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9min chapter
Tax Secrets Every Doctor Should Know
Stimulus - Learn Tools to Crush It in Your Medical Career
Maximizing Retirement Contributions for Doctors
This chapter explores the critical strategies for maximizing retirement contributions, particularly for medical professionals. It emphasizes understanding employer-provided benefits such as 401k, 403b, and 457b, alongside the strategic use of Health Savings Accounts (HSAs) for both tax benefits and long-term savings. The discussion contrasts HSAs with Flexible Spending Accounts (FSAs), highlighting their advantages in tax-free growth and portability, and shares insights on selecting the best HSA options based on individual financial goals.
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Speaker 2
Let's talk W-2. So they think they're doing everything, and in your mind think, I bet they're not doing this one thing. So what does that thing turn out to be? Usually,
Speaker 1
it ends up being that they're not maximizing out on retirement. That's the low-hanging fruit of whatever their employer provides. You'd be surprised. Most doctors are like, hey, I'm just going to max this out. But they don't really read the fine print to make sure that they are not only getting the full employee deferral but also any other incentives that the employer provides. This could even be health savings accounts like HSAs if they have that high deductible plan. I always put health savings accounts in kind of like the same realm of retirement because a lot of docs use them like retirement.
Speaker 2
Okay. So 401k, there's the lowest of the low hanging fruit that at this point most people are aware of. And sometimes you have employer matching and maybe that comes in and say, okay, I'm maxing that out. It sounds, and let me just work through this. It sounds like most people have that, that they're maxing out the 401k, but then there's this other stuff beyond it that they're not hitting. Am I right so far?
Speaker 1
Yes, that, or some places, like a lot of hospitals, since they're nonprofits, they don't have a 401k, maybe they'll have a 403b. And a lot of times when there's a 403b retirement plan, there's also a 457b retirement plan. And what a lot of people don't realize is that when you have a 403B and a 457B, you can actually max out your employee deferral twice. So like, right now in 2024, that's 23,000 each without any sort of catch up or anything.
Speaker 2
be. But the 437? 457. 457. And is it pretty much the exact same thing? It's just another place to dump your money and it's going to grow tax deferred for a while until you take it out? Basically,
Speaker 1
yeah. It's a pre-tax retirement account.
Speaker 2
I like the way you say it better, a pre-tax retirement account. And is there anything special about that where you can get burned or is it just, hey, there's this other thing that most people don't know about and you should check in to see if you have it. More
Speaker 1
the latter that you want to make sure that if you do have access to something then to like that, then it's just an extra area for you to put more money into and that helps lower your taxable liability.
Speaker 2
Let's talk about the HSA. You had mentioned that as part of a tax strategy and almost part of a retirement tax strategy. So there's HSAs and there's FSAs. There's the health savings account and the flex savings account. Right now we have an HSA, which I think is portable. If you go to a different job, you can still have them. But the FSA, that flex-saving account, I remember we used to have one of those with a previous job. And when I left the job, I lost it. I was not super stoked. So imagine, and this is not a stretch, imagine I'm not too savvy on the HSA FSA. If you'd be willing, give me a little primer on what these things are about and why you are saying that this should be in the same sentence as your 457 401k, your 403b. Just put HSA in there.
Speaker 1
Yeah, so with the flexible spending account, they're quite restrictive in the fact that it's a use it or lose it sort of situation. So if you put money in for a health care FSA, and you haven't used it by the end of the year, then you lose that. Sometimes they'll have some little provisions where you can like roll over a little bit into the next year, but most of the time use it or lose it. Now with an HSA, with a health savings account, those do not have any restrictions in the fact that if you don't use it all in the first year, for example, then it just continues to roll forward. So I love these accounts because they're triple tax advantaged and so that means that you're putting that money in tax-free, it's growing tax-free, and then it comes out tax-free when you need to use it for qualified medical expenses. Now, what I was saying before, like, hey, you can be using like a retirement plan, a lot of taxpayers, including my husband and I, we fund that HSA every single year, but then we don't touch it. We actually are saving our receipts until 30 years or so down the road when we want to actually access that money and to then submit it then. right now we're earning enough where hey, we can cover those medical expenses out of pocket, but we want to have that HSA that money be invested into like ETFs or any other sort of investment type accounts, whatever that HSA allows basically. And so then you 30 years down the road, let's say I'm 70 years old and I'm having some health problems, I want to access that money, then I can submit all of those receipts and then get that money out tax free, including the growth as long as it's used for qualified medical expenses. just like in pre-tax IRA, if you need to take money out and you're not using it for qualified medical expenses, then you do have to pay tax at whatever rate it is that when you go to take it out. Just like an IRA.
Speaker 2
Okay. So with this HSA strategy, let's say you had a surgery and you had to pay $5,000 out of pocket. How does the math pencil out with all of this?
Speaker 1
So let's say yeah, you're contributing $5,000 to your HSA. That's pre-taxed. So that's not being taxed on your W2. So let's say your tax rate is 20%. But then you go to pay your $5,000 for your knee surgery, and that's already been taxed. And so it's a wash there. But what you've done now is you've put that $5,000 into your HSA, where now it's going to be growing for the next 30 years at, let's say if you're just putting it into an ETF, the past 10 years, an index fund ETF is growing about 9% a year, give or take. You know, and it could end up being a lot more than that, depending upon the market. So you're breaking even in year one, and you're're getting that growth over the 30 years. And then when you go to take that money out and actually submit that receipt, that $5,000 receipt 30 years from now, then you're getting that growth you're getting that money out tax-free.
Speaker 2
Okay, so what I'm hearing is compounding interest is always going to win. If you need the money right now, then use it to pay your medical bills. It's, and you're saying that, hey, we have a buffer so that we can pay this with post-tax money. And then the compounding interest, we're going to rely on that to be just such a force multiplier deferred, but it's going to be a win when we're retired.
Speaker 1
Exactly. I mean, if you need the money now because you need that cashflow, then by all means use it. That's what it's there for. You're just taking away that opportunity for those funds to grow, but you've got to do what's right for you within that moment. If
Speaker 2
you start your HSA with an employer, think, oh, great, I can get on this HSA. And I personally, seven days a week recommend the HSA over the FSA after the user lose it, lost it. And the rollover of the HSA is just amazing. And then you see it grow. Is it the smart move to take that through your employer? That that's the conduit of how you access that HSA? Or is it the smarter move to find just an HSA that's out there and engage and say, I'm going to just use this HSA that has nothing to do with work. It'll be portable for me. Or does it not make a difference? Because once you start with an HSA, it doesn't matter who your employer is, you're just with that HSA.
Speaker 1
So some employer plans, like you might not like the investments that the HSA includes, or I've seen some HSAs where you're not even allowed to invest some of that money. So like, my husband and I use OptumBank, and that's just the company that his group uses. We always have to keep $2,000 in cash, but then the rest of it, we're able to just invest. And so if your employer has a plan that doesn't allow you to invest or maybe is more expensive to maintain or they doesn't have the investments that you want to put it in, then it's okay for you to not use their plan and go open up your own plan at another provider.
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