As a dentist running your practice, thoughtful financial planning is key to securing your future.

Retirement planning involves strategically utilizing the different tax environments and how each impacts your savings. This article will explain why it is important to fund your Roth “post-tax bucket” now, even if you are in a high tax bracket.

Before we discuss the importance of Roth accounts, let’s review three of the five tax environments: Pre-tax contributions, like Traditional IRAs and 401(k)s, offer immediate tax savings but are taxed upon withdrawal. Taxable accounts, like brokerage and savings accounts, offer flexibility but come with ongoing taxes on earnings. Post-tax contributions, such as Roth IRAs and Roth 401(k)s, are taxed upfront but provide tax-free income in retirement.

Roth accounts offer unique advantages and should be a critical component of your retirement planning.

1. Tax-Free Withdrawals: By funding a Roth account, you ensure that your withdrawals in retirement are entirely tax-free. Knowing that taxes won’t erode your retirement income can provide significant peace of mind. Most importantly, the growth on your Roth accounts is tax-free. This is why it is so important to fund this “bucket” now: over time, your contributions will grow to a much larger number.

2. Paying a “Good Amount” of Tax: Given the uncertainty of future tax policies, paying taxes now at a known rate may be more advantageous than facing potentially higher rates in retirement. We often counsel our clients on a “good” amount of tax to pay. For more information on “good” tax, check out our July article, Understanding Your Tax Strategy: Are You Paying a Good Amount of Tax?

3. Flexibility and Control: Roth IRAs do not require RMDs, allowing you to leave your money in the account to continue growing tax-free for as long as you like. This flexibility can be beneficial for estate planning or managing your taxable income in retirement.

4. Diversification of Tax Strategy: Having pre-tax and post-tax retirement accounts allows you to strategically choose which accounts to withdraw from based on your tax situation each year. This flexibility can help you manage your taxable income and manage your tax bracket during retirement.

Incorporating Roth Contributions into Your Retirement Plan

As a dentist, your income likely restricts your ability to contribute directly to a Roth IRA, but strategies like the "backdoor Roth conversion" allow you to still fund Roth accounts. For more information on backdoor Roth conversions, check out our March article, Backdoor Roth Conversions and Tax-Efficient Retirement.

Additionally, if you have a 401(k) plan at your practice, consider including a Roth 401(k) option. This allows for higher contribution limits and provides post-tax benefits within a structure that supports larger retirement savings.

Balancing Tax Environments for Optimal Retirement Planning

While the post-tax environment offers compelling benefits, balancing contributions across the tax environments is essential based on your current financial situation and retirement goals.

For example, during high-income years, you might prioritize pre-tax contributions to reduce your immediate tax liability. Conversely, in years where your income is lower or if you anticipate a higher tax bracket in retirement, post-tax contributions to a Roth account can be more advantageous. Taxable accounts can be a flexible supplement that provides liquidity.

Incorporating Roth contributions or conversions into your retirement plan is efficient for any dentist on the road to financial independence. The benefits of the post-tax environment—tax-free growth, flexibility, and protection against future tax hikes—make Roth accounts a powerful tool in your retirement strategy.

Not sure where to start? Contact us today!