Episode 34: Physicians can contribute how much to their retirement plans?!

The Episode discusses the importance of utilizing 401k and 457B retirement accounts for physicians looking to retire early. It covers the differences between the two accounts, strategies for maximizing contributions, potential tax implications, and the benefits of diversifying investment options. Hunter emphasizes the advantages of 457B for early retirement and provides guidance on navigating the nuances of these retirement plans.

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Transcript

0:01

If you're a physician that wants to retire early and you're not utilizing a 4 57 B, you were missing out on a huge opportunity. So today we're going to cover just that. And welcome to the 34th episode of retire early retire. Now I'm your host hunter Kelly. Owner of Palm valley wealth management. And I do this podcast every Tuesday morning. To help physicians and attorneys either retire early or retire now. if you liked this podcast, go ahead and give it a five star review on your favorite podcasting app. Or share this with a friend. I think this is a good one, especially for those physicians out there. the 4 57 B is a very unutilized mechanism for saving for retirement, especially if you want to retire early. So. Today, we're going to cover one, the basics of a 401k quickly. the Anna 4 57 B. The similarities, the differences, and then some strategies on how to utilize both those accounts so that you can retire early. Often I talk to physicians, whether they be prospective clients or clients I've been working with for a number of years. And they all love. Practicing medicine. But, they don't always necessarily love the amount of hours that they're working. So one of the good things about, being a physician is if you save properly, you can either retire early or maybe slow down to part-time or PRN. one of the things that I help my clients with a lot is utilizing those 4 57 B plans. Like I said, let's hop into one. What a 401k is, or four, three B. 401k or four, three B is generally what's offered for physicians depending on what type of hospital they work with, whether it's for profit hospital or if it's more of a nonprofit hospital. 4, 4, 3 B and 401k. for all intensive purposes, we're going to say that they're the same thing. They are not the same thing. there are some very minor nuances, but for this. Conversation. We'll just assume they're the same thing. And so generally. the, your employer, won't incentivize you to save into those plans. By giving you a match. And so if you've just graduated residency, And you have a bunch of student loan debt that you're gearing up to pay off and things of that nature. I was still strongly suggest that you contribute to these 401k or 4 0 3 B plans because generally. You'll have a match that could be thousands of dollars. And so over time, you would reap the benefit of that. That compounding interest as it's invested into. Mutual funds ETS whatever's provided inside of that plan. And also you will have the ability to defer your compensation on those plans. So if sake of easy numbers, you make a hundred thousand dollars, you max your 401k out at$23,000. Well, then it would look like you're making$77,000 for that given year. So you're going to avoid that income tax for that given year. once you go from residency to become an attending physician, Obviously your income. We'll increase dramatically. And so you may not be prepared to pay those taxes or want to pay those taxes. And so utilizing your 401k can give you. The biggest, reduction of your income, especially if you're an employee. So unfortunately, outside of the 401k and then the fourth. 70 that we'll talk about here in a second. A lot of times physicians don't have a lot of options to, lower their income, like maybe a business owner would. So if you're working at a hospital as an employee, Or a different practice as an employee. You're not going to have a lot of options, to lower your income. Utilizing these accounts would certainly help not only lower your income tax, but also potentially help with some student loan payments. If you are, on a income driven plan. given your situation. Keep that in mind, as you contribute to those accounts. So once you contribute to this account, you will get some sort of match. And like I said, even if you're paying down some syndromic student loan debt or other debt, it may. Most likely most of the time makes sense to go ahead and contribute to this because of that match. So all those dollars, generally, it's a hundred percent. Up to a certain percentage. And so if you're getting a hundred percent return on those dollars, that is likely that you're never going to get a hundred percent on return on your money, really anywhere else, unless maybe you're owning a business and so on and so forth. go ahead and get that return on your money. And then inside of that 401k, you're going to have a slew of options of investment options. So generally speaking, there'll be what's called target date funds. Where, if you know, you're going to retire in 2050 or 20, 60, 20, 70. Or somewhere close to those date range ranges, then you would pick that particular fund and that fund the longer it's, the data is out, then it'll be more aggressive, more equities inside of that particular fund. And then as you inch closer to that timeline or that end date, it'll start to become much more conservative because it assumes that you're going to retire. And so these are great for people that are starting out that want to keep it simple. it'll give you some instant diversification through a domestic type