If you’re a medical resident without access to an employer retirement plan, that doesn’t mean you’re out of luck. You can open and add money to an individual retirement account (IRA) or Roth IRA.
What is the rate of return for an IRA or Roth IRA?
The accounts are just containers that hold your cash and investments. The investment performance determines your return.
What’s the difference?
An IRA is pretax money; the contribution is deducted from your adjusted gross income when you file your tax return. When you spend the money after age 59 ½, income taxes are due based on your tax bracket at that time.
A Roth IRA is the reverse. Contributions are not deducted, so the money is after tax. However, withdrawals after at least 5 years and age 59 ½ are 100% tax free. In addition, you can withdraw your contributions, but not the investment growth, at any age without any tax or penalty. That means the contributions to a Roth IRA could double as a backup emergency fund.
Can an IRA reduce my student loan payment?
It’s partially true. If you’re in an income driven repayment plan, like Pay as You Earn (PAYE) or Revised Pay as You Earn (REPAYE), your payment is based on discretionary income which is derived from your adjusted gross income (AGI). Since IRA contributions reduce your AGI, it can reduce your student loan payment. The most it can reduce your payment is 10% of your IRA contribution over 12 months.
Here’s an example. Someone who contributes the maximum $6,000 to an IRA for 2022 reduces their AGI and discretionary income by $6,000. Ten percent of the reduction in discretionary income is $600, and that is the PAYE or REPAYE payment adjustment over a year. Divide $600 by 12 monthly payments to equal $50 per month reduction of your student loan payment for your $6,000 IRA contribution.
Which is better: the IRA or Roth IRA?
Most residents are in the lowest tax bracket they’ll experience in their career, so it’s better to pay taxes now with the Roth IRA. Even those with student loans are better with the Roth IRA if their student loans will be paid off. Those anticipating loan forgiveness are generally the only group that might consider the IRA in residency.
Other key numbers:
- The maximum contribution for 2022 is the lesser of your earned income (wages) or $6,000. This amount is raised to $7,000 for those age 50 or older. The deadline for 2022 contributions is April 15, 2023.
- Eligibility for a Roth IRA is phased out when modified AGI reaches $129,000 to $144,000 single or $204,000 to $214,000 married filing joint. In this case, use a Backdoor Roth IRA.
- If your employer provides a retirement plan, deductibility for IRA contributions is phased out when modified AGI reaches $68,000 to $78,000 single, $109,00 to $129,000 married filing joint, or $204,000 to $214,000 if only your spouse has an employer provided plan.
Ready to start your own IRA or Roth IRA? Book 30 minutes with Mark.
For personalized help eliminating debt, investing smart and securing retirement, please contact Mark Ziety, CFP®, AIF® 608.442.3750.
Mark Ziety, CFP®, AIF®
WisMed Financial, Inc. part of the Wisconsin Medical Society.
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