By Dr. Jim Dahle, WCI Founder
When I speak at conferences, I often use a slide entitled “Suitcases and Swimsuits” to demonstrate the difference between investments (the clothes) and the accounts they can be put into (the luggage.) You can put any type of clothing into any type of bag. This helps people understand the difference between different types of retirement/investing accounts like Roth IRAs, 401(k)s, and defined benefit plans and investments like stocks, bonds, and mutual funds.
One difference I have found among physician investors compared to those with lower incomes is the great difficulty they have in understanding all these different types of retirement accounts and using them effectively. For Joe WhiteCollar with an income of $50-100K, pretty much all of his retirement savings goes into his 401(k) at work and maybe a Roth IRA on the side. He probably doesn't even max those accounts out and certainly doesn't need to get creative in looking for other retirement accounts.
A physician trying to put $50,000, $100,000 or even more toward retirement each year, however, is a different story. In this post, I'm going to compare the various types of retirement accounts by:
- Quality of the Available Investments
- Tax Shelter Features
- Cost
- Asset Protection Features
- Estate Planning Features
- Bonus Features
How Each Type of Retirement Account Is Scored
In the overall weighting, I've doubled the value of the investments, the tax shelter, and the costs as these are the most important aspects of a retirement account. A five-star is the highest-ranking while a single star is lowest.
I'm hoping having this information together in one place will help people get a grip on these various types of retirement accounts, and which ones they would like to use for their individual situations. This is a very long post so you can click on any of the hyperlinks below to go directly to any of the 14 different types of retirement accounts. If you just want the bottom line, well, skip to the handy summary chart at the very bottom of the post.
- Individual (Solo) 401(k)
- Employer-Offered 401(k) or 403(b)
- Profit-Sharing Plan
- SEP-IRA
- SIMPLE IRA
- Traditional IRA
- Roth IRA
- 457 Account
- Defined Benefit Plan
- Health Savings Account
- Taxable Investing Account
- Variable Annuity
- Whole Life Insurance
- Variable Life Insurance
There's more than one golden egg to consider in your retirement plan.
Comparing 14 Types of Retirement Accounts:
#1 Individual (or Solo) 401(k)
Investments ★★★★
You can easily purchase essentially any stock, bond, mutual fund, ETF, or similar asset including low-cost Vanguard index funds. Depending on where you open your Individual 401(k), there are some minor limitations that probably won't matter to you. Direct real estate investing is difficult in an IRA, but nearly impossible in an Individual 401(k), thus the reason it only gets 4 stars.
Tax Shelter ★★★★★
If there is a better tax shelter out there, I'm not aware of what it is. Your entire contribution (up to $56,000 per year) is deducted from this year's taxes, essentially splitting the retirement account into a portion that belongs to you and a portion that belongs to the government. Your portion then grows tax-free until the time of withdrawal, perhaps 20-80 years away, longer if a stretch IRA is then used.
As an additional bonus, you can reclaim a significant chunk of the government's portion of the account if your effective withdrawal tax rate is lower in retirement than your marginal tax rate at contribution during your peak earning years, which is quite likely, even if rates go up.
As if that isn't good enough, you can also get an Individual Roth 401(k) option. It's hard to beat an Individual 401(k) as a tax shelter.
Cost ★★★★★
One of the main benefits of an Individual 401(k) as compared to a 401(k) offered by an employer is that it can be much cheaper. The ability to minimize costs by choosing your 401(k) provider and your individual investments wisely may be worth hundreds of thousands of dollars over time for the typical physician.
Asset Protection ★★★★★
While asset protection law is state-specific, 401(k) assets are generally totally protected from creditors, and often receive slightly better protection than an equivalent IRA.
Estate Planning ★★★★★
The ability to designate beneficiaries (thus avoiding probate) and stretch a 401(k) (via conversion to an IRA) make this retirement account a no-brainer from an estate planning standpoint.
Flexibility ★★
One downside of traditional retirement accounts is that it can be tricky to get to the money before retirement without paying a penalty. However, since this is RETIREMENT money we're talking about anyway, I don't see that as a huge issue. Plus, there are so many ways to withdraw it without penalty, that I think this is almost a non-issue. However, once you're over age 70, you'll be required to withdraw Required Minimum Distributions. These restrictions decrease your flexibility, so only 2 stars for this category.
Bonus ★★
There are not a lot of bonus features here, but some Individual 401(k)s do allow you to borrow money.
Overall Cost ★★★★¼
There are no perfect retirement accounts, but the Individual 401(k) is about as close as they come.
More information here:
Where to Open Your Solo 401(k)
The Best Retirement Accounts for Independent Contractors
SEP IRA vs Individual 401(k)
#2 Employer-Offered 401(k) or 403(b)
Investments ★★★
In reality, the investments available in your employer's 401(k)/403(b) may be 1 star or 5 star. There is a great deal of variability. And forget about the types of alternative investments you could get in a self-directed IRA like real estate, or small businesses. So 3 stars on average for this type of retirement account.
