Tax Tips for Docs
Pay your taxes (let’s not go to jail). But you can (legally) pay less of them.
You are paying a lot in taxes right now, and there is something you need to fundamentally understand if you want to unlock the power of tax efficiency on your money. Strategy tax-deferred savings plus a mix of tax-free savings will be a powerful accelerator of your savings.
First, the tax code. Federal and Arkansas taxes work kind of like a wedding cake—each layer gets a little fancier and more expensive the higher you go. As your income climbs, so do the tax rates, like the IRS cheering you on... with a bigger bill. The first dollars you earn get taxed gently, but by the time you hit the top brackets, Uncle Sam and Arkansas are basically splitting dessert with you. It’s a progressive system, which is a nice way of saying: “Congrats on your success—now share more of it.”
This is why you might look at your W-2 at the end of the year and realize in shock that you paid taxes that would have been your entire salary in training.
Enter: why tax efficiency is a game-changer for docs.
You have two choices: Pre-tax and Roth.
Pre-tax or Traditional 403(b) is tax-deferred savings. Whatever you put into that account does not get taxed. Instead, you put dollars in and get an immediate tax deduction on your check. The government is signaling to you to save more than you would otherwise right now with the leverage on your savings dollars. This type of account is king for you right now, because that top tier of the wedding cake is a lot. Many of you are bumping into the 32% tax bracket.
Of course, you then are a co-owner of your account with Uncle Sam. Luckily, you are in the driver’s seat. You are investing that money, growing that money. Later, when you go to retire, you withdraw that money over time, but those withdrawals would presumably be in lower brackets. Even if tax rates were to go up, you are likely to end up with a lot more money than you would otherwise.
Roth money gets taxed but grows tax-free. Any money you can put into a Roth is going to be valuable in retirement because you don’t have Uncle Sam as a co-owner on your account. You don’t have to pay him back later. What you see in this account is what you get.
If you want to skip ahead, you will see how we would use a mix of Tax-Deferred and Roth savings in your Baptist Milliman accounts in the next blog.
Spoiler alert—your system has created an INCREDIBLE opportunity for you to get uncommon leverage on your savings through these savings buckets.