Financial Benefits of Maximizing Savings
Aside from providing a place for you to invest for retirement, 401(k) plans, like their cousin the 403(b), provide significant tax, estate planning, and asset protection benefits. Money you contribute to a 401(k) is not taxed in that year. If your marginal tax rate (the rate at which the next dollar you earn is taxed) is 35 percent, contributing $10,000 to the 401(k) will reduce your tax bill by $3,500. The money inside that account will then grow in a tax-protected way, without the growth-retarding “tax drag” normally applied to investments as they distribute dividends and capital gains each year. While you will have to pay taxes on the money when you distribute it from the account in a few decades, most physicians will be able to pull out the money at a far lower tax rate than they saved when they put it in. Without much other taxable income in retirement, many doctors end up paying rates of 0 to 12 percent on a large percentage of their withdrawals. Saving at 35 percent and paying at 12 percent is a winning strategy.
Explore This IssueACEP Now: Vol 39 – No 04 – April 2020
Your 401(k) will also allow you to designate beneficiaries, so that money will pass directly and rapidly to your heirs without going through the expensive and public process of probate. 401(k)s and similar retirement plans also receive exceptional asset protection in every state. In the unlikely event of an above-policy-limits judgment forcing you to declare bankruptcy, you would be able to keep everything in your 401(k).
Your 401(k) is one of your most important benefits of employment and is a great place to start investing for retirement. Take advantage and get started today. If you are already using your 401(k), discover what you are invested in and make plans to maximize this benefit.