Tax Shelter ★★★★
Still a good tax shelter, but the fact that employees are usually limited to deducting just $19,000 ($25,000 if 50 or older) is a serious difference from using an Individual 401(k), SEP-IRA, or Profit-sharing plan. You still get the up-front tax break, tax-free growth and tax-rate arbitrage, of course, just not on as much money as you otherwise could get if you were in business for yourself. Roth 401(k)/403(b) options may be available.
Cost ★★★
Again, there is a great deal of variation in 401(k) fees and expenses. I have a pretty good 401(k) (not quite as cheap as my Individual 401(k), but many of them absolutely stink with only expensive funds available and many add on fees. 3 stars on average.
Asset Protection ★★★★★
While asset protection law is state-specific, 401(k) assets are generally totally protected from creditors, and often receive slightly better protection than an equivalent IRA.
Estate Planning ★★★★★
The ability to designate beneficiaries (thus avoiding probate) and stretch a 401(k) (via conversion to an IRA) make these retirement accounts a no-brainer from an estate planning standpoint.
Flexibility ★½
Similar to above, except you usually can't do a rollover to a better plan until you separate.
Bonus ★★★
Just like with an individual 401(k) you can usually take a loan of 50% of the balance up to $50,000. You also may be eligible from a match from your employer. Not getting that is like leaving part of your salary on the table.
Overall ★★★½
Overall, a great type of retirement account you should probably be maxing out.
More information here:
In Defense of the 401(k)
What to Do if All You Have is a 401(k)
Should You Make Roth or Traditional 401K Contributions?
3 Ways Your 401(k) Lowers Your Tax Bill
Multiple 401(k) Rules
What to Do with a Crummy 401(k)
#3 Profit-Sharing Plan
Investments ★★★★
Similar to above
Tax Shelter ★★★★★
Many doctors have a Profit-Sharing Plan combined with a 401(k), with the main benefit that they can save $56K per year instead of just $19K. Since these doctors are often partners as well, they are usually able to get better investments and lower fees than a typical employer offered 401(k), so one more star in all 3 of those categories.
Cost ★★★★
Similar to above
Asset Protection ★★★★★
Similar to above
Estate Planning ★★★★★
Similar to above
Flexibility ★★
Similar to above.
Bonus ★★
Loans usually available, but like with a straight 401(k), often limited to the lesser of 50% of the balance or $50,000.
Overall ★★★★
Better retirement account than a 401(k) due to the higher contribution limits.
#4 SEP-IRA
Investments ★★★★½
Essentially any paper asset can be put into a SEP-IRA, and using a self-directed IRA, you can often get hard assets like precious metals or real estate in there. There aren't quite as many options as a taxable account, but it's pretty darn close.
Tax Shelter ★★★★
Although you can still shelter $56,000, like with an Individual 401(k), you need to have a higher income to do so when using a SEP-IRA. Plus, you can't do a Backdoor Roth IRA, generally making a SEP-IRA inferior to an Individual 401(k) for the self-employed. There is also no such thing as a Roth SEP-IRA.
Cost ★★★★★
The ability to minimize costs by choosing your SEP-IRA provider and your individual investments wisely may be worth hundreds of thousands of dollars over time for the typical physician.
Asset Protection ★★★★
While asset protection law is state-specific, IRA assets are generally totally protected from creditors, although protection may be slightly less when compared to 401(k)s.
Estate Planning ★★★★★
The ability to designate beneficiaries (thus avoiding probate) and stretch the IRA make these retirement accounts a no-brainer from an estate planning standpoint.
Flexibility ★★★
Although you still have the age 59 1/2 requirements to get around and RMD issues, you can roll a SEP-IRA into a traditional IRA at any time, improving your investment options further.
Bonus ★
Can't borrow from an IRA.
Overall ★★★★
A SEP-IRA is a great option, but I see little reason to use one over an Individual 401(k).
#5 SIMPLE IRA
Investments ★★★
Essentially any paper asset can be put into a SIMPLE-IRA. You are usually limited to the mutual funds available at the SIMPLE-IRA provider. Depending on the provider, that might be pretty good or pretty poor.
Tax Shelter ★★★
One of the biggest downsides of a SIMPLE over an individual 401(k) or a SEP-IRA is the low contribution limit, just $13,000 per year ($16,000 if over 50.) That's quite a bit less than even an employer-provided 401(k). It also screws up your Backdoor Roth IRA pro-rata calculation and there is no Roth option.
Cost ★★★
If at a good provider, could be quite low. If not, may be relatively high.
Asset Protection ★★★★
Similar to above
Estate Planning ★★★★★
Similar to above
Flexibility ★★½
Age 59 1/2 requirements and RMD issues limit you to just 3 stars. You can do a rollover into a traditional IRA without separating, but must wait at least 2 years to do so.
Bonus ★
Can't borrow from an IRA.
Overall ★★★
The only reason doctors might use a SIMPLE IRA is if they have a lot of employees and are trying to avoid 401(k) associated expenses and hassles. Probably not a wise move. I only included this one in the list of retirement accounts for completeness sake.
#6 Traditional IRA
Investments ★★★★½
Not quite as many options as a taxable account, but pretty close.
