Some physicians are enticed by the goal of becoming financially independent to retire early (aka FIRE); making smart investments in certain accounts can help you get there.
Contributing the maximum to your work retirement accounts—ensuring you are getting the full employer match—while investing in other tax-advantaged accounts are solid first steps on the path toward early retirement.
Contributions from brokerage accounts can be taken at any time but are subject to taxes, with rates depending on things like age and how much your investments have earned over a certain period of time.
Many doctors have a goal to become financially independent with enough money to retire early (also known as "FIRE"). However, if you plan to FIRE, you will need to invest money consistently across various types of investment accounts.
Here are six account options to consider when gunning for early retirement.
401k or 403b
These work retirement accounts are tied to your job and offer several benefits for physicians. They allow you to invest up to $22,500 in the account in 2023, which is the maximum contribution allowed annually by the IRS. This amount will increase to $23,000 in 2024. It’s important to note—doctors over the age of 50, or those who are self-employed, can put even more money into these accounts each year.
5 Essential Tasks to Set Yourself Up for Financial Success
Recorded On Wednesday, December 13WATCH NOW
"Many doctors get a retirement contribution match from their employer, which can amount to thousands of dollars of 'free' money, to invest in these accounts as well."
— Lisha Taylor, MD, MPH
The money inside of these accounts is protected from creditors and any lawsuits you may become involved in. Plus, the tax benefits associated with these accounts can decrease your taxes by up to $6,000 per year or more, depending on your income tax rate.
You can access the money in this account when you turn 59.5, or at age 55 if you leave your employer. You can use the SEPP (substantially equal periodic payments) rule to access the money in these accounts if you retire even earlier.
The SEPP rule allows early retirees to take out enough money each year (ie, the annual periodic payment) to cover that year’s estimated expenses until the retiree’s death. You must make these SEPP payments for at least 5 years, or when you turn 59.5—whichever is greater.
Once you turn 59.5 or hit the 5-year mark, you can take out as much or as little as you want from the account. (For more information, visit the SEPP page on the IRS website, linked here.)
Backdoor Roth IRA
Many doctors make too much money to contribute to a Roth IRA directly. However, they can contribute indirectly using a process called the “backdoor Roth IRA.” Having money in a Roth IRA has several benefits if you plan to FIRE:
It gives you access to money tax-free in retirement. Unlike most of the money in a pre-tax 401k or 403b, you don’t have to pay taxes on money you take out of a Roth IRA, because you paid the taxes at the time of contribution.
A backdoor Roth gives you access to more investing options, as you can invest in real estate, individual stocks, index funds, and similar.
You can withdraw the money you contributed to the account at any time. If an emergency arises, even before you retire, you can use the contributions you made into this account to cover it.
You can access any profits in this account when you turn 59.5. However, you can withdraw your contributions from the account at any time (even before age 59.5). There are also exceptions in place that allow you to use the money in the account tax-free and penalty-free if you take a portion of it out early for certain expenses, such as buying your first home, paying for health insurance if you are unemployed, or to cover medical expenses. If you retire before age 59.5, you can also use the SEPP rule to access the money sooner without any penalties.Related: From residency to retirement: How compensation changes over a physician’s career
This is a deferred compensation account offered to some physicians that work for nonprofit institutions. It allows eligible physicians to contribute $22,500 in 2023 (which will increase to $23,000 in 2024) into a pre-tax investing account, in addition to the money you may have already contributed to work retirement accounts.
Similar to your 401k or 403b, contributing money to this account can save you around $6,000 in taxes each year. But unlike a 401k or 403b, this money technically will belong to your employer and be given to you when you leave the organization (so be sure your employer is stable and won’t go bankrupt during that time).
After you leave the organization, you can usually choose if you want to receive the money as a lump sum or distributed periodically over time.
Unlike a 401k, 403b, or Roth IRA, you don’t have to wait until you fully retire or turn age 59.5 to withdraw money from this account. You receive this money once you leave an organization. It’s important to note that each job has different distribution options on how you can receive the money once you leave, so it may be a good idea to review your employer’s specific policy with your HR department.
Health savings account (HSA)
This is an investment account that is open to people who are enrolled in a high-deductible health insurance plan. These individuals pay lower monthly premiums and are able to invest money through a health savings account to cover any out-of-pockets costs that arise.Related: 6 types of insurance you need to protect yourself and your money
"Those who are eligible for an HSA can contribute thousands of dollars per year into the account pre-tax and invest it to earn profits over time."
— Lisha Taylor, MD, MPH
If you have an HSA, you can withdraw the money you contributed, as well as any profits, tax-free if used on healthcare expenses. Because you don’t have to pay taxes on your contributions, your investment profits, or your withdrawals on this account, you can consider it triple tax free.
As healthcare can be one of the largest expenses for folks who retire early, having access to an HSA can be extremely valuable. After you turn 65, this account can also function as another 401k or 403b, as it allows you to withdraw money for any reason at your normal income tax rate.
Taxable brokerage account
This is a regular investment account that you can open at any brokerage firm, such as Fidelity, Vanguard, and Charles Schwab, among others. These types of investment accounts are not tied to your employer, and the money does not have to be used for retirement.Related: Investing 101: 5 steps to build passive income
"You can invest extra money into these accounts however you choose, and withdraw your money from the account anytime you want."
— Lisha Taylor, MD, MPH
With these accounts, you have more control of your investments, more investment options, and more flexibility on when you can take the money out of the account.
Unlike retirement accounts, there is no limit to how much you can invest per year, so many doctors use this type of account when they have maxed out their contributions to the accounts I’ve mentioned above.
The downside of these accounts is that they don’t have any tax benefits. Keep these points in mind regarding brokerage accounts: You contribute to the account with after-tax dollars, you pay taxes on any dividends you have at your ordinary income tax rate, and you pay taxes on any withdrawals you make at your capital gains tax rate.
Side note: There are two types of capital gains rates—short-term and long-term capital gains. The short-term rate is what you pay for any investment you have had for less than 1 year; it is whatever your normal income tax rate is, meaning if you make less, then your short-terms capital gain rate is less.
The long-term capital gains rate is what you pay for any investment you have had for 1 year or longer. So, if you bought a share of the total stock market index fund, and if you decide to sell once you've had it for at least 1 year, you will pay the long-term rate on any profit; the rate is based on how much money you make, and there are three levels: 0%, 15%, and 20%. You can find out more information here.
You can take as much or as little money out of your brokerage account at any age. If you sell investments that you have had for less than one year, you will pay taxes on the profits at your normal income tax rate. If you sell the investments you have had in the account for more than one year, then you pay the long-term capital gains rate. Many doctors use the money in these accounts first, when they retire early.
What this means for you
If you are planning to FIRE, then be sure to invest money each year in the most ideal investment accounts. This means maxing out your work retirement accounts and taking advantage of the full employee match. It also means investing money through a backdoor Roth IRA and investing in an HSA account or a 457b account, if eligible. You can use a taxable account to invest money once you have contributed the maximum to these other accounts. Rest assured, all of these accounts have rules and provisions that allow you to access the money if you retire early.