Paying attention to your taxes now AND your taxes later will give you the tax diversification and freedom you’ll want during retirement. A tax-diversified portfolio should be made up of tax-deferred, Roth, and taxable accounts.
Most doctors are aware of the importance of diversifying their portfolios among various “asset classes” such as stocks, bonds, and real estate to spread their money across a large number of individual securities or properties.
In this post, you will learn about the importance and various methods for thinking of tax now and in the future as you make investment and withdrawal decisions.
The typical physician is taxed at a high marginal tax rate during their peak earning years. As such, we naturally look for tax-deferred retirement accounts that can give us relief from this tax burden, such as 401(k)s, 403(b)s, 457s.
Each dollar contributed to these accounts is a dollar that isn’t taxed now at high marginal rates. Basically, this income is deferred into retirement when we can withdraw at least some of it at lower marginal rates.
Instead of saving taxes now and paying them later, with a Roth retirement account, you pay taxes now and you and your heirs avoid paying income taxes on that money ever again.
Utilizing Roth IRAs and 401(k)s to Reduce Taxable Income
Many physicians can save money above and beyond their retirement accounts—whether in paper assets, like stocks, bonds, and mutual funds, or in income-producing assets like real estate or small businesses.
This investment account is also taxed in a different manner than a retirement account. Qualified dividends and long-term capital gains are taxed at lower rates.
Although a doctor can use Roth accounts in the early, lower-paying years or in their last few years as they cut back to part-time work, it can be hard to save a significant amount of money due to lower total income.