When To Delay Contributing To Retirement Accounts

There are several occasions when it may make sense to delay contributing to tax advantaged retirement accounts. Tax advantaged retirement accounts include plans such as a 401k, or an IRA. For most people, it is in their best interest to invest in these retirement accounts. However for certain situations, it may actually make sense to delay contributing to these retirement accounts.

You Have A Large Amount Of Debts

Many financial personalities, including Dave Ramsey, advocate for paying down debts before maxing retirement. This is because most psychologists say that we are actually much worse at multitasking than we think.

New physicians who have large amounts of student debt (more than 1X their gross income) might make the decision to withhold retirement contributions in order to pay down debts. It is hard to focus on debt repayment while being worried about saving for vacation, house, retirement, and nights out.

If you are a new doctor wondering what to do with your money, take a look at this guide.

Staying committed to repaying debt should be a number one priority for individuals with a lot of student loan debt. Despite the tax benefits or employer match of a 401k, it may be in your best interest to put that money toward the guaranteed rate of return for loan repayment. If a new doctor has $400,000 in student loans at 6.8%, its hard to beat that rate of return other than debt pay off.

Do not choose to minimize retirement contributions and use this money for anything other than debt repayment.

Actual car one of my friends bought while in residency

Saving For Large Expenses

Large purchases such as a house often pose a dilemma for new physicians. Do you choose to save for retirement or save a larger down payment on a house for a better interest rate?

Buying in a very high cost of living city such as San Francisco or NYC may make it difficult to save for a house. Physicians in high cost of living cities may choose to save for a house rather than retirement. If you live frugally, many times a good down payment can be saved in only 1-2 years.

• Average house in central Austin = $450k
• 20% down-payment = $90k
• By saving 50% of income of $300k/ year it will take a little over 7 months to save for a 20% down-payment
• Delaying retirement contributions by only 7 months in this case will not dramatically alter when a physician can retire assuming this new doctor is 30 years old

Another large expense where one might want to cut back on retirement contributions is to save up for partnership. I can not advocate for buying into a group practice with a loan. Instead if the potential payoff is substantial, it may be a financial benefit to save for the buy in as early as possible. Once the buy in occurs, then proceed to max retirement accounts.

Personal Choice

If you are the type of person who thinks that there is little chance to retire early then it is completely up to you when to start investing in tax advantaged accounts.

These tax advantaged retirement accounts are optional. However, contributing to social security tax is not.Deciding not to use tax advantaged accounts might not be the best decision for retirement, but anyone has the option to never contribute to these accounts for any reason.

Expected Income In Retirement Will Be Higher Than Current Income

It is rare, but occasionally someone will be fortunate enough to find themselves making more money near or during retirement than their working years. Most of the time, this comes in the form of inheriting a business or real estate that brings in steady rates of return.

If you are expecting a large windfall that will continue to have yearly income that is higher than your current income, you might choose to not max pre-tax advantaged accounts. Here in Texas, I know several individuals who make more off of oil found on their land in retirement than they ever did working.

Being in a higher tax bracket is a good problem to have!

Terrible Options and Fees Associated With Employer Plan

Not everyone has a company 401k match or a choice to buy low-cost index funds. If there is no employer match or the funds are full of high fees then consider where best to put your money. Having someone take even 1% per year as a fee can end up costing you tens of thousands of dollars. Fees really do add up over the life of the account.