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Should One Raid Retirement Funds as a Fellow?

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Today, Dr. Jim Dahle addresses a question from a resident about to enter fellowship. Cash-strapped, he asks if it would be reasonable to accept a penalty to access some of the money he saved in his 401(k) during residency.

How do you think the White Coat Investor would respond? Let’s find out, shall we? As always, today’s Saturday Selection originally appeared on the White Coat Investor.




Are there situations when withdrawing the funds of my retirement account from the years during my residency is okay? Even after accepting the penalties from cashing out early I will get roughly 10k (thanks to matching funds) on top of what I contributed over the five years ($25K) for a total of $35K.  I could definitely use these funds at this time of transition into fellowship. It would help avoid taking on more debt.  This money will be less than 1 month of wages of what I’ll make as an attending, when I can really start saving considerable amounts for retirement.  This money I saved as a resident is really just “spit in the bucket” and I could benefit much more now from the money while I am semi-poor.




There are a lot of issues wrapped up in this week’s question.  First, let’s review the rules on using retirement money, outlined by the IRS in Publication 590b.


401K Rules for Early Withdrawals


Since you’ve been getting a match, I presume you have some type of 401K or 403B.  I’ll also presume that’s a traditional tax-deferred 401K/403B, rather than the newer Roth 401K/403B, funded with after-tax money.  You generally cannot roll over 401K/403B money into an IRA while you are working for the employer, but it sounds like you’re leaving one employer for another.

You can withdraw the money, paying taxes at your regular tax rate on the entire amount, PLUS a 10% penalty on the entire withdrawal since you’re surely under age 59 1/2.  You can also borrow that money, paying interest on it like any other loan (but at least the interest is going back into your 401K.)  Those loans are due as soon as you leave the employer though, so that doesn’t sound like a good option for you.

401Ks also often have a “vesting” requirement to get the entire employer match.  This is a form of golden handcuffs to keep you with the employer.  If you leave before the employer match money is vested, you don’t get it.  5 year “cliff vesting,” where it is all vested at once after 5 years with the company is common, but so is immediate vesting and there are plenty of options in between.  Read your 401K/403B plan document to find out how yours works.



IRA Rules for Early Withdrawals


Since you’re leaving the employer, you could easily just roll the money over into an IRA and withdraw it if you so chose.  So you’re really guided by the IRA rules outlined in Publication 590b.  Traditional IRA withdrawals are subject to your regular tax rate plus 10% of the amount withdrawn unless you meet one of the exceptions listed here:

Exceptions To The 10% Penalty Rule

  1. Withdrawn after age 59 1/2
  2. Unreimbursed Medical Expenses (amount > 7.5% of gross income only)
  3. Disability
  4. Inherited IRAs
  5. Qualified Higher Education Expenses
  6. A First Home (up to $10K if you didn’t own a home in the last 2 years)
  7. IRS Levy
  8. Reservist Distribution
  9. Medical Insurance if you lose your job and are getting government unemployment payments
  10. “Annuitizing” the IRA via the Substantially Equal Payment Plan (SEPP) Rule

It doesn’t sound like you qualify for any of these except possibly the first time homebuyer rule.  I’ve written more about these options in a blog post discussing How To Get To Your Money Before Age 59 1/2, but that was really aimed more at someone wanting to retire before the government dictated retirement age, not someone wanting to raid retirement accounts for another cause. [PoF: It doesn’t apply to the question at hand, but 401(k) dollars can also be accessed during or after the year in which you turn 55 and separate from your employer.]


The Roth IRA Emergency Fund


When you take money out of a Roth IRA, there is no pro-rata calculation to make.  The first money out is always your contributions.  So if you’ve contributed $15K to a Roth IRA over the last 3 years, you can pull out up to $15K tax and penalty free.  If you want to take out more than that, you’ll be subject to the 10% penalty unless you meet one of the exceptions above.  In general, you won’t owe tax above and beyond the 10% penalty on those earnings.  For this reason, lots of people just starting out saving for retirement allow their Roth IRA to double as an emergency fund, investing it more conservatively than they otherwise would if they had a separate emergency fund.


Your Situation


So the answer is yes, you can take out your retirement money to help you out in fellowship.  You will pay tax on the money at your regular tax rate, PLUS 10% as a penalty for using a retirement account for something besides retirement.  The real question, however, is should you do that?

First, I want to say good job on saving so much during residency.  Even considering it may have been a 4 or 5 year residency, and the fact that you received a match from the hospital, that’s still impressive to have over $40K in retirement by the time residency is over.

I was only in residency for three years and didn’t get a match, but I don’t think we had $25K in retirement money saved up by the time I finished training.  So good job on that.

However, I have a very hard time reconciling the fact that you were apparently a supersaver as a resident, but now view living on your fellowship salary as “semi-poor.”  A typical fellow is making over $60K these days.  The average household income in the US is less than that.  It would seem if you are needing to go in to debt to meet living expenses on a fellow salary that you have a spending problem, not an earning problem. [PoF: edited to update salary data]


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The Case For Leaving The Money Alone


While ~$45K (or whatever the pre-tax, pre-penalty amount is) may seem like spit in the bucket now, especially relative to your anticipated future salary, it is also the portion of your retirement money that has the longest to compound.  If it compounds at 8% from age 30 to age 65, that $45K will be worth $665K.  That might be spit in the bucket to you, but it isn’t to me.

Even adjusted for inflation, it’s still $248K, and a decent addition to a retirement fund.  I might be cheap, but I’d prefer to just live a little less expensive lifestyle as a fellow and let that money continue to grow.

