Guest columnist Dr. Ronald Dritz invites young anesthesiologists to join him for a series of articles focusing on the lifecycle of financial health. In this installment, he test-drives the various tax-advantaged retirement vehicles and takes readers for a “look under the hood” at each.
The 1974 Employee Retirement Income Security Act (ERISA) and The Revenue Act of 1978 created the governmental body that oversaw and rules that governed 401(k) plans. These plans, along with their corollary 403(b) non-profit and 457 government employee plans*, have become the major method for funding employee retirement plans. These plans hold a total of $8.9 trillion as of December 31, 2024.
The Taxpayer Relief Act of 1997 introduced the Roth IRA, the provisions of which allowed an additional mechanism to enhance tax-advantaged retirement savings. In 2006 an additional wrinkle was added to Roth legislation with the launch of Roth 401(k) plans. While both accept after tax contributions, these two Roths differ in many ways. Individuals can open Roth IRA accounts but cannot open a Roth 401(k) account. Your employer must offer a Roth 401(k) as part of the retirement plan package. Contributions rules also differ markedly (see below).
Health Savings Accounts (HSA) and 529 Education Accounts complete the quartet of instruments available to taxpayers.
A good basic understanding of the rules governing the plans and their relationship to the federal tax code is essential to create and manage your wealth accumulation. Let’s start by seeing how these various plans interface with the federal tax code.
*The rules that govern 401(k), 403(b) and 457 plans, though not identical, are largely the same regarding contributions and how they interface with the federal tax code. Therefore, when I refer to 401(k) plans in this blog please assume that I am including 403(b) and 457 unless designated otherwise.
Retirement Accounts and Taxes
As you can see, 401(k) contributions are deductible from your gross income for the year the contribution is made, accumulate within the plan tax free but are taxed upon withdrawal. Conversely Roth IRA and Roth 401(k) plans are funded with after tax dollars, accumulate tax free and are not taxed when withdrawn.
HSA plans offer something unique in the federal tax code as they are tax deductible the year of the contribution, accumulate tax free and are not taxed upon withdrawal provided the withdrawals are for allowed medical expenses. They are triple tax protected!
529 account contributions interface with federal income taxes in a manner similar to Roth IRA contributions, that is, after tax contributions, tax free accumulation and tax-free withdrawal. However, the rules concerning the management of these accounts differ between states. (Here's a good overview.)
Contributions
The 401(k) contribution limits for 2025 for employees is $23,500. Employers can contribute additionally up to a total combined contribution of $70,000. Additional catch-up contributions are allowed for certain older age groups.
Some plans include a Roth 401(k) option. This can allow you to contribute after tax dollars in addition to the pre-tax dollars to your 401(k). However, your total combined contribution cannot exceed the $70,000 limit. If you have such an option, the decision on how to allocate your contribution between pre-tax and after-tax dollars requires some crystal ball gazing. If you foresee being in a higher tax bracket after you retire then paying your taxes on your contributions now rather than after retirement might make sense.
Individuals can open Roth IRA accounts as an additional mechanism to supplement their retirement savings. The contributions are made with after-tax dollars and the annual limit is $7000. However, Roth IRA contributions include a phase out provision. For single taxpayers covered by a workplace retirement plan the phase out begins at a taxable income of $79,000 and ends at $89,000. That means that below $79,000 you can make the full contribution which decreases until you reach $89,000. Above $89,000 Roth IRA contributions are not allowed. For married couples filing jointly, if the spouse making the contribution is covered by a workplace plan the phase out begins at $126,000 and ends at $146,000. If the contributor is not covered at work and the spouse is covered the limits change to between $236,000 to $246,000.
Health Savings Accounts (HSAs) were established in 2003. They allow contributions of pre-tax dollars on an annual basis. The contributions grow tax free inside the HSA and can be withdrawn for qualified medical expenses tax free. To make contributions to an HSA you must be enrolled in a health plan that is HSA eligible and has a deductible amount of at least $1650 for single individuals and at least $3300 for families. Contribution limits for 2025 are $4300 for single individuals and $8550 for families. There is a $1000 annual catch up contribution allowed if you are over age 55.
The disadvantage of HSAs is the high deductible requirement. So, if you anticipate a medical expense (like having a child) during a given year an HSA might not make sense. Contributions cannot be made once you’re Medicare eligible and cannot be used to pay your health plan premiums. Withdrawals for non-qualified expenses are subject to tax as ordinary income and, if under age 65, an additional 20% penalty. However, once you reach Medicare age you can use HSA funds to pay your Medicare premiums.
Retirement Plan Withdrawals
As you can see, the magic number for retirement plan withdrawals is age 59½. The federal government gives you the opportunity to use tax-advantaged savings accounts. But it wants you to save toward retirement.
Ronald Dritz, MD, FACA, practiced anesthesia for twenty-eight years in northern California. He held numerous positions of leadership including Chairman of Anesthesia, President of the Medical Staff, hospital and health system board membership and served as Finance Chair of an IPA medical group. He is happily retired and lives with his lovely wife in Emeryville, California.
The ASA Committee on Young Physicians is pleased to present this monthly article series on personal finance. These articles are not written by hedge fund managers or real estate tycoons but by practicing physicians. Some have business degrees and some do not – but every contributor is an anesthesiologist who has some guidance to offer the rising generation of attending physicians. It is not the intention of the committee to offer definitive financial advice, but rather some pearls of wisdom to consider while developing a personal fiscal plan.
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