SHEARWATER CAPITAL

For most physicians and their families, the single most important long-term financial goal is achieving a secure and comfortable retirement. The most effective way to realize this goal is to fill three “buckets” of money during your working years, providing flexibility and tax efficiency when it comes time to draw income in retirement.

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The Three Retirement Buckets

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• Taxable Accounts

These include individual and joint brokerage accounts and most trust accounts. Funded with after-tax dollars, taxable accounts provide maximum flexibility since contributions and withdrawals are not subject to restrictions or penalties. Unlike most retirement accounts, these funds can be accessed at any time, whether to help with a home renovation or take your family on an overseas trip. We manage these accounts in a tax-efficient manner, minimizing dividends, interest, and realized capital gains. An added estate-planning advantage: when these assets are passed to your heirs, the cost basis is reset on the date of your death. This step-up in basis can reduce or eliminate capital gains taxes for your beneficiaries, sometimes referred to as “free life insurance from the IRS.”

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• Tax-Deferred Accounts

This category includes traditional 401(k) and 403(b) plans, profit-sharing plans, and IRAs. Contributions are usually made with pre-tax dollars, which reduces your taxable income in the current year, although there are income restrictions in the case of IRAs. These assets grow tax-free, but withdrawals in retirement are taxed as ordinary income. The IRS requires taxable annual distributions, known as Required Minimum Distributions (RMDs), starting at age 73 or 75, depending on your birth year.

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While tax-deferred accounts are often considered the cornerstone of retirement savings, you should not rely on them exclusively. Most physicians should build the other two buckets as well to help optimize tax efficiency and ensure sufficient retirement assets.

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• Roth Accounts

Roth IRAs and Roth 401(k)/403(b) accounts are funded with after-tax dollars and grow tax-free. Qualified withdrawals from Roth accounts are also tax-free. While direct Roth IRA contributions are subject to income limits, Roth options within retirement plans and Roth conversions give physicians additional pathways to build tax-free retirement assets.

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Roth accounts are especially valuable in retirement because tax-free withdrawals can help keep you in a lower tax bracket, reduce the impact of Medicare’s Income-Related Monthly Adjustment Amount (IRMAA), and potentially lower the taxation of Social Security benefits.

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Why the Bucket Approach Matters

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By strategically filling all three buckets during your working years, you gain flexibility to optimize tax efficiency during retirement and hedge against uncertainty in future tax policy. For physicians and their families, such diversification provides peace of mind, helping to ensure that your financial health in retirement matches the security you’ve worked so hard to achieve in your career.