Hello all,
I'm going to be starting my first paying job in Internal Medicine this July. With that said, I have tons of forms to fill out. Sure enough, the retirement account/investment stuff is giving me a hard time. I have zero experience. I tried to do some background reading and googling, but it's still too much. I would love some advice on what to do.
My employer is a city entity/corporation. They have the following retirement investment options for me ---
457 (pretax or Roth), 401k (pretax or Roth), IRAs (pretax or Roth).
Nice options. I'd do the IRA on your own and not through your employer. That way you can pick your own company to open your Roth IRA with, like Vanguard. Or Fidelity.
My plan is to max out my contributions to all of those investment options on the Roth basis. Maxing out is the smart thing to do, but is it the best thing to do? Forget med school loans (I'm only on the books for $30k luckily) for a moment.
First, I'm a little bit envious of your small loan amount from med school. That's great! If you want it badly enough, you can pay that completely off before you're finished with residency.
This guy paid off $90K of what was left of his Harvard MBA student loan debt in 7 months. He had a six figure salary and sold a bunch of stuff, but the mindset is there as well as the strategy. It's a pretty famous blog now.
Anyway, maxing out tax-advantaged retirement accounts is definitely the ideal, but the priorities depend on several variables. I assume you don't have any credit card debt? No car loans? Mortgage/real estate? Do you have an emergency fund in a savings account? While I assume losing your job in residency is not something that usually happens unless you majorly screw up, it'd be for when your car breaks down or you need an emergency repair on your furnace or refrigerator or something. Also, does your residency offer a match on the 401k? If so, what's the vesting schedule? (I've always wondered if residency retirement programs offer matches with quick vesting...) This can affect priorities.
(1) Is it feasible to live frugally/humanely after maxing out my contributions?
Absolutely. Mindset, discipline, building good habits are key. It all depends on how badly you want something.
MrMoneyMustache is a popular blog on how to live very frugally -- it may shock you if the concepts are new to you. But this guy and his wife worked from college graduation to age 30 and had enough to be financially independent (live off interest) to quit their jobs and start a family. They continue to work, but whenever they want and whatever they want. That's the dream life.
(2) Is the $17k annual limit pertaining to the individual types of account or the aggregate?
The 401k contribution limit is $17,500 for 2013. I'm not as familiar with 457 plans, honestly. Anyway, the $17,500 is an IRS maximum limit for all 401K accounts combined, including traditional 401k or Roth 401k, and the total across all employers you have. I assume you'll just have one employer unless you moonlight or something and that job has a 401k...
2013 IRA limit is $5500 and is the total of all contributions for Roth IRA and traditional IRA. (Let's not get into SEP and Simple IRAs for self-employed...) So $2000 traditional IRA + $3500 Roth IRA and you're maxed out for the year. (Although it'd be weird to do that. Just max out a Roth IRA.)
(3) How does one calculate the deferral percentage for these accounts? On the form, it states a minimum of 1% up to a max of 50%. Is this number generally referring to the paycheck or your annual salary?
Thanks!!
Deferral percentage refers to paycheck. So if your paycheck is $2000 gross and you put 5% on the form, $100 out of each paycheck will go straight to your 401k.
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I guess if you could answer some of the other questions, it'd help fill in the gaps. But the general rule of thumb you'll find all over the Internet and personal finance books:
1) Emergency fund. At least start with $1000 in its own savings account for small emergencies. Separate from any other savings accounts you may have for other goals.
2) Destroy all credit card debt if you have any. Destroy any high-interest auto loans too.
3) If your employer offers a 401k match, contribute up to the entire match. So if that's 5% of your income, at least contribute 5%.
4) Max out Roth IRA. $5500. Mine's with Vanguard, and I freakin' love that company.
5) Choose: Max out your 401k. Usually this means traditional (pre-tax) 401k, but if you're a physician, Roth 401k may make more sense since your future tax rates will be higher than they are in residency. Also, $2500 of your student loan interest payments are tax deductible, so even if your loans are in forbearance during residency, it might be a good idea to at least throw some extra voluntary payments towards your loans for the tax break.
