To Roth or not to Roth? That is the question!

Hamlet’s question, “To be, or not to be?” is certainly filled with a deeper philosophical angst, but for physicians seeking a long, confident, and tax-wise retirement, the question of which to choose—a traditional 401(k) or a Roth 401(k)—can also fill the heart with at least a bit of torment! Luckily, some basic analysis is all that’s needed to make a smart choice based on your own financial needs and situation. The key is to choose the option that will have the greatest positive impact on your long-term financial outlook while minimizing taxes over your lifetime.

Of course, as a partner or associate physician working at a healthcare organization with a great pension, you’ve already made a decision that is likely to have a very positive impact on your retirement outlook. If you are participating in the Keogh, even better (most of the time, participating at 100% is the best decision)! The next decision you need to make is whether to participate in the 401(k). Again, this one is pretty straightforward: as long as you can afford to contribute, it’s usually a good idea. First, it’s not a permanent decision; unlike the Keogh, you can start and stop your contributions at any time. Second, if you have any thought of early separation, any type of 401(k) is a great tool to help ensure cash flow for the long term.

But it is here that we arrive at the slightly more complex decision: to choose a traditional 401(k) or a Roth 401(k). Start with these basic guidelines.

If you’re under 40, the decision is pretty simple as long as:

  1. You trust that the capital markets will continue to deliver returns that are equal to or greater than the historical average over the past 150 years.
  2. You believe that tax rates are likely to stay the same or rise between now and when you retire.
  3. You can spare $6,000/year from your taxable income to invest.
  4. You are comfortable giving up access to a 401(k) loan to fund the downpayment for a home or pay for another major expense. (Learn about this important financial safety net in my post A Hidden Benefit of the SCPMG 401(k).)

If you heartily agree to all of the above, then congratulations: the Roth 401(k) is probably for you!

If you’re over 40—or you don’t fit all four of the above criteria—the question is a bit more complicated. In this case, it’s best to talk to a Certified Financial Planner™ (CFP®) who understands the details of your employee benefits and can help you explore key questions such as:

  • How does your current cash flow compare to your budget?
  • Do you have large expenses to save for before retirement, such as a downpayment on a home or education for your children?
  • Do you have aging parents whose own finances may affect your financial stability in the years leading up to retirement?
  • If you’re married, how does your spouse’s retirement plan impact your overall strategy?

Together, you and your advisor can discuss the possibilities, do the math, and determine which option is best for you. As long as you’re investing and saving for the future, you’re already making a smart move. Your advisor can guide you toward a decision that can help balance your taxes before and after retirement and, most importantly, ensure that your money is working for you today so you have the assets you need to support a long and happy retirement tomorrow.

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Advisory services offered through EWG Elevate, Inc. dba Protection Point Advisors.

This represents a partial list of clients. They have not been compensated and were not selected based on duration, performance, account size.