Tax Shelter ★★★
If you don't have a retirement account at work, these deductions are deductible to you. But otherwise, most physicians make too much to deduct personal or spousal contributions to traditional IRAs. You also have to deal with age 59 1/2 requirements and RMD issues. The only reason most doctors in their accumulation years should have a traditional IRA is to do Backdoor Roth IRA contributions.
Cost ★★★★★
Since you're in control, you can go to a low-cost provider.
Asset Protection ★★★★
Similar to above
Estate Planning ★★★★★
Similar to above
Flexibility ★★★
Age 59 1/2 requirements and RMD issues are present, but at least you can easily roll it over to another provider at any time.
Bonus ★★
Can't borrow from an IRA. You can do spousal contributions without any spousal earnings.
Overall ★★★★
Not very useful for a high earner during peak earnings years primarily due to the income limit.
#7 Roth IRA
Investments ★★★★½
Not quite as many options as a taxable account, but pretty close.
Tax Shelter ★★★★
While there is no up-front tax-break (and thus no arbitrage), Roth IRA contributions are never taxed again, which is pretty darn valuable. Because you're contributing after-tax dollars but the contribution limits are the same, you're also able to contribute more money on an after-tax basis than a comparable non-Roth account. There is a little bit of a hassle for high earners, but thanks to the backdoor Roth IRA workaround, this can usually be worked out.
Cost ★★★★★
Since you're in control, you can go to a low-cost provider.
Asset Protection ★★★★
Similar to above
Estate Planning ★★★★★
Similar to above, except a Roth IRA is even better to stretch than a Traditional IRA, not to mention is free of RMD restrictions.
Flexibility ★★★★
Age 59 1/2 requirements still in place, but contributions can come out any time, making this among the most flexible of all retirement accounts. You can also withdraw earnings for a handful of other reasons without any penalty or tax.
Bonus ★★★
Can't borrow from an IRA, but since you can withdraw money for just about any reasonable use without penalty or tax, it's still pretty nice. You can also do spousal contributions without any spousal earnings.
Overall ★★★★¼
This highest-scoring retirement account should be used by any physician (and/or spouse) able to do the Backdoor Roth IRA.
More information here:
Why I Love the Roth IRA: Back to Basics
Backdoor Roth IRA Ultimate Guide and Tutorial
17 Ways to Screw Up a Backdoor Roth IRA
The Mega Backdoor Roth IRA
#8 457 Account
Investments ★★★
Completely employer dependent. Could be 4 star, but often only high expense mutual funds available.
Tax Shelter ★★★★
Just like a 401(k) or 403(b), these contributions are tax-deferred, so you get tax-free growth and probably an arbitrage on the tax rate at contribution and at withdrawal.
Cost ★★★
Completely employer dependent.
Asset Protection ★★★
These assets are completely protected from your creditors, however, they are accessible by your employer's creditors. While I think most doctors still ought to use these plans due to the tax benefits, some choose not to as they are concerned their employer may go out of business!
Estate Planning ★★★★★
Similar to other types of retirement accounts in that beneficiaries can be named to avoid probate. Many 457s can also be rolled into IRAs and stretched.
Flexibility ★★★
Unlike most retirement accounts, there is no Age 59 1/2 requirement, but there are RMDs. You can start withdrawing money as soon as you separate from your employer.
Bonus ★
Loans generally not available.
Overall ★★★¼
Not the greatest retirement plan in the world, but most who have access to them should probably be using them as their options are limited.
#9 Defined Benefit Plan
Investments ★★
While the investments are often just fine in these plans, you have very limited control over them.
Tax Shelter ★★★★★
Just like a 401(k), these contributions are tax-deferred, so you get tax-free growth and probably an arbitrage on the tax rate at contribution and at withdrawal. Although dependent on many factors, you may also be able to shelter vast quantities of money from taxes using a DBP, up to $100,000-200,000, giving this one a full five stars as it can be the largest of all tax-deferred retirement accounts.
Cost ★★
Although these costs can be reasonable, they are almost always more than a typical 401(k) because it takes a lot more paperwork (and actuarial input) to run these plans.
Asset Protection ★★★★★
Like most types of retirement plans, protected from creditors in most states.
Estate Planning ★★★
Since most of these stop paying when you die, they have little benefit for estate planning. However, if you roll the assets into an IRA, those can have a beneficiary and stretching.
Flexibility ★
Contributions and withdrawals tend to be very inflexible compared to most defined contribution plans.
Bonus ★★
No loans, but there may be some useful withdrawal options available, including a rollover to an IRA upon separation.
Overall ★★★
Like a 457, probably shouldn't be your first choice. But for someone looking for additional tax deferral, a DBP may be worth the downsides.
#10 Health Savings Accounts (Stealth IRA)
Investments ★★★★
Most of what you can buy in an IRA can be bought in an HSA.
Tax Shelter ★★★★★
The only triple-tax free account. Contributions are pre-tax, the account grows in a tax-protected manner, and if spent on health care (either in the year you make the withdrawal or in prior years), are withdrawn tax-free.
