403(b) as a resident, do a rollover into an IRA as soon as you start practicing on your own.
     

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