“In this world nothing can be said to be certain,
except death and taxes.”
— Benjamin Franklin
As I explore how best to convey the importance of tax-efficient savings to my peers, I did a little math on how much we pay Uncle Sam as we progress through various stages of our careers.
I divided a doctor’s financial journey into the following stages:
- MS years: assuming 6k annual income
- Early PGY years: assuming 53k annual income
- Later PGY years: assuming 100k annual income (moonlighting)
- Early attending years: assuming 250k annual income
- Seasoned attending years: assuming 400k annual income
- Retirement years: assuming 150k annual income
*Assumptions include single filing status and Arizona resident.
MS years: 7.65% income to income taxes
| Tax Type | Marginal Tax Rate | Effective Tax Rate | Tax Amount |
| Federal | 0.00% | 0.00% | $0 |
| FICA | 7.65% | 7.65% | $459 |
| State | 0.00% | 0.00% | $0 |
| Local | 0.00% | 0.00% | $0 |
| Total Income Taxes | $459 |
Early PGY years: 22.2% income to income taxes
| Tax Type | Marginal Tax Rate | Effective Tax Rate | Tax Amount |
| Federal | 25.00% | 11.95% | $6,333 |
| FICA | 7.65% | 7.65% | $4,055 |
| State | 3.36% | 2.60% | $1,377 |
| Local | 0.00% | 0.00% | $0 |
| Total Income Taxes | $11,765 |
Later PGY years: 29% income to income taxes
| Tax Type | Marginal Tax Rate | Effective Tax Rate | Tax Amount |
| Federal | 25.00% | 18.08% | $18,083 |
| FICA | 7.65% | 7.65% | $7,650 |
| State | 4.24% | 3.31% | $3,314 |
| Local | 0.00% | 0.00% | $0 |
| Total Income Taxes | $29,047 |
Early attending years: 34% income to income taxes
| Tax Type | Marginal Tax Rate | Effective Tax Rate | Tax Amount |
| Federal | 33.00% | 25.53% | $63,817 |
| FICA | 2.35% | 4.55% | $11,386 |
| State | 4.54% | 3.97% | $9,933 |
| Local | 0.00% | 0.00% | $0 |
| Total Income Taxes | $85,136 |
Seasoned attending years: 38% income to income taxes
| Tax Type | Marginal Tax Rate | Effective Tax Rate | Tax Amount |
| Federal | 33.00% | 29.80% | $119,186 |
| FICA | 2.35% | 3.73% | $14,911 |
| State | 4.54% | 4.19% | $16,743 |
| Local | 0.00% | 0.00% | $0 |
| Total Income Taxes | $150,840 |
Retirement years: 31% income to income taxes
| Tax Type | Marginal Tax Rate | Effective Tax Rate | Tax Amount |
| Federal | 28.00% | 21.33% | $31,991 |
| FICA | 1.45% | 6.35% | $9,522 |
| State | 4.24% | 3.62% | $5,434 |
| Local | 0.00% | 0.00% | $0 |
| Total Income Taxes | $46,947 |
A few things I noticed/ reaffirmed,
- I should have maxed out my ROTH IRA all 4 years of medical school.
- During my first full tax year as an attending, I will be paying more taxes than I make this year as PGY2.
- I should save POST-tax whenever possible as PGY because the taxes I pay now is 55% cheaper than I what I will pay as a freshly minted radiologist. ROTH ROTH ROTH.
- I would likely choose a 1099 attending job (independent contractor) over a W2 (employee) job when other job-related considerations (lifestyle, locale, group environment) are comparable. Filing taxes as an independent contractor, when done right, provides tremendous tax savings.
- During my early attending years, I will likely contribute a mix of pre and post tax dollars to retirement (predominately pre-tax.) I anticipate that I will be paying a smaller % of taxes in retirement.
- As many of us look forward to the 5 x increase in income, we also should be aware of the 7.2 x increase in taxes we pay. (early pgy to early attending)
- Learn from a fee-based financial adviser or teach yourself, take advantage of each of your 6 tax seasons and maximize your net worth.
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This article is for informational purposes only and not intended as a substitute for professional advice. Please consult a professional accountant, financial adviser or lawyer, before making financial decisions.
Taxes are unavoidable while working, but in retirement, you can do much better than this example. I’ve shown how one can be set up to spend $150,000 a year without paying any federal income tax under the right circumstances. http://www.physicianonfire.com/the-taxman-leaveth-taxes-in-early-retirement/
To have $150,000 in taxable income, you’d have to have a huge tax-deferred account. If you’re drawing 5% per year, that would mean a $3 million 401(k) / 403(b) / 457(b). And that’s without accounting for deductions and exemptions.
Taxes can’t be avoided or legally evaded while working, but they can definitely be minimized in retirement, at least with the current tax code.
Best,
-PoF
Thank you, PoF, your post is awesome 🙂 I’m definitely a proponent for Roth whenever possible. That’s why my doing 23.5k of Roth for myself, and funding Mini’s Roth IRA with 5.5k and her 529 by 14k this year.
Will set up SEP-IRA to fund as much as possible both Mini and me this year. Whenever possible, I’m converting our SEP-IRA to post tax dollars, even if it means it’s more work or requiring roll over…
I still have 4 years of low income years, got to buy all my savings on sale right now by paying taxes today!
Any advice on how to best convert SEP-IRA to Roth funds is much appreciated 😉
You’re clearly doing all the right things, and I have no doubt you’ll be optimizing your tax situation throughout and after your career.
If you’ve got the money to pay the taxes, make the conversion(s) in these lean income years. I did it in one big fell swoop when I thought I had a short window. It was costly! http://www.physicianonfire.com/megaroth/