Cost ★★★★★
Easy to find low-cost options.
Asset Protection ★★
Asset protection law still not entirely clear in most states, but probably not protected unless in Florida, Mississippi, Oregon, Tennessee, Texas, and Virginia.
Estate Planning ★★
Beneficiaries can be named, helping you avoid probate. And if you leave the HSA to your spouse, it continues to be an HSA. However, for any other beneficiary it is fully taxable income in the year of your death.
Flexibility ★★★
Since you can spend this money on health care at any time without tax or penalty, and on anything you want without penalty after age 65, these are pretty flexible accounts. Of course, you have to have a high deductible health plan in order to make the contribution in the first place.
Bonus ★★
No loans or rollovers to other accounts, but you can move from one HSA provider to another.
Overall ★★★¾
Another great supplementary retirement plan many doctors should be using.
#11 The Taxable Investing Account
Investments ★★★★★
The most flexible of all investing accounts. Real estate, stocks, bonds, mutual funds, precious metals, beanie babies…you name it, you can buy it.
Tax Shelter ★★½
While obviously completely unsheltered from taxes, there are so many exceptions to the rule that this account still gets 2 1/2 stars. Real estate has numerous tax advantages. Tax-efficient investments like I-Bonds, municipal bonds, and stock index funds minimize any tax due, as does a buy and hold philosophy. Tax-loss harvesting and donating appreciated shares to charity can further decrease the tax bill. The step-up in basis at death also can eliminate a great deal of long-term capital gains tax.
Cost ★★★★★
Easy to find low-cost options.
Asset Protection ★
While there are some options like UGMAs, family limited partnerships, LLCs, and certain types of trusts, there is essentially no asset protection for taxable assets. Buy insurance.
Estate Planning ★★
The step-up in basis at death is awesome, but you're going to want to place these assets into a revocable trust if you don't want them going through probate.
Flexibility ★★★★★
Exceedingly flexible, although if you have low basis (an are thus facing high capital gains taxes), you might want to think twice before selling something, especially if passing them to heirs via the step-up in basis is an option.
Bonus ★★
You could borrow using the assets as collateral instead of liquidating them.
Overall ★★★½
You'll notice this account is ranked higher than many of the other types of retirement accounts. Many doctors use a taxable account as part of their retirement savings strategy.
#12 Variable Annuity
Investments ★★★
There is a great deal of variability in investments available in Variable Annuities. The Vanguard VA offers investments similar to its best index mutual funds.
Tax Shelter ★★
I actually consider a VA WORSE than a typical taxable account as a tax shelter. There is no tax-loss harvesting, no step-up in basis, and no donation of appreciated shares to charity. When you pull money out of a VA it is taxed at your regular marginal rate instead of the lower qualified dividends/long-term capital gains rates. To make matters worse, when you pull money out of a VA, the earnings come out first and the principal last. The only tax benefit of a VA is that it eliminates the tax-related drag on growth of the investment. That's worth less than 0.5% on the most tax-efficient investments, which is usually a much lower figure than the fees associated with the VA.
Cost ★★
Although there are some low-cost options like Vanguard and Jefferson National, the cost of an investment like Total Stock Market Index Fund in a Vanguard VA is still nearly 10 times the cost of it in a taxable account. Most VAs have expenses that make terrible mutual funds look good.
Asset Protection ★★
Some states do provide significant asset protection for VAs, but it is generally markedly inferior to both retirement accounts and cash value life insurance.
Estate Planning ★★
You can name beneficiaries (thus avoiding probate) but if the beneficiary isn't your spouse, they will be limited to taking a lump sum, taking payments over 5 years, or annuitizing the contract immediately, none of which are particularly attractive compared to stretching an IRA. The VA earnings are subject to income and estate tax with no step-up in basis.
Flexibility ★★
VAs are subject to the Age 59 1/2 rule and you will probably need to do a 1035 exchange if you wish to change VA providers or investments.
Bonus ★
No borrowing from VAs.
Overall ★★
One of the worst types of retirement accounts out there. Most physicians will find little need for these, even if using a low-cost VA holding very tax-inefficient assets like REITs or TIPS.
#13 Whole Life Insurance
Investments ★
Whole life is such a terrible investment that those who sell it don't even like referring to it as an investment. Expect negative returns for the first decade. If you hold it for your entire life, expect guaranteed returns of around 2% and projected returns of 4-5%. Not besting inflation despite holding the investment for 4-5 decades is a real possibility.
Tax Shelter ★★★
After-tax dollars are used to pay whole life premiums. The money grows in a tax-deferred manner. If you surrender the policy, all earnings are fully taxable at your marginal rate. You can borrow from the policy in a tax-free, but not interest-free, manner. Although often sold as a tax shelter, it is markedly inferior to traditional retirement accounts like 401(k)s and Roth IRAs in this aspect. Upon death, the death benefit is income, but not estate, tax-free.
Cost ★
Perhaps the worst aspect of whole life insurance is the high expenses. The commissions are approximately 50-110% of the first year's premium. There are administrative and insurance-related costs that cause the investment to require years just to break even.
