Physician's Guide: Comparing 401(a), 401(k), 403(b), & 457(b) Retirement Plans

By: Scott Sturgeon, JD, MBA, CFP®

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As a practicing physician, contributing to & investing in retirement accounts through work is a great way to reduce your tax liability over time & build wealth in working toward retirement. The challenge though (as you may already know) is that doctors and medical professionals are often confronted with a myriad of decisions to make & plan types to navigate. How much should I contribute to a retirement account? Should I make pre-tax or Roth contributions? How should I invest these accounts? Of the plan options I have available, how do the answers to those questions apply to me?

Physicians & medical professionals may often have a variety or blend of workplace retirement plans available to them including a 401(a), 401(k), 403(b), 457(b), or a Profit Sharing Plan. In this guide, we’ll delve into the differences between these plans, providing a framework on how to approach these plans & hopefully empowering you to make informed choices regarding your retirement savings. But first, lets get a few important points out the way…

Why contribute and invest in a 401(a), 401(k), 403(b), or 457(b) plan?

Great question! The answer is two-fold.

First, by regularly contributing dollars out of your paycheck to these various workplace retirement plans, you’re effectively implementing a dollar cost averaging strategy by regularly investing in the market. That approach, combined with both the growth of those investments and the reinvestment of cashflow generated allows the value of your retirement plan to compound over time. If done over long periods of time, that compounding can really start to add up and eventually when you retire, you can withdraw from those portfolios to fund your lifestyle.

Second, and maybe just as important for physicians, contributions made to these kinds of accounts can be made with pre-tax dollars. That means you’re able to reduce your taxable income for any dollars you put into the accounts. When you’re making hundreds of thousands of dollars each year, you’re likely in some of your highest earning years and are simultaneously taxed at some of the highest rates you’ll ever be. Rather than pay tax on those earnings at that high rate, you can instead contribute it to a retirement account, let it grow over time, then eventually withdraw portions of the account to fund your lifestyle in retirement when you’re hopefully in a much lower tax bracket. The net effect in doing so should hopefully reduce your tax bill both in the present day and in the future as well.

Important Caveat: 

As you read through these descriptions, it’s important to remember that no two employer plans are going to be exactly alike. What works for you may be completely different for a colleague or classmate at a different hospital or private practice, even if you both have the same types of plans! For that reason, it can be really beneficial to seek out advice on how to properly setup & continually monitor these workplace plans over time. If navigating all of this is overwhelming, consider scheduling a no-obligation consultation with us to see if working with Oread Wealth Partners can help you align your finances with what’s important in your life. 

With that out of the way, on to the different types of plans you may be navigating…

401(a) Plan: Flexibility and Employer Contributions

Picture yourself working in a hospital, research institution, or academic center. The 401(a) plan is designed for professionals just like you, particularly within the public sector. This plan offers adaptability, enabling employers to mold it to fit their specific organizational needs, which also means a plan at one hospital could be different at another hospital.

 Key Features of the 401(a) Plan:

1. Employer Contributions: The 401(a) plan’s standout feature is the potential for substantial employer contributions. These contributions can take various forms, such as fixed amounts, matching contributions linked to your own, or a combination of both.

2. Enhanced Contribution Limits: If you’re a high-earning medical professional seeking to maximize your retirement savings, the 401(a) plan permits higher contribution limits compared to other retirement accounts like IRA’s.

3. Vesting Structure: Keep in mind that employers may implement a vesting schedule that dictates when you gain full ownership of the employer-provided funds. This can influence decisions about staying with your current employer as you’re “penalized” for leaving prior to full vesting.

4. Portability: In the event you change employers, in certain cases your 401(a) funds can be rolled over into another qualified retirement plan, such as a 401(k), 403(b), or an IRA, ensuring you continue to enjoy the tax-advantaged nature of your account.

 401(k) Plan: Tailored for the Private Sector

Let’s say you’re working in a for-profit organization like a private practice or a physicians group that’s contracted with a hospital. The 401(k) plan is a go-to option in the private sector. It offers a familiar structure with the potential for employer contributions and valuable tax advantages. Important to note, these points are directly applicable to Traditional 401(k)’s, not Roth 401(k)’s or After-Tax 401(k)’s. For more info on that, check out this article on The 3 Types of 401(k)’s.

Key Aspects of a 401(k) Plan:

1. Pre-Tax Savings: It’s important to remember you receive immediate tax benefits when you contribute to a 401(k) plan. Contributions are made on a pre-tax basis, reducing your taxable income for the year. While you’re working, you’re likely in a higher tax bracket than you will be when you’re retired. By taking advantage of those pre-tax savings, you can wait to be taxed on that money until you’re hopefully in a lower tax bracket in retirement.

2. Your Contributions and Employer Matching: You have the power to allocate a portion of your earnings to your 401(k) plan. Plus, some employers match a certain percentage of your contributions, amplifying your overall savings. Similar to a 401(a) though, your employer match may take several years to vest, so if you leave prior to that vesting date, you may not receive the full benefit of your employer match.

3. Investment Choices: A 401(k) plan typically offers various investment options to suit your preferences or time horizon to retirement. Often those choices are more limited than what you might have in an IRA or brokerage account, so it’s important to review what’s available to make sure it matches your time horizon, risk tolerance, and that you’re not paying too much in investment fees or expense ratios.

