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Investments & Financial Planning for Nurse Practitioners (NPs)

Once a nurse practitioner has become an expert in their field, they can start focusing on what to do with their income.

NPs are high-salary professionals and should take the time to learn how to save and invest their money. By using the saving vehicles below, they can decrease their tax burden and optimize their path to financial success.

Many medical professionals are focused on studying and practicing in their field. However, they should also take the time to expand their financial knowledge.

Reaching financial freedom allows NPs to focus on patient care instead of worrying about financial strains.

Read on to learn about creating an emergency fund, 401ks and other retirement accounts, and various types of investments.

Creating an Emergency Fund

Once a nurse practitioner starts working, they should focus on saving up an emergency fund. An emergency fund is usually three to six months’ worth of savings. Although working in healthcare is a secure job, the recent pandemic has shown that even healthcare workers are at risk of layoffs.

Besides unemployment, having an emergency fund will come in handy for any health emergencies or expensive housing costs. Having a fully funded emergency fund will prevent the NP from accumulating high-interest debt.

Paying off Debt

Plenty of healthcare professionals start their careers with a plethora of student loans. Having all of this debt can prevent an NP from being financially independent. Paying off student loans should be a priority for NPs. They should try to refinance their student loans for a lower interest rate. They can also look into public service loan forgiveness. In qualifying cases, it allows those working in the public sector to have their student loans forgiven after making 120 monthly payments on their loans.

Other types of debt that NPs should not carry include credit card debt, personal loans, and car loans. These typically have high interest rates, and the debt can accrue pretty quickly.

Consider paying off this type of debt using the debt snowball method. This is a debt-reduction strategy where you pay off the smallest amount of debt first, gaining momentum as you eventually knock out the larger debt.

Another approach is to use the debt avalanche method. This tactic is based on first paying off the debt with the highest interest rate. Either option is a win, as long as the debt gets paid off. Once the NP is debt free, they can focus on investing.

Investing in a 401k

Most workplaces allow employees to contribute to a retirement plan called the 401k. Per the IRS, this is an “employer-sponsored plan that gives employees a choice of investment options.” These are typically pre-tax dollars that are invested in vehicles such as bonds and index funds.

In 2022, the maximum contribution an employee can contribute per year is $20,500. Employees 50 years old and older may fund a “catch-up contribution” of an additional $6,500 per year for a total of $27,000.

This can benefit nurse practitioners because the 401k contributions are tax deductible and can lower their overall adjusted gross income. For instance, if an NP makes $100,000 per year and contributes $20,000 to their 401k, their adjusted gross income would only be $80,000. That means they would only have to pay taxes on the $80,000.

Another benefit of the 401k is that many employers contribute a 401k match. For example, for every $1 the employee contributes to their 401k, the employer may contribute 50 cents up to 6 percent of employee contributions. This varies by employer, and some even match dollar per dollar. This is technically free money.

Nowadays, there are two types of 401ks. A traditional 401k and a Roth 401k. The traditional 401k is the one mentioned above where contributions are pre-taxed. This means taxes are not paid on the money put in a 401k, but upon withdrawal of funds, taxes will need to be paid later. The earnings of these contributions are also tax-deferred and taxes will need to be paid when the earnings are withdrawn.

A Roth 401k is similar to a traditional 401k, except that the contributions made by employees are with after-tax dollars. These contributions are not tax-deferred. As a result, any interest, capital gains, or dividends earned from this account is tax-free upon withdrawal. Both the Roth and traditional 401ks are good options. It is just a matter of deciding if taxes should be paid presently or in the future.

Some NPs cannot max out their 401k because they are paying off debt or focusing on other personal financial goals. In the meantime, they should at least contribute to the match their employer provides. So, if their employer offers a 4 percent match, then the NP should contribute 4 percent of their salary into their 401k.

Considering a 457b

A 457b plan is similar to a traditional 401k but is typically only offered in the government sector, such as academic hospitals, schools, or non-profits. Some nurse practitioners may find that their employer offers both a 401k and a 457b. This means they can max out both retirement accounts with $20,500 in each account, each year. Having a 457b plan and a 401k is like double dipping. Since these are pre-tax contributions, 457b contributions can also help decrease the NP’s total taxable income. By maxing out both the 401k and 457b, the NP can decrease their overall taxable income by $41,000.

One of the main differences between a 457b plan and a 401k is that once an employee separates from an employer, they may withdraw from their 457b without penalty. This is in comparison to a 401k, where if you withdraw funds before the age of 59.5, you would be charged a 10 percent penalty. Similar to a traditional 401k, taxes would have to be paid upon withdrawal of the funds from a 457b.

