Reposted from a previous post. Updated with 2026 figures.
Hospital Retirement Benefits and Understanding What's Available
One of the more fundamental financial decisions a person makes is contributing to a retirement plan. In most hospital systems, the retirement plan options are 403(b)s [and 457(b) plans, although 457(b) plans technically are not retirement plans]. Within retirement plans, a matching benefit is often offered, which leads one to think the sole purpose of the retirement plan is to accept an employer’s match and store money for an eventual retirement. While this may be so, the true value of retirement plans is much deeper: tax deferral.
Traditional vs. Roth: What's the Difference?
When you opt in to a retirement plan, you often get to choose traditional contributions or Roth contributions. The decision can have a significant impact on your future. What’s the difference and which one should you do?
A traditional retirement plan allows for tax deferrals of contributions, where the Roth retirement plans don’t. This means your taxable income is reduced by the amount of savings that goes into a traditional retirement plan. A Roth retirement plan, on the other hand, does nothing to reduce your taxable income, meaning you pay income taxes on the contributions, just like you would when transferring money to a savings account. This is what separates the two decisions.
Once income is deferred in a traditional retirement account, it usually becomes qualified money, which carries stringent rules, especially when the funds are distributed, e.g., using the funds as income in retirement. Roth contributions are not deferred, which means you pay taxes on all contributions, and since taxes have already been paid, Roth retirement plans carry significant advantages over many other types of accounts, such as tax-free distributions.
The Tradeoff
The fundamental difference between a traditional and a Roth retirement plan is the position of the tax break. Traditional retirement plans offer a tax break on the contribution, where the Roth does not. Roth plans offer a tax break on the distribution, where the traditional does not. Both plans offer tax-deferred growth. See the chart below for a quick analysis of traditional vs. Roth Retirement plans:
Which One Makes Sense?
It appears Roth retirement contributions would make sense for just about anyone; however, there is a premium for Roth funds that’s not always considered, especially for those who are in high income tax brackets. For high earners, this premium can be so high that it’s entirely possible a Roth retirement plan could end up underperforming traditional retirement plans altogether. Let’s take a closer look at the actual cost of Roth retirement accounts.
The Calculation
One calculation I always consider is the gross cost of Roth contributions vs. the gross savings of traditional retirement plan contributions. The calculation is so simple, it’s often overlooked. Since retirement plan tax deductions are taken “from the top” of your income, the contributions only affect your highest tax bracket. Let’s look at an example:
The second-highest tax bracket in 2026 is 35% and is assessed on incomes between $256,226 and $640,600 (Single Filers) and $512,451 and $768,700 (MFJ), so it affects many physicians making decisions on retirement plan contributions. The maximum annual 403(b) contribution in 2026 is $24,500. If you made, let’s say $550,000 (this income falls under the same tax bracket for Single Filers and Married Filing Jointly) and maxed out the 403(b) in Roth contributions, you would pay a 35% tax on the contribution:
$24,500 x .35 = $8,575
Add this 35% tax to the contribution, and the total cost to contribute $24,500 to the Roth 403(b) is $33,075 (not including state income taxes) because you put the money into the Roth account and paid taxes on that contribution.
If you instead chose to fund a traditional 403(b), there would be a tax deferral on the contribution. The tax deferral would be the same as the tax assessed on the Roth 403(b), which is $8,575, so we can subtract the tax from the contribution to arrive at the gross cost to contribute $24,500 to a traditional 403(b) is $15,925.
$24,500 - $8,575 = $15,925
Analyzing the Bigger Picture
In both the traditional and Roth retirement accounts, the 2026 contribution totals would show $24,500, yet the cost to get the $24,500 into the account varied wildly. The Roth account was assessed a premium, and the traditional retirement account was given a discount. If this exercise is repeated year after year, the cost savings can be dramatic. After 20 years (given the same tax brackets and contribution limits), here are the differences in cost between Roth and traditional retirement plan contribution costs:
The difference between traditional vs. Roth over 20 years: $343,000. That means it cost an additional $343,000 of income taxes over a 20-year period to utilize the Roth retirement plan, assuming all tax brackets and contribution limits were unchanged. If either taxes or contribution limits increase over the next 20 years, the tax savings on the traditional retirement plan could be even greater.
