VOLUME 36, ISSUE 2

Residents who are about to begin their final year of training view the prospect of transitioning from resident to staff anesthesiologist as an exciting time. Years of training, hard work, and numerous call shifts have led to this point. Yet, many decisions still need to be made. An important one is developing a financial plan, a topic often overlooked in medical training. In our specialty, it is crucial to formulate a safe and effective anesthetic plan that considers numerous patient, surgery, surgeon, and environmental factors. In our clinical care, we always have multiple contingency plans to deal with the potential for unexpected situations. It is also important to give similar attention to our individual financial plans. These plans will allow us to adequately care for ourselves and our families in retirement, long after our clinical responsibilities have ended.

Financial literacy has been an interest of ours since medical school and we have continued reading and researching since those early days. Given the numerous options, rules, regulations, account types, and tax implications in the financial world, we wish to focus on a specific area of retirement as it relates to resident physicians. It is important to understand and decide whether retirement contributions are made with pre-tax or after-tax dollars, as residents can expect a significant increase in compensation and taxation once training is complete. Although we are not financial advisors, we believe that there are simple elements of financial literacy that we can share with our colleagues to allow them to benefit from information that we have learned over the years.

We will begin with a discussion of pre-tax contributions to investment accounts, which include any funds to an investment account made before federal taxes are deducted. Particularly, these accounts are tax-deferred, (also known as tax-advantaged) retirement accounts that are often employee sponsored. Examples include traditional Individual Retirement Account (IRA), 403(b), Health Savings Accounts (HSA), Flexible Spending Accounts (FSA), and most 401(k) plans. An individual will not be able to completely avoid those taxes. They are just deferred until that individual begins to withdraw from their account in retirement (or when certain conditions are met). Advantages to pre-tax contributions include reducing taxable income (which ultimately means less income tax upfront, allowing investments to grow tax-deferred until withdrawal in retirement), increased take-home income, and the ability to take advantage of employer match programs (which match a certain percentage of contributions to your retirement account). Arguably, the most important consideration with pre-tax contributions is understanding how those deferred taxes will be paid in retirement and at what rate. This is especially noteworthy in situations where the expected retirement income is significantly higher than present income, resulting in the retiree being in a higher federal income tax bracket. Additional considerations include those general to most retirement accounts, such as early withdrawal penalties, limited account specific contribution amounts set by the Internal Revenue Service (IRS) and required minimum distributions which must be taken once you reach a certain age (historically 72 years of age).

Post-tax contributions, also known as after-tax contributions, are made into investment accounts after taxes are deducted. As with pre-tax contributions made into tax-advantage accounts, the money can come from payroll. However, these accounts are often specifically classified as Roth accounts and have strict rules. A Roth account invests after-tax funds, which means the investment return can be withdrawn tax-free in retirement (or when money has been held in the Roth account for at least 5 years). Both Roth IRAs and 401(k)s exist and many employers offer a Roth 401(k) and/or allow rollovers of an existing 401(k) into a Roth 401(k). There are instances where you can make post-tax contributions to non-Roth 401(k) plans which are not subject to contribution limits, but, for simplicity, this discussion will be limited to Roth accounts. As an aside, anytime money is transferred from traditional IRA/401(k)s into their Roth counterpart, federal taxes at your current tax rate are paid on those conversions, as it is considered income. Unlike a Roth 401(k), which does not have income limits, Roth IRAs have specific income limits in which earners are not eligible to contribute and phases out between $146,000-$161,00 for single/head of household, $230,000-$240,000 for married filing jointly, and $10,000 for married filing separate. There is an option to contribute to a Roth IRA if you make over these income limits via a process known as backdoor Roth IRA. Furthermore, the annual contribution limit for a Roth 401(k) is $23,000 while a Roth IRA is $7,000 for 2024. An entire discussion can be made regarding Roth IRAs, but we will focus on employer-sponsored Roth 401(k)s. Since those contributions are taken after tax, your initial tax burden is higher, which typically results in a smaller paycheck. However, given those contributions have already been taxed, any future growth can be withdrawn tax free, even if you are in a higher tax bracket later in life. Additionally, you often benefit from employer matched contributions which further compounds your tax-free earnings.

So, is it better to contribute pre-tax or after-tax to your retirement account? Let’s look at an example. As with all investment calculations, there are many assumptions, and some may not hold true for everyone. Our goal is to provide a simplistic model using real salary figures seen by residents. The average Texas resident physician’s yearly gross income is $67,362 or $5,613 per month before taxes. If the resident contributes 5% of their salary pre-tax to a retirement account, that equates to $280 per month. Thus, their taxable income per month decreases from $5,613 to $5,333. Extrapolated to an annual salary, their taxable gross income decreases from $67,362 to $64,002, and their federal income tax decreases from $12,223 to $11,237, a savings of $986. Residents understand the importance of extra cash at a time when expenses are high, and income is low. When looking at post-tax contributions to Roth accounts, the $280 is deducted after taxes have been paid, thus, the resident will see no immediate income savings (the benefit will be realized much later). Now let us assume the resident only contributed to their Roth retirement account during training (total contribution of $13,440) and then allowed the account to grow for 30 years at the average annualized real rate of 7.5% (taken from the historical average S&P 500 return since the 1950s). The $280 per month contribution would grow to about $117,700, a gain of $104,260. If the same resident instead contributed pre-tax to a 401(k) plan, they would owe taxes on the entire $117,700 which would be deducted once they begin to withdraw money in retirement (the tax rate depends on retirement income and is likely in a higher bracket than during residency, resulting in a higher tax burden overall). If you contributed post-tax to a Roth 401(k), you do not owe any taxes on your distributions from this account in retirement. Realistically, most would continue to contribute to their retirement accounts throughout their career, thus, it is safe to assume these numbers will compound to an even larger degree.

Therefore, the consensus is that post-tax contributions are advantageous to low-earners (particularly when large increases in salary or higher tax brackets at retirement are expected) and pre-tax contributions are advantageous to high-earners (who reap the benefits of lowering their gross income and their tax burden). Of course, contributing both pre- and post-tax to different retirement accounts facilitates options for withdrawing your money in retirement and deciding what percentage you will pay taxes on. Given Roth contribution limits on an attending salary, you may find yourself contributing the maximum amount to both pre- and post-tax fund options. The decision to make pre-tax versus post-tax contributions will depend on individual needs and financial situations. It is important to talk with tax experts and discuss the unique considerations of your own tax and retirement goals. Numerous free calculators exist online that can facilitate these decisions. There appears to be a benefit for residents to convert an existing employee 401(k) plan into a Roth 401(k), despite having to pay taxes on the converted money, since residents are typically in their lowest tax bracket as a resident when compared to their time as a staff anesthesiologist (when they will likely be in a much higher tax bracket).

Finally, one of the biggest advantages a resident can use, regardless of whether pre- or post-tax contributions, is time in the market. Time allows investments to benefit from compounding interest where investment earnings generate additional earnings and boost your overall returns. Additionally, in the short term, markets are volatile, constantly going up and down; however, over the long term, these fluctuations generally trend in a positive direction. By contributing early and consistently as a resident, time can be used to a tremendous advantage.

Hopefully, this article sparks resident interest in learning more about financial planning. The proper individualized selection of retirement accounts is an important aspect of a resident’s overall financial plan to ensure a stable future retirement. Just as we make careful clinical plans for our patients, we must also make careful financial plans to protect the future for ourselves and our families.