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Revisiting Retirement Planning, Yet Again!

Staff Reporters

In this time of Wall Street chaos, GNP economic recession and marketplace turmoil, doctors must realize that not all investments and related activities are appropriate in IRAs for tax, legal, and investment reasons. This philosophy is an old reminder from Richard B. Toolson who wrote the classic article “Which Assets Don’t Belong in an IRA?” 

Yet, funds in IRAs, if invested appropriately, can make a significant difference in securing a safe and comfortable retirement for any physician.

So, how are thing the same, or different today; and how shall we revisit the Individual Retirement Account [IRA] in today’s environment?

Prohibited Activities

A number of prohibited activities, including borrowing from the account, could result in adverse tax consequences, including losing the account’s tax-deferred status.

An IRA also cannot invest in collectibles such as art objects, antiques, or stamps under penalty of having the cost of the items considered a constructive distribution and subject to tax. IRA accounts also need to avoid Unrelated Business Taxable Income (UBTI), which may result from ownership of an interest in a partnership or “S” corporation or from purchasing securities on margin or borrowing to acquire real estate.

Arguable Activities

The author also advises against holding tax-free, tax-deferred, or tax-sheltered vehicles inside an IRA, such as municipal bonds, Series EE U.S. savings bonds, or variable annuities. Conversely, assets that are expected to generate the greatest relative pretax returns should be held in an IRA. This would include fixed-income investments expected to yield high returns, stocks with high dividend yields, stocks expected to be held short term, mutual funds that emphasize stocks paying high dividends, and mutual funds that expect to hold stocks short term.

Assets Outside IRAs

Investments in individual foreign securities or mutual funds that hold primarily foreign securities are ideally left outside IRAs in order to receive tax credits on the foreign taxes paid. These credits reduce the physician-investor’s tax liability on a dollar-for-dollar basis, subject to certain limits. If these securities are held inside an IRA, any taxes withheld by a foreign country merely reduce the IRA’s market value. The option of receiving a tax credit is not available.

IRA Checklists

What to have in an IRA:

Generally, assets that are expected to generate the greatest relative pretax returns, such as:

• fixed-income investments expected to yield high returns,
• stocks with high dividend yields,
• stocks expected to be held short term,
• mutual funds that emphasize stocks paying high dividends, and;
• mutual funds that expect to hold stocks short term.

What not to have in an IRA:

• collectibles (e.g., art objects, antiques, and stamps),
• tax-free, tax-deferred, or tax-sheltered vehicles (e.g., municipal bonds, Series EE U.S. savings bonds, or variable annuities), and;
• investments in individual foreign securities or mutual funds that hold primarily foreign securities.

Activities to Avoid in an IRA:

• borrowing from the account, and;
• creating unrelated business taxable income, which may result from ownership of an interest in a partnership or S corporation or from purchasing securities on margin or borrowing to acquire real estate.

Assessment

Informed physicians and their financial advisors can play a valuable role in managing IRAs in a way that maximizes the amounts available at retirement.

Conclusion

Your thoughts and comments are appreciated, as the above is sure to generate some controversy.

Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Filed under: Investing, Retirement and Benefits | Tagged: IRA |