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Two Different Personal IRA Investing Strategies?

Based on Tax Considerations?

 

 

 

 

 

By Dr. David Edward Marcinko MBA

LINK: https://medicalexecutivepost.com/schedule-a-consultation/

One personal investing strategy is to place more conservative investments (those with lower expected returns) in a tax-deferred traditional IRA, 401-k, 403-b or similar, and more aggressive (higher-earning) assets in a taxable brokerage account or Roth IRA.

WHY? Each account is thus working hard but in very different ways.

HOW? The conservative funds in the traditional IRA or retirement accounts would fill any needs for safety as they grow more slowly – and the higher tax rate won’t take out as big of a bite.

Meanwhile, the more aggressive funds in a taxable brokerage accounts would grow more quickly, but be taxed at a lower rate.

Assessment: Any thoughts?

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Even More IRA Mistakes

Three More Critical Mistakes to Avoid

By Rick Kahler CFP®

Previously, I discussed two critical IRA mistakes, based on information I learned from Jeff Levine of Fully Vested Advice, Inc., at the 2018 spring conference of the National Association of Personal Financial Advisors. This week I will cover three more.

1. Failing to understand beneficiary options on inherited IRAs. You may well be among the millions of Americans, most of them spouses, who will inherit IRAs. Knowing the options you have can save you thousands of dollars in benefits and taxes.

Spouses have the right to remain as a beneficiary of the plan or roll it over into their own IRA. Which to choose depends upon the age of the person who has died, and the age and financial needs of the beneficiary. The “99% rule” says beneficiaries under age 59½ should retain the plan as an inherited IRA; those over 59½ should roll it over. The “1%” scenario is when the deceased spouse was over age 70½ and the beneficiary is more than 11 years younger. A rollover is best if the beneficiary doesn’t need any IRA distributions until after age 59½.

Another option for IRA owners is to name a trust as the beneficiary of the IRA. Levine suggests not doing this if you can accomplish your goals without it. But there are many cases when a trust will accomplish things that giving the IRA outright to a beneficiary won’t do. Estate planning attorney Ilene McCauley, from Scottsdale, AZ, says some of those instances are when you want to protect the IRA from a divorce of a beneficiary or guarantee that the proceeds go to your children when your spouse dies or remarries. McCauley recommends using a living trust as the IRA beneficiary rather than a testamentary trust established through a will.

2. Not understanding the RMD aggregation rules. These are widely misunderstood even by advisors. Levine asked the group of about 50 advisors this question: “If a 72-year-old client had two traditional IRAs, two 401ks, and two 403bs, how many RMD checks would need to be issued?” Only three advisors got the right answer—four. You can aggregate the RMDs from the two traditional IRA accounts and take the combined RMD out of just one account. You can do the same with the two 401k accounts. But with the 403b accounts you must take the RMD separately from each account. You can’t aggregate them or you face penalties and taxes.

3. Not doing periodic reviews of IRA beneficiaries. It’s important to review your IRA beneficiaries regularly. This is especially crucial when a beneficiary dies or you get remarried. For example, assume you want your employer’s retirement plan to go to your children upon your death. You remarry, but don’t have your new spouse sign a disclaimer waiving rights to your retirement plan. If you die after one year of marriage your new spouse, not your children, inherits the employer’s retirement plan funds.

The reverse is true with an IRA or a 403b. Let’s assume you listed your kids as the beneficiaries on either of these accounts. If you remarry and want the proceeds to go to your new spouse but you forget to sign a change of beneficiary form, there is no one-year rule as there is with an employer’s plan. Your kids , not your spouse, will inherit the account.

Assessment

The bottom line is that, to get the most benefit from a retirement plan, you need to do your homework and seek appropriate advice. The money you save by avoiding IRA mistakes can make a big difference in your security and standard of living in retirement. 

Conclusion

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Avoid Costly IRA Mistakes

Avoid These 2 Mistakes

By Rick Kahler CFP®

Investing through an IRA is a foundational method of retirement saving. Opening and contributing to an individual retirement account is not hard. That doesn’t mean IRAs are simple and easy to understand.

National Association of Personal Financial Advisors

I was reminded of this at the 2018 spring conference of the National Association of Personal Financial Advisors, where I attended a workshop by Jeff Levine of Fully Vested Advice, Inc., on “10 Critical IRA Mistakes.”

Top on his list of mistakes was failing to make charitable contributions out of your IRA when you are over 70½. These are called Qualified Charitable Distributions (QCDs). Here is why giving to charity directly from your IRA is a good idea.

