Are you taking full advantage of the employee benefits your practice offers?
Taking full advantage of what is offered can have a significant impact on your finances. First off, it's important to know that benefits packages vary widely. The key is to learn the details of your employer's benefits package and then make choices that will keep you financially healthier.
Here are some of the major factors for you to consider.
What Are the Basic Types of Employer Retirement Plans?
Your employer retirement plan will be a 401(k) or 403(b). A 401(k) is used by for-profit employers and a 403(b) by not-for-profits. For practical purposes, they are the same for the employee.
No matter which type you have, here's a to-do list:
Contribution amount: Max out your 2022 contribution by deferring $20,500 if you are under age 50 and $27,000 if you are 50 or older.
Roth contributions: See if your employer's plan allows for after-tax or what is commonly referred to as Roth contributions. If so, we recommend that clients under age 40 defer to the Roth bucket to give time for the tax-free compounding to pay off in retirement. Another option is to defer a portion to the traditional pre-tax bucket and the rest to the Roth bucket. Any contribution from your employer will go into the pre-tax bucket.
Target date funds — yes: For younger physicians who don't have significant investments within or apart from their employer plan, a good option might be the target date funds that most retirement plans offer. If you don't have knowledge or interest in investments, it's worth it to pay a small fee to have your retirement plan provider make these asset allocation decisions for you.
Target date funds — no: There may be times when the one-size-fits-all target date fund asset allocation is not a good fit, such as if your spouse has a retirement plan at work or you have significant assets outside of your employer plan. Then it might be worth it to customize your allocation, apportioning the percentage of money to go to different investment choices in the plan to give you greater control over your total retirement portfolio.
Beneficiary designations: In the event of your death, the retirement plan beneficiary designation, not your will, governs who receives your retirement plan assets. Keep up-to-date with who you named as beneficiary, which you might want to modify based on life-cycle changes. For example, you probably don't want to leave your retirement assets to your parents or siblings if you now have a spouse and children.
401(a) pension plan: If your employer is putting away additional money for your retirement through a pension plan, you probably can't add any contributions on top. However, you can usually choose the investment allocation in line with the rest of your portfolio. If you have a choice at retirement between taking the pension as a lump sum and rolling it to an IRA or taking monthly pension payments over your lifetime, a careful analysis is in order before making this irrevocable decision. The most important factor to consider is what internal rate of return the pension option offers.
457(b) plan: Many nonprofit employers (such as nonprofit hospitals and medical groups) offer a 457(b) plan in addition to the 403(b), which allows you to contribute up to $20,500/year pre-tax at any age. However, these assets are exposed to creditor claims on the employer, adding a risk factor, particularly for our younger clients. Governmental institutions (such as county and state university hospitals) don't face the same creditor exposure, making them attractive at any age.
457(b) plan distribution options: Continuing with some differences between governmental and nongovernmental 457(b) plans, let's look at distributions. A governmental 457(b) will allow you to roll your assets to other eligible retirement plans like 401(k), 403(b), IRAs. Nongovernmental 457(b) plans don't, usually allowing a rollover only to another 457(b) plan.
The problem we've encountered is that your new employer, while they may offer a 457(b) for payroll contributions, usually doesn't permit money to be rolled in from a previous 457(b). Other details, such as distribution options at retirement, can also vary widely and affect the attractiveness of your employer's plan.
In some cases, the only distribution option from a 457(b) is a lump sum payout the year after retirement — not good from an income tax perspective. Other 457(b) plans allow the participant to defer the initial payout to age 70 and spread the taxable payments out over 10 years — much more favorable for lowering the tax hit on the money distributed from the plan. Check out all the details of your 457(b) and understand what they mean to your retirement planning.
Health insurance: Many employers offer a range of health insurance options. If you're married and your spouse is employed, you will need to coordinate coverage with your employed spouse. Will you each choose your own employer's plan or both go onto one of the plans? The choices are more complex if you have children. Be thorough in reviewing the monthly insurance costs, including deductibles and copays, the provider network, and what type of treatments your family has required in the past.
Health savings account (HSA): How is your health overall? A high-deductible plan with an HSA is often the best choice for healthier clients who don't anticipate much spending on healthcare. These plans often include an annual employer contribution to the HSA account and the ability to invest the money in the HSA for long-term growth.
Life insurance: I'm not a big fan of purchasing extra employer-sponsored insurance coverage, as in most cases the cost escalates over time. As the cost increases incrementally, these plans become quite expensive as you reach your 50s and 60s. Another problem is that they are usually not portable to another employer. However, if you have preexisting conditions, employer-sponsored insurance is likely your best bet, as you can often get at least some coverage without having to go through medical underwriting.
Disability insurance: For this benefit, consider whether you would receive the benefit pre-tax or tax-free. In some cases, you can opt for one over the other. If so, opt for tax-free benefit by paying income tax now on the premium amount your employer pays for the insurance.
Every employer's benefits package is unique, including options for retirement savings, insurance, and other areas affecting your family's health and long-term financial well-being. It pays to find out the specifics of your benefits — and how the choices you make will affect you in retirement and throughout your lifetime. By doing your homework, you'll be able to take full advantage of the benefits your employer offers.
The above article is intended for informational purposes only. Please consult a legal or tax professional regarding your situation.
He practiced internal medicine in the Twin Cities for 11 years before making the transition to financial planning for physicians, beginning in 1998.
Joel's wife is a radiation oncologist, making him all too familiar with the stress of medical practice.
Knowing firsthand the challenges of practicing medicine, Joel's passion is making the lives of physicians easier by helping relieve them of financial worries.
Connect with him on LinkedIn or on his website.
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Any views expressed above are the author's own and do not necessarily reflect the views of WebMD or Medscape.
Cite this: Joel S. Greenwald. Make the Most of Your Employer Benefits -- Starting Today - Medscape - Feb 07, 2022.