Jordan Fortunato is a final-year PharmD candidate at The Ohio State University College of Pharmacy, and Tim Ulbrich, PharmD, is the cofounder & CEO of Your Financial Pharmacist.
As a student pharmacist, saving for retirement might not always be top of mind. Between attending class, studying, and being active in your local APhA–ASP Chapter, you’ve got a lot on your plate!
On top of that, with the countless pharmacy acronyms to remember already, adding 401(k), 403(b), IRA, etc., to the list may sound confusing and daunting, leaving that as a later “pharmacist” problem. But the reality is that the financial choices and mistakes you make as a student pharmacist will affect your future, and who doesn’t want to become financially successful? With the power of compounding interest, tax savings, and peace of mind, getting a head start will pay large dividends in the future.
Don’t worry—in this article, we’ll break down the alphabet soup of retirement planning and provide you with the necessary tools to become well-prepared. While not the only way to build long-term savings, we’ll focus on tax-advantaged accounts, as that is the place most will start to launch their retirement savings.
Tax jargon explained
Before diving into the alphabet soup, keep in mind that in most cases, the money you save must be taxed at some point—either going in or out. When you see something referenced as a “traditional” account, that means the dollars in that account will be taxed later upon distribution. This is commonly referred to as a “tax-deferred” or “pre-tax” retirement account. For example, for a pharmacist making $120,000 putting $20,000 into a traditional 401(k), they will have a taxable income of $100,000 because their $20,000 contribution into the traditional 401(k) account is tax-deferred.
On the other hand, when you see something referred to as a “Roth” account, that means the contributions going into the account have already been taxed, grow tax-free, and won’t incur any further taxes. This is commonly called a “post-tax” retirement account.
Now that we have that jargon out of the way, there are two main buckets when breaking down tax-advantaged retirement plans: those accounts administered by an employer and those accounts administered by the individual.
Tax-advantaged accounts administered by an employer
Common examples of these types of accounts include 401(k), 403(b), TSP, and 457. Previously, pensions, in which employees received regular payments in retirement based on years of service and the responsibility for saving for retirement was primarily on the employer, were more popular. Over time, however, employers transferred more of the savings burden and risk to the employee in the form of a 40(k) or similar plan.
A summary of common employer-managed plans is outlined below. Contributions are typically made through payroll deductions, and additional catch-up contributions are available to certain participants depending on their age. Furthermore, when hired as a new employee, the employer may set up automatic employee contributions and any adjustments up or down need to be made by the employee.
Plan: 401(k)1
Eligibility: For-profit entities
Contribution limits (2023): Employee: $22,500/year; combined employee and employer: $66,000/year
Catch-up limits: If you are 50 years old or older, can contribute an additional $7,500/year.
Good to know: Many (but not all) employers offer a Roth (post-tax) and traditional (pre-tax) version of a 401(k). Most withdrawals prior to the age of 59.5 years will incur a 10% penalty and, if in a traditional account, will also be subject to tax. Both are subject to required minimum distributions.
Plan: 403(b)2
Eligibility: Nonprofit entities
Contribution limits (2023): Same as 401(k)
Catch-up limits: Same as 401(k)
Good to know: Same as 401(k)
Plan: TSP3
Eligibility: Military or government employees
Contribution limits (2023): Same as 401(k)
Catch-up limits: Same as 401(k)
Good to know: Same as 401(k), plus typically lower fee investment options compared to a 401(k) or 403(b) plan, 1% of salary is automatically contributed and caps out at a 5% government match, and the 10% early withdrawal penalty is waived if you retire at age 55 years or older.
Plan: 4574
Eligibility: State/local government or certain nonprofits
Contribution limits (2023): Same as 401(k)
Catch-up limits: Same as 401(k), plus double-limit catch-up provision for those nearing retirement
Good to know: Benefits become available upon separation from an employer providing the 457 plan.
Tax-advantaged accounts administered by an individual
Common examples of these types of accounts include traditional Individual Retirement Account (tIRA) and Roth IRA (rIRA)
Unlike the previous plans, which are administered by an employer, the following are plans administered by the individual. These accounts can be set up yourself or by working with a financial planner who can open and manage them on your behalf. A 10% penalty + tax (for tIRA) applies in most cases where withdrawals are made before the age of 59.5 years. While outside of the scope of this article, additional IRA vehicles (SEP IRA and SIMPLE IRA) are commonly used vehicles among small business owners.5
Plan: tIRA
Eligibility: Anyone with earned income
Contribution limits (2023): $6,500/year
Catch-up limits: If you are 50 years or older, can contribute an additional $1,000/year.
Good to know: Depending on your income amount and whether or not you are covered by a retirement plan at work, you may be able to deduct your IRA contributions on your federal income tax return.7
Plan: rIRA
Eligibility: Anyone with earned income within certain income limits
Contribution limits (2023): Same as the tIRA
Catch-up limits: Same as the tIRA
Good to know: Depending on your filing status and income, you may be able to contribute directly all (or a portion) of the maximum annual amount.8 Those exceeding the income limits to contribute directly to a rIRA may consider a “backdoor Roth IRA strategy.”9
Establish your strong financial foundation
Besides planning for retirement savings, there are a number of things you can do as a student pharmacist to establish a strong financial foundation. For additional resources and information, visit the Your Financial Pharmacist (YFP) website and listen to the YFP Podcast. You can also use the coupon code APhA at checkout to get 15% off YFP's book Seven Figure Pharmacist.
References
- Rodeck, D. 401(k) plans: 10 things you should know. Kiplinger. kiplinger.com/retirement/retirement-plans/401k-plans-everything-you-should-know
- The Investopedia Team. Understanding 403(b) plans. Investopedia. investopedia.com/terms/1/403bplan.asp
- Kagan J. Thrift Savings Plan (TSP): How it works and investments. Investopedia. investopedia.com/terms/t/thrift_savings_plan.asp
- Liberto D. 457 plan. Investopedia. investopedia.com/terms/1/457plan.asp
- SoFi Learn. SEP IRA vs. SIMPLE IRA: The pros & cons of each. SoFi. sofi.com/learn/content/sep-ira-vs-simple-ira/.
- Internal Revenue Service. Retirement topics: IRA contribution limits. Internal Revenue Service. irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
- Internal Revenue Service. IRA deduction limits. Internal Revenue Service. irs.gov/retirement-plans/ira-deduction-limits
- Internal Revenue Service. Amount of Roth IRA contributions that you can make for 2023. Internal Revenue Service. irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023
- Boyle C. Why most pharmacists should do a backdoor Roth IRA. Your Financial Pharmacist. yourfinancialpharmacist.com/why-most-pharmacists-should-do-a-backdoor-roth-ira/
Disclaimer: The information in this article is provided to you for informational purposes only and is not intended to provide, and should not be relied on for, investment or any other advice. Read our full disclaimer here.