Asset Protection ★★★
Most states provide at least some protection from your creditors for cash value life insurance. However, state guaranty corporations usually only protect something like $250,000 from insurance company failure. Despite statements to the contrary, many life insurance companies failed in the Great Depression and there was a 6 month “insurance holiday” where investors were unable to get their cash value. Overall, 3 stars.
Estate Planning ★★★★★
Whole life insurance can be pretty handy for estate planning. Heirs get the death benefit income tax-free and the policy can provide liquidity that may be needed to pay estate taxes or split up particularly illiquid estates. Buying a policy in an irrevocable trust can also help avoid estate taxes.
Flexibility ★★
Whole life insurance proponents love to point out all the stuff you can use a whole life policy for. You can spend dividends, use them to reduce required premiums, or use them to purchase more insurance. You can borrow from the policy before or after age 59 1/2 to provide spending in early retirement. You can also exchange the cash value into another life insurance policy, a VA, or even long-term care insurance. However, these options are really only useful AFTER you've been making payments for decades, which must be made or the policy lapses. Surrender fees are heavy, and if you change your mind about the policy in the first decade you will almost surely take a loss. 80%+ of those who purchase these policies surrender them prior to death, almost ensuring a poor investment outcome. Like a marriage, you should go into a whole life policy with your eyes wide open, because if you want out before death it is going to be very expensive.
Bonus ★★★★
You can borrow some of your cash value from your policy at any time. Although these products have very high expenses, those expenses do purchase you something- a death benefit in case you die early.
Overall ★★½
WL is a relatively inferior retirement account, even when compared to a fully taxable account, primarily due to low returns, high costs, and lack of flexibility in the early years of the policy. The rare physician who places high value on the death benefit or estate planning benefits may find a use for it.
More information here:
Debunking the Myths of Whole Life Insurance Pt 1-7
Whole Life Insurance: What You Need to Know
The Downsides of Whole Life Insurance
10 Reasons People Regret Buying Whole Life Insurance
How to Dump Your Whole Life Policy
#14 Variable Life Insurance
Investments ★★★
The vast majority of variable universal life insurance (VUL) policies contain terrible, expensive investments. There are a couple of them that use Vanguard, DFA, and TIAA-CREF based investments, however. Since the investments range from one star to 5 stars, I'll give 3 for this category. This is the main advantage of VUL over WL.
Tax Shelter ★★★
Similar to above.
Cost ★
Similar to above. The best policies minimize costs, but compared to low-cost taxable or retirement accounts, any VUL has very high expenses.
Asset Protection ★★★
Similar to above
Estate Planning ★★★★
Permanent life insurance can be pretty handy for estate planning. VULs are less useful than whole life as returns are less predictable
Flexibility ★★★
Another benefit of universal and variable life insurance over whole life is the flexibility of changing the death benefit and premiums due. However, with that flexibility comes the possibility of having a policy fail (and causing earnings to become taxable) if earnings are poor or too much is borrowed from the policy.
Bonus ★★★★
Similar to above
Overall ★★¾
While VUL can be significantly better than a WL policy, it is absolutely critical that you buy a “good policy” with low expenses and good investments. A bad VUL (the vast majority) is an absolutely horrid retirement account.
The 14 Types of Retirement Accounts Overall Rankings
Agree with my retirement account rankings? Disagree? Which types of retirement accounts do you use and why? Comment below!
Pretty much living off of spouses 110k income. My 52k gross salary will all be retirement funds, and 1k student loan payment.
Yea, I guess that’s a little different. Your resident income is 4 times what ours was.
I have my own s-Corp and am going to be partnering with another physician. There are less than 10 additional employees working for the practice. Am I able to set up an individual 401k being part of this partnership?
No. You have employees and a non-spousal partner.
What would be the best retirement account in my scenario? Is there one that I can do on my own?
Taxable and Roth IRA unless you’re willing to offer something to your employees or you have side self-employed income.
I do have side self employed income that is from call coverage outside the partnership. It would be enough to fund my retirement account. Thanks for entertaining my personal scenario.
Does that open any other options?
You can use that to fund a solo 401(k).
I know this is an older post, and realize you may have addressed what I’m about to ask elsewhere, so forgive me if that’s the case. I’m much less advanced in my understanding of this stuff than most of your readers, and my question is pretty basic, but I’m struggling figuring it out on my own. I have a Transamerica 403(b) account through the university that employs me and am trying to figure out what is going on with it. You state that many employer 401(k)s “absolutely stink with only expensive funds available and many add on fees.” My question is–how do I even find out what funds are available, how much they cost, and if there are add on fees in my 403(b)? For example, when I log onto my retirement portal, I basically just see this list:
– Short Bonds:Vanguard Federal Money Market Inv
– Interm/Long Term Bonds: Baird Aggregate Bond Instl
– Aggressive Bonds: Transamerica Partners Instl Hi Yld Bd
– Large Cap Stocks: Dodge & Cox, Steward Lrge Cap Enhanced, Vanguard Institutional Index, Principal LargeCap Growth
– Small/Mid-Cap Stocks: Transamerica Partners Instl Mid value, Harbor Mid Cap Growth Instl, DFA US Targeted Value I, Vanguard Small Cap Index Instl Plus, Hartford SmallCap Growth HLS IA
– International Stocks: American Funds Europacfici, DFA International Small Company I
There is no option to look through different funds, nor is there any statement that clarifies add on fees, etc. Would you recommend I try and talk with the people at Transamerica to figure out this stuff? I just have no idea where my money should be, what my options are, and who I can really trust to answer these questions. Thank you for this blog.