More importantly, I think the habit matters more than anything.  If you just raid your retirement accounts (or your home equity) every time you want to buy something, you may arrive at your 60s without much net worth at all.  You’ll then be working because you have to (if you’re lucky) or eating Alpo (if you’re not lucky.)  I find that people that can’t save money at all as a resident or a fellow have a hard time saving an adequate amount even on their larger attending salary.  Behavior is key in personal finance and investing.


The Case For Raiding The Retirement Account


There is a concept in financial planning known as “consumption smoothing.”  This is the idea that you borrow money when you’re young, gradually pay those loans back while also saving money as you get older, and then spending your savings in retirement.

The idea is that your standard of living remains about the same for your entire life.  All of us do this to a certain extent.  Thanks to our parents, we don’t have to sleep in a tent in the woods as a 5 year old.  We also buy our houses before we can really afford them by using a mortgage.  These are forms of consumption smoothing.

But I don’t think I would apply it to the rest of your life.  I find that I’m much happier when my standard of living is constantly increasing.  It is far easier to be young and poor than old and poor in my opinion.

By living within my means in med school and residency, saving heavily in my first few years as an attending, and then saving less and less each year I can have an increasing standard of living throughout my life.  I’d rather have that than a “consumption smoothed” life.

You, however, may feel differently.  Certainly, it will be much easier to save $45K on a salary of $30-45K per month than it will be on a salary of $60K per year, assuming you can control your behavior.  If your alternative is to carry debt at high interest rates then you can also make a good case for raiding your retirement funds.

Paying off credit cards at 18% or even 30% is obviously a much better “investment” than hoping for 5-10% in your retirement accounts, even with the tax savings.  You may even feel paying down Direct PLUS loans at 7.9% is a better investment, since the return is guaranteed.  A medical student can make a very good case for raiding retirement accounts (especially since he can do so with almost no tax or penalties) instead of racking up more student loans.

Overall, I would discourage using money that you put away for retirement for something else.  Not only are you penalized on the withdrawal and losing the benefits of decades of tax-deferred compounding, but you’re also reinforcing a bad habit.  Every situation is different, however, and only you can decide how best to spend your money.  If you do decide to raid your retirement accounts, I would be sure not to make a habit of it.


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What do you think readers?  Should this doctor raid his retirement account to “help out” in fellowship?  Comment below!


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8 thoughts on “Should One Raid Retirement Funds as a Fellow?”

  1. PoF may want to double check the tax on early Roth IRA earnings. I could be wrong, but my understanding is that non-qualified early withdrawal of Roth earnings is subject to ordinary income tax AND a 10% penalty.

    I read the above as stating only the 10% penalty applies. Given that fact, and that it will add 10 percentage points to the effective marginal tax rate on that money withdrawal, I do not think that it should be taken out. Instead, take a bit more (student?) loan while the interest is still tax deductible, and then pay it off ASAP while an attending.

    Or even better, do not take it at all, suck it up and spend less, and still live better than the average american, who already lives very well.

    • Earnings are definitely subject to 10% penalty and taxes unless one of the exceptions applies. If I wrote something that implies that isn’t true it is a mistake or at least poorly communicated.

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  3. Don’t do it. Don’t let any family member, friend or so called financial advisor talk you into tapping into your retirement account. If there was no such thing as “compound growth”, then we would not need to have this discussion. There is simply no reasonable way to make up for the loss of growth down the road by picking up extra shifts, moonlighting or taking up locum tenens assignments on your vacation time. It simply doesn’t work.

    Treat your retirement account like your first born. Protect it with your life!

  4. I also vote for not taking out the money. One of the few good financial decisions that I made in medical school/residency was to not cash in any of my retirement savings and to use a line of credit (and eventually my salary) to pay my way. I got a slightly better return on my savings than I was paying in interest on my LOC, but most importantly it was a lot harder for me to spend LOC money than money I had saved, because I didn’t like to go further into debt. It is also easier to repay debt once you’re working than it is to save, because you’re forced to do it by the banks! If you can’t be frugal and make ends meet with your current income, I would advocate going a bit further into debt over cashing in retirement savings.

  5. I agree with the author, The Physician Philosopher, and hatton1, Catherine T: let the money grow, and don’t take it out. The price is too high in the long run. I feel there might be two exceptions:

    1) Unless there is some big financial emergency, and you have exhausted all other means. One example could be a sudden and huge medical bill.

    2) If you plan to move outside of US permanently, and decide to live your rest of life there. This may apply to some foreign students, who finished their school and choose to go back to their home country.

  6. Don’t do it. We cashed out a 401k to buy his first practice from the hospital. Then 6 years later had to cash out in part of another 401k to buy ourselves out of what turned out to be an awful partnership. My family medicine husband (now 50) is working for a very large group and is finally maxing out his 401k again, but will have to work until he is 63 to make up in a pension (thank God for it) what he never will be able to make up for at this late date in those lost 401ks.
    Just don’t do it. Compounding is your friend!

  7. I think the reinforcement that this is an acceptable move to make it the worst part. The psychology behind that would torment you if performed over and over in your career.

    And to say, “I’ll only do it once!” Well, I would believe that as readily as I’d believe it from my drug seeking patient with a history of polysubstance abuse.

    It is addictive to spend money. Just use the minimal expenses you need for moving and transitioning from fellowship. Assuming that doesn’t involve buying a new house, new car, and moving expenses… It shouldn’t cost that much.


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