By Katherine Vessenes, JD, CFP®

Many of our doctors are confused about Roth accounts, which ones they can have, and how they differ. In today’s podcast, Katherine Vessenes, CEO and founder of MD Financial Advisors, breaks down the differences between Roth IRAs and Roth 401ks and Roth 403bs. She highlights how they can work individually and together to help doctors feel more confident in their investments and retirement.

Rich Doc. Broke Doc. Learn how doctors can use this strategy to avoid the Broke Doc quagmire.

What are Roth Accounts?

Roth accounts hold post-tax dollars for retirement. Money that goes into Roth accounts is taxed upfront so that the funds can be withdrawn tax-free in retirement. This is true for both the principal and your earnings. Think of it as tax insurance. No matter what happens in the future with tax rates, your Roth accounts will remain tax-free in retirement.

Who Can Contribute to These Accounts?

Roth IRAs- Anyone can open a Roth IRA, but not everyone can directly fund one. The IRS limits funding at certain income thresholds. Single filers earning over $161k per year and married filing joint earning over $240k per year cannot directly fund Roth IRAs in 2024.

There is a loophole that we have covered before called the Backdoor Roth Conversion Strategy. Feel free to check out our previous article on the topic for more information.

Roth 401ks/Roth 403bs- These are both company sponsored plans and therefore must be provided by your employer. They are very similar, so for today we are lumping them together. The biggest difference is that Roth 403bs are for government or non-profit organizations and Roth 401ks can be used in both the public and private sector.

There are no stipulations on funding based on income like there are for Roth IRAs. Anyone can contribute to these accounts as long as they’re offered by your employer. We’ve noticed over the years that more and more doctors have Roth options at work. This was not the case 10 or 15 years ago.

What Are the Contribution Limits?

Roth IRAs- These tend to increase every year or two, but for 2024 the limit is $7k per year for those under age 50 and $8k per year for those 50 or older.

This does carry the caveat that you must make at least the amount you are funding in that year. So, if you only make $5k in 2024, you can only contribute up to $5k for 2024 regardless of age. There are some exceptions here for spouses that do not work out of the home and funding on their behalf. If you think this affects you or if you have questions, feel free to reach out to us to discuss your individual situation.

Roth 401ks/403bs- These accounts allow a bit more, up to $23k this year for those under age 50 or $30.5k for those age 50 and older.

Does Maximizing the Limits Really Matter?

Funding $7k into your Roth IRA and $23K into your Roth 401k/403b for the year may not sound like a lot in the long run. Maybe it’s better to use that money now to pay off debt instead of investing? We don’t think so. We strongly encourage you to max fund both if at all possible.

If at age 30 you start contributing $7k a year into your Roth IRA and $23k a year into your Roth 401k/403b and you continue this for 20 years, assuming an 8% interest rate, by age 50 you will have over $1.6 million.

Now add in those catch up contributions with $8k into your Roth IRA and $30.5k into your Roth 401k/403b for 15 years, assuming the same 8% rate, you will have over $6.3 million by age 65. And it’s all tax-free!

A little funding can absolutely make a huge, huge difference.

Do Roth Accounts Qualify for Employer Match?

Roth IRAs- Since these are individual accounts and not employer accounts, they do not qualify for any sort of employer match.

Roth 401ks/403bs- These accounts are employer sponsored accounts unlike Roth IRAs. Employers are not required to offer any sort of match, but most do offer something- usually around two or three percent. However, employer match goes into pre-tax accounts, not Roth accounts.

What are the Investment Options?

Roth IRAs- As Roth IRAs are individually owned, you can invest these in almost any way- stocks, bonds, even hard assets like silver and gold. We prefer to diversify our doctors’ accounts into diversified funds using an evidence based approach.

Roth 401ks/403bs- Investment options for these accounts are limited to the options provided by your employer. Some employers may have hundreds of options while others may only have a few. The options include various different approaches like evidence based plans like Dimensional Funds or Advantis or age-based funds that change as you near retirement.

Regardless of the type of investment options, you should look out for options that include high internal fees. Many doctors have selected investment options with fees as high as 2% without realizing it.

If you are unsure what options are best for you, feel free to reach out and have us take a look.

How Do You Withdraw the Funds?

Roth IRAs- As these are accounts specifically for retirement, Roth IRAs do have an early withdrawal fee. If you take out your funds before age 59½, you will be fined a 10% penalty and have to pay ordinary income tax on the funds. There are some exceptions to this rule under certain circumstances, but we have never recommended it. Once you take that principal out there's no way to get the funds back and you've lost all the potential for that future tax-free growth.

The good news is that there are no required minimum distributions (RMDs) on Roth accounts. These exist on pre-tax retirement accounts and are withdrawals required after a certain age on an annual basis.

Roth 401ks/403bs- Roth 401ks/403bs are very similar to Roth IRAs when it comes to withdrawals. They, too, are free from RMDs and carry a penalty for early withdrawals (before age 59½) .

After age 59½, you are free to pull from these accounts tax and penalty free!

Who Should NOT Invest in Roth Accounts?

It seems hard to believe there is anyone we would not recommend having both a Roth IRA and Roth 401k/403b, but there are some situations where it just doesn’t make sense.

Case Study #1- Dr. Susan is 68 years old and would like to retire in two years. She currently has zero funds in a Roth IRA or a Roth 401k. She's at the top of her earnings potential, making $450,000 a year. Should Susan start contributing to both her Roth IRA and her Roth 401k at work?

No. If she funds her Roth 401k, her taxable income would increase by $30.5k and cost her thousands of dollars in taxes.

We did recommend in this case that Dr. Susan funds her Roth IRA this year. $8k in her Roth IRA instead of in her brokerage account gets her some money in the tax-free column without changing her taxable income on the year.

Case Study #2- Dr. Mike is a 42 year old orthopedic surgeon in New York City. He makes $1.1 million a year, but has medical school loans to pay off. He is in the highest federal tax bracket, pays state taxes, and city taxes. Should he contribute to both a Roth IRA and Roth 401k?

No. Dr. Mike needs the extra deductions funding a pre-tax account this year. However, we still recommend in this case that he fund a Roth IRA so that he doesn’t miss out on having tax-free retirement funds.

In conclusion, Roth accounts, whether it's a Roth IRA or Roth 401k/403b, are one of the few ways doctors have to get tax-free retirement funds. When possible, you should fund both accounts every single year. By using both of these account types together, you literally can have millions of tax-free dollars in retirement, even with the strict funding rules and limits. It’s best to start early- the earlier you start the more time you have for these funds to compound.

If you have questions about how to open, start funding, or invest in these accounts, or even if you think you might fall into the category of those that should not fund Roth accounts, make sure to talk to your advisor.

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Remember that you can send us any questions at: Info@MDFinancialAdvisors.com

Katherine Vessenes, JD, CFP®, is the founder and CEO of MD Financial Advisors who serve 600 doctors from Hawaii to Cape Cod. An award-winning Financial Advisor, Attorney, Certified Financial Planner®, author and speaker, she is devoted to bringing ethical advice to physicians and dentists. She can be reached at Katherine@mdfinancialadvisors.com.