stocks international. Small, large size companies, things of that nature. and it's something that you don't necessarily need to worry about now, as you accumulate more assets, and your objective changes and you have assets elsewhere. You may want to go in to the individual funds to compliment your other accounts that you have elsewhere, whether that be brokerage accounts or former employees, IRAs, things of that nature. And so generally you'll have, not very many options, but a handful of options between small cap funds. Large cap funds. growth funds, value funds. And so on and so forth and then some fixed income bond funds as well. And so if you are building. Assets and you're north of, let's say$250,000. Thus while assets throughout all of your accounts. Well, then you may want to start individualizing each count. So that you can, make sure that all of your accounts, your 401k, your brochures counts, IRAs, things of that nature, all sync together. And so sometimes if you're utilizing those target date funds, you may have more significant overlap than you would, you would want. And so then you can utilize those individual funds to meet, your investment need or investment objective. a little bit better than the target date funds, where they're kind of picking the allocations for you. again, 401k, you're going to get the match. You're going to be able to contribute as of 20, 24, up to$23,000. So if you do a pre-tax contribution, you're going to be able to deduct$23,000 of your income. you also could have a Roth option, so you could put up to$23,000 into Roth. And so that could be something you potentially look at. But, that is the basics of that 401k. And so the 401k. Also ha is a retirement account. So it's going to have that 59 and a half. restriction. So you would not be able to take that money out. And put it into like a personal bank account until you are 59 and a half without a penalty. now, if you left that employee, you left that hospital into a different hospital. You would be able to roll that over either into a new plan. Or an IRA, something of that nature, as long as it goes from pretax to pre-tax or Roth or off, then you would be able to move that without any penalties or taxes, anything of that nature. Now the thing that I want to focus on today. The thing I want to focus on today is at 4 57 B. And so if you are working for a nonprofit hospital, or a hospital that offers or 4 57 B, this can be a great tool to retire early expecially early on in your career. You just, Graduated redundancy got your first attending job. And now you have this option to contribute to both 401k and 4 57. So the beautiful thing about a 4 57, it is a considered a different retirement entity. If you will, it's its own set of rules. so you can actually contribute.$23,000 a year to the 4 57 and$23,000 toward, a 4 0 3 B. Unlike other rules, where if you let's say you worked at two different hospitals and wanted to contribute to two different 401ks. You would be restricted to a toll road,$23,000. For both of those 401ks. So the 4, 4 57 B is considered as old entity own. Deal. And so you're able to contribute. And so one, you would be able to increase your savings rate in a, in an account. That's going to give you tax deferred growth. you would put it in, in a pre-tax manner. So you're going to, you're going to deduct that income for that given year. Now, there are some things that you are going to want to consider for this 4 57 B. And you're going to want to figure out well, is this 4 57 BA governmental 4 57 B? Or is this 4 57 B. A non-governmental. And so generally speaking, we want it to be. A fo, governmental 4 57 B you don't have the choice. The entity has the choice. to make that, through the guidelines of their plan and all that and how they have to deal with their appliance stuff. but the governmental is going to be. Backed by the us government and you can roll it into IRAs later on down the road or other 401k is maybe from a different company. Or hospital that you go work for? And so the money is held in a trust. And generally we just call this kind of a bonus 401k, because you're not necessarily. You don't have the risk of that company going under and then creditors having, their hand at taking it because of the debts of the hospital may. If you do have a non-governmental 4 57 B. These are some things that you're going to have to. To worry about. So the non-governmental 4 57 B. The funds generally can only be transferred or thrawn. From a, from another non-governmental plan. And generally speaking, not going to be able to roll it into an IRA. so it's going to be a bit of a headache on how to take. this money out. And, sometimes even after you leave or retire, They may say, Hey, this is your window to take the money out. So if you have accumulated. Let's call it hundreds of thousands of dollars into this particular plan. you may have a tax headache because of the restrictions and the requirements on how to get the money out and things of that nature. So these are some things that you want to consider when you start contributing to a non governmental 4 57 B. and then the biggest risk, not very common, but the biggest risk to me. Is that the money is subject to your employer's creditors. So this is a non-governmental 4 57 B. And your hospital goes under for one reason or another. those creditors. Can come after. That money because it's not technically your money until you leave and pull that money out of your account. Okay. It's. It's in the 4 57 B titled toward your Mr. Or Mrs. Dr. Smith, account, but if they go under and you're still employed with that hospital, Those creditors