What Account Should I Max Out First?

Ever Wonder What Type of Account You Should Max Out First (It May Surprise You)

If you are wondering whether maxing out your 401k first is the best decision for a high-earning physician, you may need to keep reading. It is a 2 1/2-minute read. 

There are a myriad of types of investment accounts for high-earning physicians. From 401ks (lumping 401as here) to Roths to some Annuities. I want to focus on four main types of accounts in this article. Let’s dive in. Oh, and they are in order of what makes most sense for the majority of my select physician clients. 

Health Savings Accounts, better known as HSAs. These are nicknamed Triple Tax Savings accounts. The reason is pretty simple. Contributions go in before taxes. Grow without taxes. And there are no taxes with distributions as long as you follow the rules. 

A few items to note with HSAs. 

• They only apply if you participate in a High-Deductible Health Plan. 
• The maximum annual contributions are not that high. 
• Plan administration can be high, but more custodians are offering HSAs so be sure to shop around. 
• The effectiveness of HSAs is greatest if you contribute to the account, invest it, and not touch it until retirement. Use cash flow to pay for current medical bills. 
• There are more qualifying expenses you can use your HSA for than you might think. 

Next is kind of a tie between Tax-Deferred accounts (IRAs and 401ks) and Roths (traditional or Backdoor – but Backdoor is more likely for physicians due to income levels). The question that needs to be answered to determine which to max out first (IRA/401k vs Roth) is from looking at your taxes. Not only now but also in the future. You want to pay your taxes when they are lowest. If your taxable income will be higher now than down the road, you may want to go the Tax-Deferred route of maxing out your IRA/401k. So, doing some tax planning is paramount here. 

As a bonus, you may be able to do both, but your tax analysis will help you figure out which to max first in case you can do only one. 

Finally, we have the third (or is it fourth) option – Taxable Accounts. There are two things I want you to know here. 

• Taxable accounts are taxed! Read that again. You would be amazed how many people I talk to think that since you are putting money into a Taxable account that has already been taxed, there will never be taxes again. Just look at the title of the type of account to determine if there will be taxes. 
• Yes, the taxes should be lower than ordinary income rates when taking money out of an IRA, but this is not always true. You may be subject to short-term capital gains rates (think ordinary income) if you have not held the positions long enough. 

I will stop here as we are pushing the time limit. Just know there is an order to which accounts you should be maxing out first if you are a high-earning physician.