For most individuals, the first place to begin investing is with your employer-sponsored retirement accounts like a 401K/403B/457B because there's usually a match of 3-9%. This is the closest to getting free money you can ever get. All high-income earners should max out their 401K/403B (currently $23K/year in 2024) because it helps you AGI. Low-income earners on the other hand, should invest up to their company match and then move on to the next important account, which is the ROTH IRA. For high-income earners, you are unable to contribute directly to your ROTH IRA due to something called the pro-rata rule. For a single filer making over $161,000, you must do what is called a “back-door-ROTH-IRA. This can be done by opening a traditional IRA and simply converting the funds to a ROTH-IRA a few days later.
The pro-rata rule will lead to a taxable event (speak to your tax professional if you have a traditional IRA and would like to take advantage of the back-door Roth IRA). Most physicians and other high-earners will not have a sizable traditional IRA, and the best option is to roll it into a Roth IRA prior to leaving training or in your low-income years and paying any taxes that may be due. The neat thing about a ROTH-IRA is that you contribute tax-free money up to age 59 and ½, and all gains in the market are tax-free at retirement. Any contributions made to the Roth IRA can also be removed with no tax penalty, so it can serve as another emergency fund.
The next investment account all investors need is a taxable account. I believe this is where the real magic happens. Just imagine that $5,000 monthly contributions invested in an S&P 500 index ETF will yield $9,800,000 in 30 years, with a total contribution of $1,800,000. A taxable account allows you to invest in free-range assets like stocks, mutual funds, bonds, real estate investment trusts (REITs), and now cryptocurrency. In essence, you can increase your rate of return from 10% to upwards of 15% year-on-year over the long term.
This is a small gist on investing. For more information or if you are interested in one-on-one coaching please book a session.
Dr. Boadu.
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