of that hospital kink say, Hey, we need to be paid our debt and they can go into that 4 57 B and take that money. so those are some things that you want to consider with the 4 57 B. So this is a lot of information and you may be asking yourself, where would I find, some of this information? How do I know if it's a governmental or non-governmental 4 57 B. what are the rules around taking the money out once I leave the employer? And so what you're going to want to do is either go directly to the custodian that holds. the plan and you can ask for what's called the summary plan document, or you can go to HR. to the plan administrator at the hospital and ask for that. Plan summary plan document. And generally this will show. All right. Well, when can I get the money out? if I want to do maybe insert. Withdrawal. For whatever reason. if I leave, what are my options with this plan? is there a window when I can get the money out? Or can I leave it in there? Indefinitely? Can I roll it to an IRA? Is it a governmental or non-governmental 4 57 B. to answer your questions about what I'm mostly highlighting or talking about so that you can raise these questions. You want to have that. Summary plan, document to answer those questions now in both cases, the reason why a 4 57 B is a great option for early retirement is that it does not have that 59 and a half requirement. Oftentimes. When I work with clients and they say, Hey, hunter, I want to retire 50. Or Hey hunter, I want to retire by 55. And They have an option for a 4 57 B plan. this is the first area that I will go for a couple of reasons. One. The 1500, a half rule does not apply here. Two they're going to yet tax deferred growth in this plan. this can be a great vehicle for that. bridge between age 55 and 59 and a half or age 50 to 59 and a half. Now some things that you want to consider as you're contributing to this account, if you are putting in both pretax to your 401k or 4 0 3 B plan, and then also maxing out that 4 57 B. You may be, creating yourself a tax headache from an RMD standpoint, right? because all of this money is going in. Pre-tax let's say you work for 20, 25, 30 years. And right now as, as it is, you can put up to 23,000 in each. So what's that$46,000. And each, total and each plan. And. on top of that, maybe you're getting a match and one of the plans. You get down to that 30th year and now you have millions of dollars in this account. And maybe you don't need as much income as what the portfolio can provide. And you get to what's called RMD age at 75 as it stands now. you may have to start taking off a very large chunk of your portfolio, creating a big tax bill. So one of the things that you want to consider a long the way. with, Contributing to these accounts is one potentially building a brokerage account. So that early on in retirement, you can supplement. Your income with that brokerage account and then do some Roth conversions at a much lower tax rate so that you can kind of smooth out your tax bracket. Along the way. so that when you hit age 75 and the government says, Hey, I want three and a half percent of your entire retirement portfolio. And you're not getting hit with a two,$300,000 distribution. And having a super high tax bracket that you didn't necessarily have to have, or necessarily want to have. Right. And so these are some things to consider. The last thing I want to cover about 4 57. BS is generally when I review these for. Clients and getting them started on contributing or maybe reviewing them as they have contributed over years and years. Uh, the investment options tend to be a little less favorable than let's say a 401k and then definitely an IRA. So you just have to be mindful about. What funds are within the 4 57 BS. And so whether that be cost or, just the rating of the fun. Maybe there's one or two really good funds and you start contributing to those and then build your other assets around those funds so that you don't necessarily have to utilize, less than desirable funds within the 4 57 B arena. So consider that as well. and so just wanted to touch this topic. I think it's a very unutilized and uncovered, topic within The medical industry. And I love working with physicians and other medical professionals. And so doing some research for this podcast. there were only a handful of articles and YouTube videos that I saw. so hopefully that this will spread the word a little bit more about utilizing both your four, three B or 401k. alongside with a 4 57 to supplement. that early retirement, or just lower your income if you're wanting to, mitigate some taxes in the short term as well. So hopefully you found this valuable. if you did go ahead and leave a five star review on your favorite podcasting app and share this with, one of your physician friends that maybe could use this podcast as. Kickstarter to contributing to therefore 57 BS so that they can retire early. Again, thanks for listening. And we will see you in the next one. If you're looking for help on your 4 57. or any other, specific financial questions that you have? You can always go to my website, Palm valley, go ahead and schedule an introductory call. I would be happy to answer any general questions that you may have and see if we can be a good fit to work together. But as always, this podcast is for educational purposes only. It is not meant to be financial or investment advice. If you need help about your specific situation, please seek a financial tax legal or insurance professional. About your specific situation and as always, please keep Palm valley. Wealth management in mind. When making those considerations.