I know this is an old post, but I’m a newish reader and working through the back-logs. I’m trying to make sense of my work Transamerica 403(b) (literally have never looked at it or thought about it except for checking the % to contribute to it until now) and am trying to educate myself. You state above regarding work retirement accts that “…there is a great deal of variation in 401(k) fees and expenses. I have a pretty good 401(k) (not quite as cheap as my Individual 401(k), but many of them absolutely stink with only expensive funds available and many add on fees.”
My question is how do you even figure out that the funds offered through your work plan are expensive or not? And how do you know if there are add on fees? When I log into my retirement portal there is not an option to compare different funds, and there is a non-specific statement regarding whether or not a fee will be charged, so I have no idea. I see basically only a list of investments (below), which means nothing to me:
Short Bonds:Vanguard Federal Money Market Inv
Interm/Long Term Bonds: Baird Aggregate Bond Instl
Aggressive Bonds: Transamerica Partners Instl Hi Yld Bd
Large Cap Stocks: Dodge & Cox, Steward Lrge Cap Enhanced, Vanguard Institutional Index, Principal LargeCap Growth
Small/Mid-Cap Stocks: Transamerica Partners Instl Mid value, Harbor Mid Cap Growth Instl, DFA US Targeted Value I, Vanguard Small Cap Index Instl Plus, Hartford SmallCap Growth HLS IA
International Stocks: American Funds Europacfici, DFA International Small Company I
How can I overcome my serious lack of knowledge regarding this? Would you recommend I talk to a Transamerica rep? I’ve been reading one of the books you recommended (Andrew Tobias the Only Investment Guide You’ll Ever Need) but it doesn’t give me the detailed information I need to understand what funds I should be picking, figuring out fees, etc. Thank you for the work you do on this blog.
They’re required to give you a fee disclosure form every year now- so read it. Also ask for the plan document (your employer is required to provide it if you ask) and actually read it. Look for all the fee and expense ratio disclosures. “Excellent” is < 0.20% ER and no additional fees. "Good is < 0.5%" and minimal fees. Bad is > 1.0% and all kinds of fees.
You can look up the funds in your plan at Morningstar.com. Like most plans, you’ve got some good ones and some bad ones, but enough good ones to just use those and surely be able to get a reasonable asset allocation. Hint- Vanguard and DFA are usually the ones you want to use.
My wife is a public school teacher with access to a (a) mandatory pension contribution, (b) a 401(k) (which we max), and (c) a 457(b) plan. The 457 options are awful, but assuming we could find something decent to use the account with, can we also contribute to the 457, or does having contributed to the 401k negate that option for us?
You can do both.
I’ve been following your blog for roughly two years and it is awesome. I have a couple of questions regarding a 401k. I’m about to switch practices from one that used a simple IRA to one that utilizes a profit sharing 401k and separate defined benefits plan. My first question is should I contribute my 401k money as pre-tax or as designated Roth? Question two, I know I can roll my simple IRA into the 401k, but I also have a separate traditional IRA with about 385k in it through Betterment that I would also like to roll into the 401k so that I can start it over and do a conversion. Can I do that? Will I take a big tax hit? Finally, my next employer allows us to choose our own 401k plan sponsor. I like Betterment, but they currently don’t have this option. A friend uses TD Ameritrade and likes that. Any suggestions on other companies like Fidelity vs Schwab vs Vanguard? Thanks for all your great advice!
1. Hard to give advice on this complicated topic without more info. Read this: https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
2. I’d roll it all into the new 401(k) so you can start doing Backdoor Roth IRAs. No taxes due. Yes, you can almost surely do that but read the 401(k) plan document to be sure.
3. That’s interesting. Vanguard is my usual default option for stuff like this unless there’s a good reason to go elsewhere. Read the plan document.
Thanks! I’ve decided to contribute 100% as traditional pre-tax 401k money. I figure that I will withdraw and live on less in retirement than I currently get paid in salary, so probably pay less in taxes overall with that approach. As for the plan broker, I will try out a relatively newer company called Blooom (yes with three o’s), that operates as a robo-adviser that only deals in 401k’s. They charge a flat monthly fee of 10 dollars to manage the fund.
I have been doing some reading on pros/cons of different retirement accounts and just learned FICA taxes apply to solo 401k’s. If that is correct then just from a tax shelter standpoint wouldn’t a Defined Benefit Plan be superior as you save 2.35% of the medicare portion of FICA taxes (assuming income is greater than 200k) that you would otherwise have to pay with a 401k?
