This article is based on a recent episode of the Scholar Financial Advising podcast. Listen here for the full discussion.
“We’re both doctors with a high combined income—how can we reduce our tax burden while still saving aggressively for retirement?” This is a common and pressing question among physicians, and one that deserves a thoughtful and nuanced answer. While the income is high, it’s often W-2 income, which is the least favorable for tax planning. If your income came from investments, you’d have lower capital gains rates and more control over when you realize income. Real estate offers depreciation benefits, and business owners have access to a wide range of deductions and incentives. But with two W-2 incomes, your options are more limited.
Start With the Basics
You can begin with the low-hanging fruit—max out any available accounts. That includes 401(k)s, 403(b)s, HSAs, and, if you’re at a hospital, 457(b) plans. These are solid tax-advantaged vehicles. From there, you have to think strategically. What will your future accounts look like? If you’re just getting started, your success in saving for retirement will be mostly driven by your own contributions—not market returns.
Contributions Matter More Than Returns Early On
It’s easy to get caught up in performance. You might want to be in an aggressive portfolio to try and squeeze out every bit of return. But the truth is, if you’re contributing $100,000 or $200,000 in a year, and the market gives you 10 percent, that’s just $10,000 or $20,000 on top. You’re doing the heavy lifting, not the market. Later on, that changes. Your accounts start throwing off income, and your new contributions don’t matter as much. That’s when retirement becomes possible—when your investments, not your savings, are doing the work.
Tax Reduction Strategies
Stick with tax-advantaged accounts as long as possible. But watch for the 457(b)—the money technically still belongs to the employer, so there is some risk if you leave or the organization has financial trouble. Backdoor Roth IRAs are another option. If you have IRA balances, you can still do a backdoor Roth, but you’ll need to roll the existing IRA into an employer plan first. Let’s run the numbers: if you and your spouse both have 403(b)s, that’s about $50,000 combined. Add Roth conversions for another $14,000 or so. Add in 457(b)s, and you’re saving over $100,000 a year in tax-advantaged accounts.
Build a Taxable Account Too
This is where many people miss an opportunity. Even though it doesn’t offer tax deferral, a taxable brokerage account gives you flexibility. You don’t want to lock up all your funds in retirement accounts and leave nothing liquid for other goals or early retirement.
Charitable Options
Yes, there are other deductions like donor-advised funds, but if your goal is to build retirement savings, it may not be the time to give that money away. Those tools are useful later if you no longer need the cash.
Look for a Mega Backdoor Roth
If you’re in private practice, or even at some hospitals, you might have access to a mega backdoor Roth. If you can set this up, it’s a great move. You can put a lot more into your 401(k), then convert it to Roth. It’s definitely something to ask about.
This post is adapted from a recent episode of the Scholar Financial Advising podcast. Listen here to get the full conversation.