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Part 3: Practical Applications

Which account (grocery bag) should I choose?

In general, if your employer offers a match, the answer is the employer-matched 401(k) or 403(b). Consider choosing the Roth option for this account if you have one available, and be sure to contribute enough to get the full match. If your employer does not offer a match, the best options are probably either a Roth IRA (assuming that you qualify) or unmatched contributions to your employer’s retirement account—usually a 401(k) or 403(b), either Roth or traditional. Figure 3 outlines an algorithm to help decide which account to use for your investments during residency.

Figure 3. Investment account choice algorithm

MDITB Investment Flowsheet

Roth IRA

If you qualify to contribute to a Roth IRA, this is a reasonable choice. The 2020 income limits for Roth IRAs begin at $196,000 for married filing jointly and $124,000 for singles. Even though contributions to Roth IRAs are made with post-tax money, the account grows tax-free and there are no taxes on the money when you withdraw it in retirement. There are other benefits to the Roth IRA, including that you aren’t required to start taking the money out at a certain time, you can withdraw your contributions early without penalty (though this is not recommended), and the account can be passed on as inheritance without being taxed. 

Unmatched 401(k)/403(b)

Making unmatched contributions to your employer’s 401(k) or 403(b) plan is also a reasonable choice. If you make too much money to qualify for a Roth IRA, this is almost certainly the first account you should fill up. Your contribution to these funds are not taxed on the way in, so your tax bill will be lower at the end of the year when you fund this type of account. The higher your income (and therefore your tax bracket) gets, the more important it is to take advantage of making these pre-tax contributions. While you are a resident with (most likely) a relatively low income, this lower tax benefit may be outweighed by the other benefits associated with a Roth IRA. Either of these choices, however, is reasonable.

Traditional IRAs

In the case that your employer does not offer a 401(k) or 403(b) account for residents, it may be tempting to consider making pre-tax contributions to a traditional IRA that you set up yourself. While this seems reasonable, having pre-tax money in a traditional IRA will decrease the value of your ability to make “backdoor” Roth IRA contributions in the future. This discussion is beyond the scope of this resource, so we will leave it at this: try to avoid making pre-tax contributions to traditional IRAs.

If your employer does not sponsor a 401(k) or 403(b), your best account option as a resident is likely a Roth IRA.

Which types of assets and specific assets (groceries) should I choose?

Answering this question completely involves determining your long-term financial goals, assessing your risk tolerance, and evaluating assets to find ones that match your goals and risk tolerance. In the interest of simplicity, we will abbreviate this discussion by assuming that residents are early in their career (i.e., many years from retirement), are seeking at least moderate returns, and are willing to accept a moderate amount of risk to pursue these returns.

If you don’t want to worry about regularly checking in on your accounts and rebalancing your portfolio, buy a target date fund with the year in the name that is closest to your estimated year of retirement. 

If you want to be more involved, your initial investment should likely be something with at least moderate projected returns (which usually comes with moderate risk). To this end, consider starting with a US stock market index fund. Note that with this approach (in contrast to using target date funds), you will be the one responsible for diversifying and rebalancing your assets to match your investment goals over time. Those that want to be more involved in their investments should read more than this book before creating their own investment plan. Consider starting with The Boglehead’s Guide to Investing.

Investing only in a total US stock market index fund while in residency is reasonable if it matches you risk tolerance and goals (consider using Vanguard’s free asset allocation questionnaire  if you want help deciding how to distribute your investments based on personal factors). That said, most will probably find that they are interested in more diversification within a few years of graduation, if not immediately or later in training.

For those looking for more diversity in their portfolio while still only using index funds, one popular approach is the “three-fund portfolio.” This concept and the next paragraph are only for those who are interested in significantly more involvement in their portfolios than the target date fund group. If you’re happy with the target date fund strategy, feel free to skip to “Costs” below.

An entire book on the three-fund portfolio has recently been published,  but the short version is that owning (1) a total US stock market index fund, (2) a total international stock market index fund, and (3) a total US bond market index fund is a reasonable portfolio for most investors. Deciding how much goes into each of these funds is again a personal decision based on your goals and risk tolerance, but some loose guidance from the recent book on this topic is to own your age in bonds and the rest in stocks, 20% of which should go into the international stock market index fund.24 For example, this would mean that a 30-year-old resident would have 30% of his or her investments in the US bond index fund, 14% in the international stock market index fund (20% of 70% = 14%), and 56% in the US stock market index fund. You can also use the Vanguard asset allocation questionnaire cited above to help with these decisions.

If you don’t want to worry about regularly checking in on your accounts and rebalancing your portfolio, buy a target date fund with the year in the name that is closest to your estimated year of retirement. 


A key consideration when choosing between funds is cost; keeping costs low is a cornerstone of investing best practices. Always look for accounts that are no-load (meaning you don’t pay a commission just to put your money in or take it out) and have a low expense ratio (meaning you don’t pay too much for fund management). Each of these costs will eat away at your returns, and they are collected even if your investments lose value. The assessment of large fees can be salt in the wounds of accounts that have already lost value. Minimizing the likelihood of this scenario requires keeping costs as low as possible.

In general, index funds should have expense ratios below 0.3% and target date funds should have expense ratios below 0.5%. Many traditional mutual funds will also have expense ratios less than 0.5%. Note that there are many options that have significantly lower expense ratios than those listed here. Choose the fund with the lowest costs that matches your desired level of risk, your goals, and the level of involvement you want to have in the routine management of your investments.

Roth IRA


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