Impact in Retirement
Let’s fast forward to retirement. There are plenty of flaws with this assumption, but it’s almost always assumed that you’ll be in a lower tax bracket in retirement. I have never liked this assumption, because the definition of retirement is never really defined. In most models, it’s assumed a person doesn’t work in any capacity during retirement, and lives solely off of accumulated assets and Social Security. In this case, it is likely the retiree will be in a lower tax bracket (assuming tax brackets are unchanged) because there is no earned income flowing in. To keep it simple, let’s assume retirement means there is no earned income.
If a person contributed $24,500 each year for 20 years and earned an average interest rate of 6%, the ending account balance would be $949,696, ignoring any employer matching (since the match would have been the same for either account). If a Roth account was chosen, this $949,696 account balance would have cost an additional $171,000 in income taxes. If a traditional account was chosen, there would have been $171,000 of tax deductions. If the tax deductions were able to be saved and invested at the same 6% instead of paid in extra tax, the tax savings account would grow to approximately $331,424. That “side account” of $331,424 can be added to the overall asset pool for retirement, giving the traditional retirement plan account owner $1,281,120 in assets.
Apples to Apples
In addition to the spendable tax savings a traditional retirement plan creates, there are no additional taxes paid, unlike the Roth contribution. In the example above, we assumed the traditional retirement plan participant utilized a total funding for this plan of $24,500 annually (the $24,500 retirement plan contribution + saving the resulting tax deductions). Unequally, we assumed the Roth retirement plan participant utilized $33,075 annually (the $24,500 retirement plan contribution + the additional $8,575 in taxes the Roth retirement plan generated at a 35% tax bracket).
The total annual difference of tax between these two plans is actually 70% of the contribution because the traditional retirement plan is saving taxes on the contribution at a rate of 35% and the Roth retirement plan is paying an additional 35% of taxes, based on the retirement plan contribution. If we compare the two plans "apples to apples," then the traditional retirement plan participant would need to save and invest $8,575 annually for the tax savings, and then an additional $8,575 in the taxes that weren't needed to be paid by utilizing the Roth contributions. We must account for this so the total cash flow is identical in both situations. That investment essentially doubles the tax savings and provides an additional $331,424 on top of all the current assets.
The total breakdown of assets accumulated, utilizing the same cash flow for both models, looks like this:
If the retiree is indeed in a lower tax bracket during retirement and had a 20-year retirement, then $82,798 could be distributed annually from each retirement plan for 20 years, earning 6%, and ultimately spending the account to a zero-balance. The MFJ tax bracket on $82,798 is 12%, so assume 12% of the account is taxed (note: this neither takes into consideration the progressive nature of the tax bracket system, nor does this account for the standard deduction, so taxes at this income level would likely be even lower). This would result in approximately $9,936 in annual income tax for the traditional retirement plan holder. Over the next 20 years, the traditional retirement plan holder would pay $198,715 in income taxes.
The total payment of tax in retirement ($198,715 in tax was paid in the retirement scenario above) is similar to the original $171,000 in tax savings recovered from the tax deductions, illustrating that tax deferred savings is truly just delaying the tax; however, the biggest difference is the retiree with the traditional retirement plan being able to save and tangibly redirect the annual tax savings from the retirement plan tax deduction; this savings act created the additional account totaling $331,424 (redirecting the tax savings of utilizing a traditional retirement plan, and investing those savings each at 6%). On top of this, the traditional retirement plan didn't require excess taxes to paid, as the Roth plan did; thus, those taxes could be saved at the same amount and rate as the retirement plan tax deferral savings, so the additional investment account would be doubled for a total of $662,848. The improved cash flow during the working years allowed this individual to save more money. This tax savings account could have been used to provide additional income or to be allowed to grow as a backup to the retirement plan once it was distributed in full.
Make a Plan
The choice between a traditional retirement plan vs. a Roth retirement plan can be a complicated choice. At higher income tax brackets, the traditional retirement plan actually improves current cash flow by generating a tax savings; however, that tax savings may be worthless without a proper savings plan. The difference-maker in the retirement example above is that the tax savings from the tax deferral of the traditional retirement were saved and invested. The tax savings in a traditional retirement plan offer an opportunity to save more, but that opportunity requires action.
In the bigger picture, there are ways for some individuals to still save into Roth retirement accounts and fund a traditional retirement plan simultaneously. Pairing multiple strategies together is a way to ultimately make good use of the tax advantages of both plans.
Many physicians employed by hospital systems are offered retirement plans with many choices. While these choices are designed to provide a pathway to financial success, they can sometimes provide added confusion. While there is no "right" choice for funding a retirement plan, there is no plan that works without a savings strategy.