High Income, High Debt, High Taxes: What Now?
By Jared Andreoli, CFP®, CSLP®
After years of school and an enormous amount of work, new physicians find themselves in an enviable but unique position: they have a great income, yet that income puts them in a high tax bracket, and they have likely accumulated sizable amounts of debt.
While the focus until now has been to learn valuable skills to create a great income, once you start making that income, the focus needs to change. If you are simply making a high income but spending it as quickly as it comes in, you aren’t gaining traction in your financial life.
The focus of your financial life now should be how to build wealth for the long term. That means making a solid plan for how to handle your income, how to best reduce your debt, and how to start a smart tax-planning strategy. Let’s discuss how you can do that:
High Income and No Savings
Simply making a great income isn’t enough; we want to do a great job of saving a portion of that income as well. Unfortunately, over 40% of people who make between $100K to $150K are living paycheck to paycheck. I want you to reward yourself and enjoy the fruits of your labor and your skills—but I also don’t want you to have no savings and be vulnerable to a financial emergency.
I typically recommend a 20% savings rate. If you can do that right off the bat, wonderful! However, I know that for people just starting out in their savings goal, 20% immediately might be a little too much. In those situations, it might make sense to start at a 10% savings rate and then work up to 20% over time.
Dealing With Debt
For a variety of reasons, it’s extremely easy to rack up a lot of debt. Everything from credit cards to car loans to student loans to medical debt can accumulate quickly and cause significant financial stress. That being said, not all debt is created equal, and different types of debt should be treated differently.
Credit card debt, which typically has interest rates between 15% and 20%, is an especially harmful form of debt as the high interest rate continues to accrue at a rapid pace. If you have credit card debt, you should prioritize paying it off as soon as possible.
Student loans, on the other hand, aren’t as simple. While I do think you should make a plan to pay off your student loans, there are several factors. For instance, are the loans public or private? Are you eligible for PSLF? What type of repayment plan are you on? What’s the interest rate?
Regardless of the type of debt you have, you need to have a clear and thoughtful plan of action on how to tackle it.
Planning Your Tax Strategy
One downside of making a great income is that as your income grows, so do your taxes. That means it’s especially important to take advantage of the tax code and put together a smart tax strategy. Luckily, there are a number of options available.
For instance, in 2022 you can contribute up to $20,500 into your retirement plan (like a 401(k) or 403(b)) and deduct those contributions from your taxable income. As a physician you may also have access to a 457 which allows you to contribute an additional $20,500 on top of your 401(k)/403(b) contribution. In other words, you get money set aside for your future retirement while lowering your taxes today.
Another account that has great tax benefits is an HSA (health savings account). When you enroll in a high-deductible health insurance plan (which isn’t for everyone), you might have access to an HSA, which allows an individual to contribute up to $3,650 into the account while reducing your taxable income by the amount you contribute.
Additionally, you can invest the money in the account and have it grow without paying taxes, as well as distribute it without taxes, as long as you are over 65 and use it for a qualified medical expense. If you’re counting at home, that’s three great tax benefits (tax deduction, tax-free growth, tax-free distributions)!
Lastly, if you have a high income, you might be over the income limits to contribute directly to a Roth IRA. However, there is a workaround called a Backdoor Roth IRA. It’s a complicated strategy that could be costly and painful to fix if you make a mistake, but the essence of the strategy is to contribute to a traditional IRA and then convert it to a Roth IRA. I recommend working with a professional to ensure you implement the strategy correctly.
Put Your Income to Work for You
If you’d like to put a comprehensive plan together that will make the best use of your income, while helping you build wealth, I’d be happy to speak with you. You can get started by scheduling a free consultation, or reach out to me by email at jared.andreoli@simplicityfinancialllc.com or by 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.