Funding an IRA

The IRA comes in several forms. The most common ones are the traditional IRA and the Roth IRA. Similar to the traditional 401k, contributions to the traditional IRA are tax deductible. Like the Roth 401k, contributions to the Roth IRA are with after-tax dollars, so money grows tax-free. Keep in mind that the NP would be able to contribute to both a 401k and an IRA if they qualify.

To contribute to a Roth IRA, as a single person, the NP would have to have a modified adjusted gross income (MAGI) of less than $129,000 for 2022. For married NPs, the MAGI would have to be less than $204,000. For a traditional IRA, the income limit in 2022 is $68,000 or less for single persons, or $109,000 or less for married people.

A traditional IRA is best suited for a person who expects to be in a lower tax bracket when they plan to start withdrawing their funds. A Roth IRA is great for individuals that expect to be in a higher tax bracket when they withdraw their funds. The maximum contribution to an IRA is $6,000 per year. Catch-up contributions for people 50 years old and older are an additional $1,000 per year.

Like a 401k, IRAs are used to invest in the stock market via ETFs, stocks, index funds, or bonds.

Using an HSA

A health savings account (HSA) is a tax-advantaged account that allows employees to set aside money for health expenses on a pre-tax basis.

To qualify for an HSA, an individual must have a qualified high deductible health plan; may not be enrolled in Medicare; and is not claimed as a dependent on someone else’s tax return.

For 2022, the maximum contribution for an HSA is $3,650 for an individual or $7,300 for a family. Those that are 55 years or older can make a catch-up contribution of an additional $1,000. These contribution totals include those made by both individuals and employers. They are also considered tax-deductiblem similar to a traditional IRA.

The funds are invested over time and can be withdrawn tax-free to pay for qualified medical expenses. Medical expenses include surgeries, prescription drugs, medical visits, dental work, and vision care. Once an individual reaches 59.5 years old, they have the option to withdraw funds for non-medical expenses but will need to pay income tax on the distributions.

Investing in a Brokerage Account

A brokerage account is an investment account used to purchase stocks, ETFs, mutual funds, and bonds. These days, there are plenty of licensed brokerage firms where an account can be set up online, such as Vanguard, Fidelity, and Charles Schuab. This is not a retirement account.

Unlike the investment accounts above, a brokerage account is funded with after-tax income. Earnings and contributions can be withdrawn at any time. However, this type of income is taxed as capital gains.

Short-term capital gains, in which assets are sold within less than a year from holding them, are taxed at the same rate as ordinary income. Long-term capital gains, from the sale of assets held for longer than a year, are taxed at more favorable and lower rates.

A brokerage is a nice option for NPs that already max out their 401k and IRA and have extra money to spare. It is often used as a long-term savings account.

Keep in mind that this would be a risky savings account since the money would be invested in the stock market, which is volatile. Savings that are needed within five years should not be invested in a brokerage account. However, it is definitely beneficial for those that plan to retire early.

Purchasing Real Estate

Investing in real estate has plenty of benefits. This is separate from a primary residence. When investing in rental properties, there are many ways to make money.

First, there is the monthly rental income coming from the property. Second, there is appreciation, in which the value of a property increases over time. And last, there are the tax deductions that come from owning real estate. These deductions include mortgage interest, property taxes, and repairs. Additionally, real estate investors can use the depreciation of their properties as an income tax deduction. This allows individuals to recover the cost or perceived decrease in real estate value.

To purchase a rental property, the NP will need to save a lump sum of cash to put down 20 to 25 percent of the value of the home as a down payment. The NP will also have to prove to the mortgage lender that they have consistent income and enough savings to afford the monthly mortgage payments. Investing in real estate can require a lot of money upfront, but it is a common way to produce passive income.

Starting a Business

Entrepreneurship is another way nurse practitioners can invest and grow their income. Examples include investing in a franchise, owning their own clinics or home health agencies, or creating their own consulting company. Going from being an employee to being self-employed opens many paths to producing income and further tax deductions.

Once the NP’s debt has been paid off and they have built a large emergency fund, they can consider opening their own business. It is important to establish that emergency fund because many business owners do not see a profit immediately.

By saving and investing through the recommendations stated above, the NP can have the financial flexibility that will allow them to pursue entrepreneurship.

Editor’s note: This article is for informative purposes only and is not meant to guide individual investment or financial decisions.

Sophia Khawly, MSN

Writer

Sophia Khawly is a traveling nurse practitioner from Miami, Florida. She has been a nurse for 14 years and has worked in nine different states. She likes to travel in her spare time and has visited over 40 countries.

Being a traveling nurse practitioner allows her to combine her love of learning, travel, and serving others. Learn more about Sophia at www.travelingNP.com.