I am trying to figure this all out as I am finishing residency this year and about to get a pay increase. My future partnership offers a DBP so this is personally applicable. Can the FICA taxes be avoided as an S corp vs a sole proprietor for funds placed into a solo 401k or are you are stuck either way?
I don’t think you save payroll tax on DBP contributions. Got a source for that? Money that goes toward retirement accounts has to be salary, not S corp distribution, and that means you must pay payroll taxes on it.
I really appreciate your response and all the info on your blog, it really is helpful. I think I was wrong with the blanket statement on FICA taxes in relation to DBPs. I went back and looked at different blog posts and the best I can make out is that FICA is due on everything except? for employer contributions. Best I have been able to make out is it seems FICA would not apply to employER contributions whether DBP or solo 401ks in the case of an S corp. At least that is what several blog posts seemed to indicate. But the below article is the only legit source I could find and it isn’t completely clear.
https://www.irs.gov/government-entities/federal-state-local-governments/employer-pick-up-contributions-to-benefit-plans
Here is an excerpt:
“The amounts that would have been included in wages for FICA tax purposes “but for the employee contribution” are determined based on the facts and circumstances that determine the employee’s compensation under the overall employment relationship. If the circumstances indicate that the wages are equal to what they otherwise would have been, but for the contribution, then the amounts are not included in FICA wages. If the facts and circumstances indicate that the contributions reduced or offset the wages paid, they would not meet the test and the contributions to the plan and would be included in FICA wages.”
I could assume from the above if you predetermine your reasonable “salary” and make employer contributions in excess of employee contributions, those employer contributions would not be included in FICA wages.
If that is the case I might need to go back to the drawing board regarding S corp vs sole proprietor, as this could possibly lean in favor of an S corp. But I’ll be in Cali so it is still probably not worth it given the 1.5% tax on S corp net profits.
I just realized this all might only be applicable to government entities. I think I am in over my head with this tax law.
I guess I interpret that quote differently from you. It seems to me if you weren’t putting that money in a DBP that it would come to you in cash to me. Thus it wouldn’t meet the test. Maybe best to get an opinion from an accountant in your state.
Thanks for the awesome info.
My wife has a profit sharing plan from ex employer that I have to deal with. Only about $4000 but I plan to roll into VG Roth IRA.
Can I still make the usual 5500 contribution to traditional IRA to convert to Roth for her as well since a rollover into an IRA is not the same as a contribution for the same year? All for her of course.
Yes.
Didn’t know where to ask this question, so I found this old post. I have an employer 401k and 457b through T Rowe Price. I have 16 investment options and only 4 are index funds (International index, large company index, small-mid company index, total bond index). I have been using only the index funds, but I want to have access to some other types of investments. T Rowe Price also offers access to a Schwab Self Directed Brokerage Account. Can you help me understand this? Does it mean that I can move money from my T Rowe Price investments into whatever fund I want through the SDBA. I know that you won’t know specifics, but can you generally move all of your money into the SDBA? It seems like I would have more flexibility in the SDBA to invest in the funds that I want while still being in a tax deferred account. Thanks.
Yes, I have something similar in my 401(k) (PCRA at Schwab) that I use to buy Vanguard ETFs. I don’t use the preselected funds at all (not that there’s anything wrong with them, they’re all Vanguard funds, it’s just that the cost is a little lower for me due to the way the 401(k) fees are structured.)
Dear WCI,
Thanks for your personal information and advice as well as expert links and articles.
I am a relatively new attending trying to achieve ~50% savings rate of my post tax income or around $100k annually. I am a W2 until late 2020, ideally.
As I see it, I have an employer 401k (max contribution $19,000 in 2019), HSA (max contribution $3500 in 2019) and will likely do a backdoor RothIRA (additional $6k in 2019). That gets me to $28,500 or not even 1/3 of my goal. To make up the remaining amount, would you suggest taxable account or something else?
Many thanks.
Hi Ben I’m not Jim Dahle but I believe the only thing left for you is a taxable brokerage account to invest in. Ideally you would want to put your most tax efficient investments in this type of account. So low-cost US or international stock market index funds or municipal Bond funds. Make sure to put your less tax efficient investments such as non-muni Bond index funds or REIT’s in the 401K/HSA/Roth accounts.
BTW Jim I love these Tuesday classics, given I only read your book and blog starting earlier this year. I am not sure based on what you published regarding whole and variable life insurance that they should have any positive points at all! Maybe they should have negative points IMHO. One advantage also that you mentioned regarding low-cost variable annuities and maybe you should add to this Tuesday classic is the 1035 exchange in order to get out of a whole life policy which I have done under your guidance in this website. Maybe that should give the low cost variable annuity an additional point because has been very helpful for me financially, and likely other who bought into whole life insurance.
The problem with saying there is NOTHING good about it is that when someone finds out that there are some relatively minor advantages they’ll assume I don’t know what I’m talking about on the subject. I think my opinion on whole life is sufficiently clear on this site that few who read it for very long will have any doubts about how I feel.
