As you transition to practice, there’s a lot to do and think about. From a financial perspective, here are four questions that are frequently asked by residents.
1. Should I pay down my medical school debt or invest?
If you have accumulated significant debt throughout your studies, you may feel motivated to pay it off as quickly as possible. On the other hand, you also know that it’s important to start investing early. For residents, this is one of the most important and difficult questions. You’re starting to earn a salary for the first time and need to find a strategy for managing your income.
While the answer to this question is different for every resident, the key factor is finding the right balance that will work for your current financial situation. It has to take into account your income, personal goals, lifestyle and approach to money.
2. Should I incorporate my medical practice?
Toward the end of your residency, you may be thinking about incorporation. No doubt, there are many benefits to incorporating your practice, notably significant tax advantages when you earn your income through your corporation. At the same time, it’s important to take a good look at your income, expenses and family situation before making this decision.
As an incorporated physician, you will be able to defer taxes by leaving some of your earnings in the corporation, thereby reducing your personal income for the year, and your tax rate. However, unless you are earning more than you need to live on each year, incorporation may not be of much benefit right now. It might make more sense to incorporate further down the road, when your income is higher or your expenses decrease.
Learn more: Is incorporation right for you?
3. How do I save for my retirement?
In Canada, most physicians are considered small-business owners. This means they don’t have employer-funded pension plans, so they need to start retirement planning early. Although some provinces have plans that allow physicians to make annual contributions that the province will match — for example, British Columbia’s Contributory Professional Retirement Savings Plan — most provinces don’t currently offer such programs.
As a physician, you need a financial plan that implements the best strategies to help you achieve your retirement goals.
A registered retirement savings plan (RRSP) is an important retirement savings vehicle that allows you to deduct your contributions from your taxable income. What’s more, as your RRSP investments grow, the tax on those earnings is deferred until the funds are withdrawn — ideally in retirement, when income is lower and the tax rate is reduced.
A tax-free savings account (TFSA) allows you to save money that grows tax-free. The funds can be withdrawn at any time, and your contribution room is restored the following year. Withdrawals from your TFSA are not counted as income when the government determines your eligibility for benefits such as Old Age Security and Guaranteed Income Supplements.
Learn more: RRSP, TFSA or both? What you need to know
4. How can I plan for my children’s future?
After the years of studying to become a physician, you know all about the costs of an extended education. Paying for your children’s education out of your regular cash flow could affect your future lifestyle, given that tuition fees are rising, and especially if your children also choose to pursue careers in medicine.
It’s important to start planning early, and one of the options is a registered education savings plan (RESP). An RESP is designed to help parents, grandparents and other family members build education savings for their loved ones.
The key benefits of RESPs are tax-deferred growth of your investments; and government grants that help you save faster. The best way to maximize your savings with such a plan is to develop a strategy and start saving early.
An MD Advisor* can answer your financial planning questions and help you start off your journey on the right foot.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.