Deferred Compensation for Physicians
By Jared Andreoli, CFP®, CSLP®
For physicians who are saddled with high amounts of student loans, a higher tax bill than they’d prefer, and the desire to catch up on their retirement savings, it can often feel like there’s not enough paycheck left at the end of every month. While many physicians have a great income, they don’t always do a great job of using that income to create wealth for themselves and their families.
Fortunately, there are tools you can use to not only contribute significant amounts to your retirement savings, but also lower your tax bill in the process. Specifically, a deferred compensation plan, like a 403(b) or a 457(b), can be a great way for high-income earners to save more while lowering their tax bill.
What Is a 457(b) and 403(b)?
A 457(b) plan is typically offered to state and local government employees, while 403(b) plans are typically offered to nonprofit workers. These tax-advantaged accounts are offered by employers as a way to increase your retirement savings, beyond the maximum limit of $6,500 that an IRA offers.
One important distinction between them is that the 457(b) is actually a non-qualified plan, as opposed to the 403(b), which is a qualified plan. While there are many nuances to that difference, the most important point for physicians to know is that you can actually contribute to both a 457(b) plan and a 403(b) plan. For high-income earners looking to ramp up their savings, this is an attractive option.
What Are the Benefits?
In 2023, the maximum contribution amount for each deferred compensation plan is $22,500. Additionally, both plans offer tax-deferred growth, which means that your investment returns won’t be cut down by taxes on a yearly basis. Instead, you’ll pay taxes when you distribute this money in retirement. Once you contribute the money, you’ll be able to pick your investment strategy from the options provided in the plan.
What Are the Drawbacks of a 457(b)?
One unique aspect of a 457(b) is that it is technically a salary deferral program, and not a traditional retirement savings plan. In fact, the money contributed to a 457(b) technically isn’t yours yet. It’s actually the company’s money, which is holding it on your behalf. What this means is that if your company were to go bankrupt, you and the other creditors would have to place a claim to receive your portion of the money. This is unlike a traditional 401(k) or 403(b) plan where each individual owns their account contributions.
We also rarely see 457(b) plans offer an employer match, which is a really solid benefit that can ramp up your retirement savings. And lastly, we also see account and administrative fees on the high side in some of these plans.
Before you fully enroll in a 457(b) plan, make sure you’ve done your homework in terms of your company’s financial stability, the fees associated with the account, and other retirement options that might be available to you.
Whatever You Do, You Need a Plan
While both 457(b) and 403(b) plans can be helpful tools to save more and pay less in taxes, they are just one important piece of the puzzle. A comprehensive financial plan that takes into account all areas of your life and offers personalized recommendations can help you get the financial confidence and clarity you need. If you’d like to learn more and see if we’d be a good fit to help, you can get started by scheduling a free consultation, or reach out to us by emailing jared.andreoli@simplicityfinancialllc.com or calling 414-207-6473.
About Jared
Jared Andreoli, CFP®, CSLP®, is president and financial planner at Simplicity Financial, a fee-only RIA dedicated to helping early-career physicians conceptualize their financial picture and achieve their financial goals. Jared specializes in devising individualized financial road maps for clients, and he loves nothing more than a full day meeting with clients who value his partnership to solve problems—big and small.
After college, Jared spent six years working as a mutual fund administrator for a large company. While he learned an immense amount about the financial world, he was missing the personal connection of working with individual clients. Combining his passion for finance and personal connection, he established Simplicity Financial in 2017.
Jared has a degree in finance with a concentration in financial planning from Western Kentucky University, along with the CERTIFIED FINANCIAL PLANNER™ (CFP®) and a Certified Student Loan Planner (CSLP®) certifications. Outside of work Jared enjoys cooking and traveling. He played baseball in college and still coaches occasionally. He and his wife recently welcomed a daughter, who occupies most of their time. To learn more about Jared, connect with him on LinkedIn.