Retirement Savings Opportunities for Self-Employed and Small Practice Physicians

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Funding your own Retirement

Guy P. Jones

  • By Guy P. Jones CFP®
  • 21 Stone Creek Place
  • The Woodlands, TX  77382
  • 832-677-1692 www.guypjones.com

As a self-employed physician or small practice physician, it’s up to you to fund your own retirement. You don’t have your employer furnishing you a retirement program with matching dollars and various investment options in which to invest.

On your Own

Basically, you’re on your own to figure out the best plans, the best investments, and the appropriate fees to pay for these services. Oftentimes, without the help of a retirement plan specialist, self-employed physicians and small practice physicians choose the simplest plan, which may not be the best plan for their particular situation.

The Choices

Given the myriad of choices available, let’s take a look at the various plan options and what savings opportunities exist.

Retirement Plan 2014 Savings Limits for an  MD age 52 earning $300-k*

Plan type SIMPLE IRA SEP/PROFIT SHARING 401(k) Single DB Single DB + 401(k)
Maximum contribution $22,300 $52,000 $57,500 $183,000 $221,600

*Defined Benefit plan maximum contribution limits for a 52 year old, including “catch-up” contributions of $2500 for SIMPLE IRA, $5500 for 401(K)

Due to the simplicity of setting up and administering the plan, most self-employed physicians and small practice physicians choose either a SIMPLE IRA or a SEP/Profit Sharing plan. While simple and easy to administer, these plans don’t offer the maximum opportunity to set aside large annual tax-deductible contributions which can accumulate as much as $1-2 million in just 5-10 years. This higher level of contributions can potentially reduce income tax liability by $40,000 or more annually for individuals in higher income tax brackets.

While these higher limit plans may not be right for everyone, they are best suited for physicians who have self-employment income or small practice physicians who are older and want to increase their retirement savings while reducing their tax liability.

Ideal candidates are:

  • 40+ year of age
  • Interested in contributing more than $50,000 per year or a higher percentage of compensation that is allowed in a 401(k)
  • Able to make contributions for at least 3-5 years
  • Earning at least $100,000 per year in one of these ways:
  1. Owns a practice with 5 or fewer FT employees including the physician
  2. Is self-employed as the primary way of earning a living
  3. Has a second source of income whereby he/she is earning self-employment income
  4. Is an independent contractor vs. an employee
  5. Receives payments or royalties from patents, books, consulting, Board of Directors fees, or speaking engagements, etc.

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These plans can work for physicians and practices that are sole proprietors, partnerships, corporations, LLCs, LLPs, or PA’s. High income sole proprietors and couples who are in business together can potentially maximize contributions by doing a combination of a 401(k) and Defined Benefit plan.Recent legislation has increased the flexibility of Defined Benefit plans so that the physician can better manage their contributions from year to year.

However, defined benefit plan contributions are required to keep the plan on track each year to deliver the promised retirement benefit. If the physician wants to terminate the plan, the assets can be rolled over into an IRA where they will continue to grow tax-deferred until withdrawn.

Assessment

If you want to find out if one of these higher limit plans would be appropriate for your situation, don’t wait until the last minute for 2014. Plans such as this have to be opened by the end of the fiscal year or by December 31st if the practice is on a calendar year basis.

Conclusion

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