When starting out in a career, whether it be a nurse, doctor, or any profession, figuring out how to start saving for retirement is paramount. It is hard to start thinking about retiring when first starting a job, but ask anyone about to retire, and they will tell you, time moves fast.
The gold standard is to make sure you enroll in the 401k/403b up to the company match to get the “free money” your employer is offering. “If I put in 3%, they will match dollar for dollar up to 3%”. Amazing right? Double your money for doing nothing and get a tax deduction if contributing pre-tax dollars.
WE ARE GOING TO LOOK AT THE NUMBERS HERE and see if contributing up to the match, pre-tax, in a 401k for someone in their 20s, vs. maxing out a ROTH IRA, and see how things compare. Let’s also look at how doing both adds up
ROTH IRA
For 2025, the maximum to this account is $7,000. If you are a single filer and make over $150,000 you begin to phase out of contributions. If you are a married filer and make over $236,000 you will start to phase out of contributions. (We can always do the backdoor ROTH for these individuals, but keeping things simple for now)
Now, let’s assume this employee is 25 years old, and will make $100,000 gross income in 2025. This person will max out their ROTH IRA from 25 to age 60 and retire at 60. Let’s assume an 8% return over that time period (if invested in all equites, this is very achievable based on historical data) At age 60, this young person will have accumulated $1.3million dollars all tax-free. Simply by making the $7,000 contribution every year and letting compound interest work.
At age 60, the amount contributed to the account would total $252,000
The amount of interest accumulated would be $1,057,715. (See below for visual)
The ROTH IRA is the quiet millionaire maker. It is not sexy. It is not exotic. It is not sophisticated. It is extremely simple, and substantially powerful.
If you started a $100k job at age 25, and max out your ROTH until age 60, and achieve at least an 8% return, you will become a millionaire.
401k/403b Employer Plans
Many employers offer retirement plans. Long gone are the days of pensions and unfortunately, saving for retirement has been pushed from a business risk to a consumer risk. This created the invention and push for more employer sponsored plans. Many have “safe-harbor” matching now which immediately vest all contributions into the plan from the employer. As an employee, your contributions will always be vested (it was your money, you are just deferring it until retirement)
Same example of the 25-year-old making 100k this year, but instead of contributing to the ROTH IRA, they will defer 3% of their income into a 403b.
Simplicity purposes let’s say this individual will put in $3,000 into the employer plan (3%) and that they will get a 100% match on that contribution (another $3,000 employer contribution). This in total will have $6,000 a year going into the 401k. Let’s see how it stacks up.
To keep this apples to apples, we kept initial deposit, and compounding frequency the same. In reality, the 403b does not have the full $6,000 a year all at once, and is averaged in over time, but again, for simplicity purposes, we are looking at the base numbers.
The difference between the two?
$187,103
That may not seem like a lot at the end of the day, but it is not the NUMBERS that are the big difference.
IT IS THE TAXATION OF THE ACCOUNTS THAT MATTER.
Let’s get real here with another example of how the taxation plays out at age 60.
I retire. At 60. And the first thing I want to buy is a vacation home. It just so happens to be $500,000 and I want to pay for it. CASH. Because I am keeping my primary home and do not want a second mortgage.
How the distrubition from the ROTH IRA would work
$500,000 pulled out of the ROTH IRA, with NO TAX ramifications. Property is bought. ROTH IRA account is down to $809,715. E-Z. P-Z.
How the distribution from the 403b/401k/Traditional IRA would work
$500,000 pulled out and all would be subject to federal income taxation (and state income tax depending on the state). We are going to assume this person lives in Pennsylvania (my home state) and there is no state tax. This person would be subject to $139,000 in taxation. Now, most people have the tax withheld from their distribution, instead of paying it cash. Oh, super easy right? Just add the tax we owe of $139,000 on top of the $500,000 and that is enough to cover the tax, and purchase the home.
WRONG.
Pulling $639,000 from the pre-tax account would have around a $187,000 tax payment, which would not allow enough left over to purchase the house for cash and leave enough cash to pay the tax.
Essentially, the pre-tax retirement account would be cut by more than half, leaving around $422,612
and
the ROTH IRA would have $809,713 still growing tax-free.
This can be the negative effect of pre-tax monies in a retirement account.
How contributing to BOTH A ROTH IRA, and 403b/401k ADD UP
Alright, you guessed it. If you add up what you would have by doing the ROTH IRA, and contributing to the match in the 403b (3%) you would have $2,432,327.89 at age 60. This is a substantial amount of money, and it is literally from doing two of the simplest, yet most powerful savings mechanisms for retirement.
This is a savings rate of 10% of income. $7,000 to the ROTH, and $3,000 to the 403b. A very healthy savings rate and leaves the rest of income for fixed/variable expenses.
Was anyone curious what the difference would be between this person retiring at age 60 vs. retiring at age 65, and how that would impact these accounts? If not, too bad, and see below.
MASSIVE DIFFERENCE…
A $684,826.52 difference to be exact.
The most staggering is the amount of interest accumulated
IN 2060 (after 35 years) interest accumulated would be $1,964,327.92
IN 2065 (after 40 years) interest accumulated would be $3,117,153.52
A difference of $1,152,826
For waiting to retire another 5 years….
TAKEAWAYS
- Get accustomed to saving in a ROTH IRA and employer sponsored plan EARLY
- Invest in equities for the long haul
- Understand your savings rate, and how that may impact your retirement
- Take the time to fund your future self
The reality is most nurses, and medical professionals could afford to put $10,000 a year between their ROTH IRA and 403b.
Are you?
