Healthcare Professionals
As a healthcare professional, you likely have some unique retirement planning opportunities available to you. This can add a level of complexity to your overall retirement plan and present you with some tax challenges people in other professions may not have to deal with.
Because of the variety of retirement plans offered to healthcare professionals, we believe it is important for you to understand the options you may have available to you. Also, some employers are quite restrictive with what you can do with the money when you leave the employer. Some require you to liquidate and distribute the entire account balance when you stop working. If you have a large balance, this could create quite the tax bill for you in that year. Be sure to check the distribution options of the plan prior to utilizing it, the more flexible the better.
403(b)
A 403(b) account is a retirement account that allows you to make elective salary deferrals. This means you can elect to have a certain amount withheld from your paycheck and deposited into the account. You are allowed to contribute up to $20,500 in 2022. If you are over 50 years old, you can contribute an additional $6,500.
Deposits can be made on a pre-tax or Roth basis. If you make pre-tax contributions, money is deposited before taxes are taken from your paycheck. For example, if you earn $250,000 in a year, and deposit the maximum $19,500 into your 403(b), the IRS will only tax you on $230,500 of income.
Once in the 403b, any investment gains are tax-deferred, meaning you don’t pay any taxes as long as the money stays in the account. You have to wait until you are 59.5 years old before you can withdraw the money, otherwise you are penalized and pay extra taxes. In retirement, when you withdraw the funds from a pre-tax account, the amount withdrawn is treated as earned income in that year and taxed accordingly. If you make Roth contributions, the opposite happens. Money goes into the account after taxes have been withheld. So if you make $250k in a year and make a Roth contribution to the 403(b), you are still taxed on $250k of earnings for the year. No incentive on the front-end to save. Money still grows tax-deferred, and you still have to wait until you are 59.5 to touch it. Once eligible, qualified withdrawals are tax-free.
401(a)
Not all employers offer a 401a, but many hospital systems do. The employer sets the contribution rules for this account and it is mandatory. The employer could make all the deposits into this account, or they could mandate the employee deposit a percentage of his or her paycheck as well. Whatever the amount is, it will be fixed until the employer decides to make a change. For example, the employer may have a 401(a) plan that dictates you will deposit 6% of your paycheck pre-tax into the account and the employer will also deposit the equivalent of 6% of your salary into the account. Contributions are made on a pre-tax basis (no Roth option available). Participants get to decide how to invest the money within the plan, similar to a 403(b). You also have to wait until age 59.5 until you can touch the money.
457(b)
Not all non-profit employers offer 457(b) accounts. If your employer does offer a 457(b) plan, it could be worth taking advantage of if you are already maxing out the 403(b). The contribution limits are the same ($20,500 in 2022). Contributions are made on a salary-deferral basis, meaning the money is withheld from your paycheck if you elect to contribute to the plan. Some employers allow Roth contributions, in addition to pre-tax.
The main differences between the 457(b) and the 403(b) are the age restriction and the asset protection component. With 457(b) accounts, you don’t have to wait until you are 59.5 until you can withdraw the money. Typically, the employer only requires you to be “separated from service,” meaning you don’t work for the company anymore. When looking at retirement plans the 457(b) can be attractive for people who do a good job saving for retirement and are in a position to retire early.
The major downside to 457(b) plans is the money isn’t as highly protected as other qualified retirement accounts. For example, if the hospital declares bankruptcy, they could potentially dip into the 457(b) plan assets in order to pay back creditors. This means they could potentially take the money you saved in your account. So, you probably only want to use the 457(b) account if your employer is financially stable. Lastly, 457(b) accounts are sometimes difficult to take with you when you leave the employer. Most can only be rolled to another 457(b) and not an IRA or other retirement account. Also, some employers are quite restrictive with what you can do with the money when you leave the employer. Some require you to liquidate and distribute the entire account balance when you stop working. If you have a large balance, this could create quite the tax bill for you in that year. Be sure to check the distribution options of the plan prior to utilizing it, the more flexible the better.
With all the savings options available, it can be difficult to put together an effective and efficient retirement savings plan. It can also be difficult to turn these accounts into tax efficient income sources upon retirement. Use the link below to schedule a Free Discovery Call and see how we can help you put together an effective savings plan or create tax efficient income in retirement.