Dr Dahle,
Thank you so much for a succinct and timely article for someone like me (72 and love working PT as an employed doc in a single specialty, multiple physician practice in a major SW city, also on RMD’s and taking SS benefits for myself and my wife). Are there any podcasts or blog posts specifically for older docs still employed PT, addressing issues specific for them? It seems that much is written for docs earlier in their careers. I am new to WCI and could be wrong, however.
Appreciate everything I’ve learned in the last few months, so thank you again.
Dr. K
I try to write for docs and similar professionals of all ages and life stages. Is there some specific topic you would like to learn about that seems particularly relevant to you right now?
Dr. Dahle,
I think you have done that and that I simply cannot appreciate how to apply some of those teachings to my situation. I am concerned that perhaps it is unwise to continue working, paying into SS and yet drawing benefits . I know I am past the 2nd bend point that I’ve read about. But I do love working. I fired our financial advisor from BenFEdwards last year, and we are with a financial advisor at Vanguard now, at least for the first year. Our retirement accounts are modest, about 1.9. Our “dream home” and ranch are for sale, to enable us to live debt free. In any event, past sins being what they have been I will continue to learn and apply to the best of my ability. Thank you again.
Dr. K
If you enjoy working and enjoy the financial benefits of doing so, I would NOT say it is unwise to do so just because you’re not getting as much bang from your social security buck as you may have previously.
I know a $1.9M nest egg might seem modest to some, but the truth is it is quite a lot of money, even among physicians. A physician net worth (not nest egg) survey from 2016 showed that 1/4 of doctors in their 60s weren’t even millionaires! You’re a multi-millionaire! You’re certainly in the top half of physicians your age. If you work a few more years, perhaps that $2M will be $3M by the time you retire, but certainly 4% of $2M plus SS from someone past the second bend point should provide quite a nice retirement.
I have a basic question, I did not contribute to my employer sponsored 401 k plan , can I claim tax deduction if I contribute to IRA plan not roth but traditional. If so how much can I contribute per year. Thanks in advance
Not enough info to answer your question. But you should know that you may not be able to deduct your IRA contribution if your income is over a specific amount AND you are offered a retirement plan at work. Offered whether or not you used it.
But you can still do a Backdoor Roth IRA contribution.
Can you open up and contribute both to a solo 401K and SEP IRA as a 1099 Employee thereby allowing a a total of $112,000 of tax shelter.
No. One or the other.
No. One or the other. You might be able to have both, but it’s the same $57K limit.
Hi WCI,
I recently left an employer with a vested $8800 in my 401k through Fidelity (100% stock with extremely low fees/expense ratio <0.09). It looks as though my fees for remaining in this plan (employer charged) have hovered around $1.50 per quarter in 2020 (~$5 total for the year). My spouse has a 401k through his work that he fully maxes out, we max our our Roth IRAs each year as well, and I also have a taxable Schwab account. Should I plan to keep my fully vested ~9k in the old 401k plan as the fees are insignificant compared to the gains, or should I consider rolling this into a different type of plan that would be more advantageous further down the line since I do not plan to go back to this company? Individual 401K? IRA? I work part time as a contract worker now (1099) for a new company so I'm also not sure if there is a way I can leverege this new income with a retirement account as well. For now, my primary concern is what to do with this old 401k to ensure I'm not paying unnecessary fees, and then, if and how I can contribute to retirement from my new 1099 in any tax efficient way, or if my only options are to put the 1099 money moving forward into my taxable account?
Thanks.
I learned a lesson the hard way this year. I rolled a portion of Traditional to ROTH to max out my tax bracket during retirement. This pushed me into the next bracket for the IRMAA. with Medicare premiums. Less than $5000 of additional taxable income increased our premiums $2448 for the year.
Ouch. Gotta watch those cliffs. They’re rare in the tax code, but that’s one of them.
Hi,
I’m not sure if this has been asked already.
But I have a 403 plan offered by my employer with a 4%match and a solo 401k.
I’ve been maxing out the 403 employee contributions to the 403 and then putting in 20%of net earnings to solo401k. But I’m wondering, tax wise, if it would be smarter to put in 4%in the 403 to meet the employer match and the remainder of the contributions to the solo 401k as an employee and 20% to the the solo 401k. Ie increasing contributions to solo401k to minimize tax. The funds in my 403 are pretty standard and I picked the vanguard funds in a 80-20 distribution . TIA
Shouldn’t matter. Pick whichever one you like better. In most cases the total contribution will be the same.
I would like to add a government pension. They take the average of your last 3 years salary as your base.
To that they multiple by the number of years you worked and multiple by 1%. This is your yearly pension. Divide by 12 and you get your monthly income. Also there is a TSP account with which they match 5% for your biweekly deposit. So you can understand that when they gave me $1000 for my Congress approved increase and I was the highest paid physician class at my original VA. I got on the phone and got a better deal. Smartest thing that I ever did. So we have monthly pension income and I converted my TSP into 2 annuities. Of course, we get social security and we have real estate income also. But the truth is: I could never have accumulated money to live off of the interest to equal my pension!
I wouldn’t call a government pension a retirement account. It’s not that it’s a bad thing, it’s just a different thing. Although many pensions can be turned into IRAs, just like a cash balance plan.