Attending urges me to consider "Roth IRAs" during Residency

This post is geared more towards International Medical Graduates starting residencies in the US and are planning to settle in the US, since I expect the American Grads to already know about this.

An IRA stands for 'Individual Retirement Account', a provision of tax-sheltered or exempt investments for the purpose of retirement. It is money you start saving with the intention of not using until you hit retirement. There are several types like Traditional IRAs, Roth IRAs, Simple IRAs, etc.

A Roth IRA is different from the rest in that while your yearly contributions are not tax-exempt, all interest earnings & withdrawals at retirement are tax-free - it is the opposite for other retirement accounts, including the 401(k)s, where your withdrawals are taxed like regular income. My attending made a good point to me about saving money during residency to take advantage of the Roth IRA for the following reasons:

1. Once a physician finishes residency / fellowship and starts a job, he/she is likely never going to be eligible for investing in a Roth IRA - why ? Because Roth IRAs come with income limits. A single person is not eligible to contribute to a Roth IRAs account in a given year if income exceeds $120,000. For a married person filing income taxes jointly with wife, that income limit is $166,000 - See Roth IRA limit calculator

2. The power of compound interest favors the young, which is a no-brainer - but implies that since all of us will mostly retire at 65, the only way to make more money with compound interest is to start early ! A great example:

Ben puts in $2000 each year at age 19 in a 10% interest growth fund and stops adding more at age 26. His money keeps growing, when he is 65, assuming sustained compound interest growth at 10%, his investment grows to $1,035,161. While his elder Brother John, starts investing into a similar 10% growth fund starting from age 27, and puts in $2000 every single year until he turns 65..and yet his total amount at 65 is much lesser than Bens at $883,185! Makes you wish you could travel back in time...

Putting the above points 1 & 2 together should make you understand that it's a great idea to try and save up some some money during residency for your small Roth IRA investment window period ! So maybe getting a used car instead of a new one & making other adjustments to free up money for investment isn't bad after all !

It is beyond me to cover all details of Roth IRAs and other investment types, I am learning myself ! But to give a general overview, your residency program may be providing Roth IRA accounts, or you can open your own accounts with banks, mutual funds, money market accounts, etc. About the rate of interest - You can designate any investment as a Roth IRA and the rate of interest will depend on type of invesment - remember a higher rate comes with a higher risk. So stock market investments could potentially give you 10-20% interest rate but carry a risk of losing money or not being consistent. A stable Bank saving account might be much safer, but then the rate of interest will really suck at less than 1%.

My personal take would be going for a high interest fund with your Roth IRA, because:
1. You will not be investing much (Maximum $5000 allowed each year) and because its always a good idea to invest only so much in stocks that you can afford to lose..
2. Because stocks generally perform good over the long term.

I urge you to read this article from Get Rich Slowly: How to Start a Roth IRA

Another good one:
- Traditional v/s Roth v/s SEP IRA

Good Books:

- Personal Finance for the New Physician -- Money Management for Residency and Beyond
- Personal Finance for Dummies
- Roth to Riches