4. Catch-Up Contributions: As you approach age 50, remember that the 401(k) plan allows for catch-up contributions, allowing you to make even larger contributions to your plan and giving you the chance to boost your savings during your final working years.

 403(b) Plan: Designed for Nonprofits and Education

If your career path takes you to a nonprofit institution, like a teaching a hospital or healthcare organization, you may have access to a 403(b) through work. It shares similarities with the private sector’s 401(k) plan but is adapted to fit the unique circumstances of nonprofit employees.

Key Elements of a 403(b) Plan:

1. Tax-Advantaged Savings: Similar to a 401(k) plan, your contributions to a 403(b) plan are made on a pre-tax basis, translating to immediate tax benefits.

2. Contributions Galore: Just like your counterparts in the private sector, you can contribute a portion of your earnings to the 403(b) plan. Some employers even match your contributions, boosting your savings.

3. Diverse Investment Options: Just like many of the other plans listed, 403(b) plans can have a variety of different investment options. It will often vary from plan to plan as to what those options might be, so it’s important to do your own due diligence to which investments you’re allocating your contributions.

4. Unique Catch-Up Contributions: Similar to the above listed plans, once you turn 50 you can make additional annual contributions to a 403(b) plan. Unlike the aforementioned retirement plans however, 403(b)’s have unique contribution rules for those who have been with the same employer for 15 years or more, allowing employees with these types of plans even more opportunity for tax-deferred saving & investing.

 457(b) Plan: Tailored for Government and Nonprofit Professionals

If you’re working for a government agency or specific tax-exempt organizations, the 457(b) may be an option for you to contribute to. Note that 457(b) plans are somewhat unique from the other plans previously mentioned as you may be able to contribute more to them each year, but there are some important risks you should weigh that are unique to these plans.

Key Features of the 457(b) Plan:

1. Deferred Compensation: Just like any of the other plans, contributions to a 457(b) plan are made with pre-tax dollars, thereby reducing your current taxable income and deferring the payment of taxes on those dollars to a later date.

2. Flexible Withdrawals & Rollovers: Unlike other workplace retirement plans, you can make penalty-free withdrawals from the 457(b) plan before you hit 59½. This flexibility can be good if you’re considering early retirement or a transition to part-time work. Additionally, once you separate from service with your employer providing a 457(b), you can roll over the balance of your plan into another workplace retirement plan of the same tax type, or even roll the funds into a Traditional IRA.

3. Juggling Dual Enrollment: Often, if you have access to a 457(b) plan you can also simultaneously participate in another retirement plan. This potential double involvement maximizes your savings potential over time.

4. Claims Against Your Money: One of the unique elements of a 457(b) plan is that while you’re working and making contributions to the plan, the total dollar amount in the overall plan can be subject to your employers creditors in the event of bankruptcy. While that may not necessarily stop you from contributing to the plan, it’s certainly an element of risk you should weigh in participating.

Profit Sharing Plans: The Workhorse of a Private Practice

Most commonly used in private practice settings, a profit sharing plan is a company-sponsored retirement plan that gives participants a share in the company’s profits. Contributions are made by the employer based on the company’s earnings subject to a pre-determined formula, often based on some combination of age, length of service and earnings. 

Key Features of a Profit Sharing Plan: 

1. A Unique Plan: Unlike some of the other plan types listed above, profit sharing plans are some of the more unique retirement plans available. There are a variety of formulas that can be used to determine contribution amounts & it can be used in tandem with other accounts like a 401(k) to offer additional tax-deferred growth. 

2. Employer Only Contributions: For profit sharing plans, the employer decides how much to contribute to the plan each year, and the amount can vary. Contributions are discretionary and can depend on the company’s profitability. Additionally, the funds in the profit sharing plan may also be invested as a large pool of all employee or partners funds, so it’s important to incorporate how those funds are invested to reflect your other retirement plan investments.

3. Tax Implications: The astute reader may now be asking, “if only the employer funds the plan, how does that offer tax benefits to the physicians?”. The answer is that profits contributed to the plan are tax deductible to the employer, which also happens to be the physician owners of the practice. The end result is additional tax-deferred dollars saved for the physicians that can be used in tandem with some of the other plans listed above.

Making the Right Choice: Tailoring Retirement Plans for You

Selecting the ideal retirement plan hinges on your unique circumstances and goals. Consider factors such as your expected income, tax implications, employer contributions, investment preferences, and retirement timeline.

As a doctor, you’re presented with a wide array of opportunities and decisions to make when it comes to financial planning, especially as it pertains to workplace retirement plans. Having access to any combination of a 401(a), 401(k), 403(b), 457(b), or Profit Sharing Plan offers unique benefits & challenges in deciding how to utilize the plans that are available to you. By understanding the distinctions between these plans and factoring in your financial goals, you can hopefully make more confident decisions on what path is a good fit for you individual financial situation. That being said, if you ever feel stuck or unsure if you’re making the right financial decisions or if your finances are aligned with what you prioritize in life, consider scheduling a consultation call with us to determine if Oread Wealth Partners can provide value in working toward your goals and objectives.  

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