6 investment accounts to help you retire early

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. 

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.

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. 

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. 

457b 

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.

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. 

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.

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. 

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. 

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. 

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.