Typically, residents, depending on what their PGY year is, are paid anywhere from mid-40’s to high 60’s throughout their training. This makes it increasingly difficult to save and invest, especially if they live in a city with a high cost of living. Again, this comes down on trying to pay yourself first and unfortunately trying to streamline your expenses.
A Roth IRA is probably the best investment vehicle to start investing in. The reason being, you can directly contribute your post-tax dollars into this fund and never have to pay taxes on any of the gains in the future. The privilege of directly investing into a Roth IRA requires that you make less than $153,000 for tax year 2023 as a single person or if you are married filing jointly your joint income should be less than $228,000 for tax year 2023.
For tax year 2023, you can directly contribute $6,500 per person into your Roth IRA if you meet the above criteria. This is a great vehicle to invest, because if you manage to pick the right securities and your account grows astronomically, you never have to pay taxes on those gains when you are withdrawing them in retirement. Whereas, in a traditional IRA, any distributions that you with draw will be subject to income tax. In order to avoid taxes in a Roth IRA you need to be invested in the Roth IRA for at least 5 years since your first contribution, and take distributions/withdrawals from the account after you turn 59.5 years old).
$6,500 is a large amount of money, especially for someone in residency. How are you expected to save that kind of money. Well, let’s break it down: if you get paid bi-weekly, you will have 26 paychecks for the year. That means you would need to save approximately $250 per paycheck and put that into your Roth IRA. That is if you plan on maxing out your Roth IRA contributions, you can also contribute a little bit less if you truly cannot afford to save $250 per paycheck. However, a dollar invested today will be compounded and produce more future dollars, but it really needs to stay invested over a long period of time to truly provide that benefit.
What if your income exceeds the limitations to directly invest in a Roth IRA, do you have any option to access the benefits of a Roth IRA? The answer is yes; however, you have to conduct something called a “Backdoor Roth IRA Conversion”.
Essentially what you need to do is open a traditional IRA usually in the same brokerage firm as your Roth IRA. You would then contribute your $6,500 throughout the year to your traditional IRA. Once you have maximized your contributions, most traditional IRA’s will have a “Convert to Roth IRA” function in one of the submenus. Once you complete this process the funds and securities present in your traditional IRA will be sent to your Roth IRA, where they will remain going forward. You must make the Backdoor Roth IRA conversion before the end of the calendar year. There is no extra tax bill for this Roth conversion, as you were already using after-tax dollars to contribute to your traditional IRA, since they were nondeductible contributions. The difference is the growth in a traditional IRA would be taxed, which isn’t the case in a Roth IRA.