For traditional IRAs, at age 70½ you must begin to withdraw required minimum distributions (RMDs) whether you want to or not. An RMD is taxable at ordinary income rates. Further, if you make a charitable donation and you are over age 65, you now must have over $13,300 of itemized deductions per person to get any portion of it deductible. By donating out of your IRA, you can reduce your RMD by an amount equal to your charitable gift. This makes your charitable gift 100% deductible and lowers your adjusted gross income, which can also help lower your Medicare premiums.

Here’s an example

Assume you are age 71, give $9,000 a year to charity, your property taxes on your home are $2,500, you are in the 22% tax bracket, and your RMD is $10,000. Without planning you will take your $10,000 RMD and pay $2,200 of income tax on it. Since you only have $11,500 in itemized deductions you will take the standard deduction of $13,300.

If instead you contribute $9,000 to charity out of your IRA, you reduce your taxable RMD from $10,000 to $1,000, slashing your tax liability on it from $2,200 to $220. The savings of $1,980 would cover most of your property tax.

If you make a QCD like this, it’s essential to inform your tax preparer. There is no required written evidence from your IRA custodian that your RMD needs to be offset by the amount of your gift. It’s your responsibility to tell your accountant so they report the correct reduced amount of the RMD on your tax return.

In Bankruptcy

Another significant source of mistakes is the complex asset protection rules for IRAs and retirement plans. Protection differs between bankruptcy and non-bankruptcy creditor actions.

In bankruptcy, all employer plans (ERISA), SEP and SIMPLE IRAs, and rollovers from retirement plans to IRAs are 100% protected from creditors. Amounts you personally contributed to traditional and Roth IRAs are protected up to a total of $1,283,025. However, inherited IRAs are not covered. You can see why it’s important to keep traditional, rollover and inherited IRAs in separate IRA accounts.

To make it even more complicated, different rules apply if creditors sue in non-bankruptcy proceedings. ERISA plans are 100% protected in all states. All IRAs are 100% protected in most states, except California, Georgia, Maine, Mississippi, Nebraska, South Dakota, and Wyoming, where they have limited to no protection.

Solo 401(k), SEP IRA, and SIMPLE IRA plans are fully protected from non-bankruptcy proceedings in about half of the states. The others, including South Dakota, have limited or no protection. If you live in one of these states and have a Solo 401(k), SEP, or SIMPLE, you want to roll it into an IRA as soon as circumstances allow.

Assessment

Mistakes like the two described here can be costly. To avoid them, especially if your circumstances are at all complex, it’s wise to get tax and IRA withdrawal advice from qualified financial advisors.

Conclusion

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On “Forced” Required Minimum Distributions

Mandatory RMDs

By Rick Kahler CFP®

Planning is important for all things financial, including retirement, which is inevitable no matter how far into the future it may seem. The financial decisions you make in your 20s through your 60s will greatly impact the quality of your lifestyle during retirement. Social Security and family won’t be enough to get you through 30 years of retirement. If you haven’t worked for a branch of government, you will rely heavily on income you’ve stashed in 401(k)s and IRAs.

Traditional IRAs

One of the big advantages of a traditional IRA or 401(k) is being able to save pre-tax dollars and let them grow tax deferred until you need them. Hopefully, when you take the distributions in retirement, you will be in a lower tax bracket than when you made the contribution. The downside is that traditional IRA funds become 100% taxable when you withdraw them.

Deferrals

Deferring distributions from your IRA only works until age 70½, when you’ll be forced to take money out whether you want to or not. This is called a Required Minimum Distribution, or RMD. If, at age 70½, you don’t need to withdraw funds to live on but are faced with an annual RMD, there are several things you can do to minimize your tax hit.

The easiest is don’t stop earning an income if you have a substantial 401(k). Employees are not required to take RMDs when they are still working, even part-time. This only applies to your employer’s 401(k). You will need to take RMDs from personal IRAs or 401(k)s and IRAs from previous employer plans.

***

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However, if you plan ahead you may be able to bypass this. If you have IRAs that are rollovers from previous 401(k)s, your employer may allow you to roll them into your current plan. By consolidating previous qualified employer plans into your current plan, you can defer taking an RMD until you quit working.

If you give to charities, you can give any portion or all of your RMD to a charity and not pay any taxes on the distribution. This can really save you a lot of money if you are currently giving to charities out of taxable accounts. When you turn 70½, simply redirect your charitable giving from taxable accounts to your IRA. You can give up to $100,000 annually without paying taxes on those distributions.

Another strategy we use commonly with clients is converting traditional IRA funds to Roth IRAs. Money in a Roth is not subject to RMDs. Of course, the downside is that you must pay taxes on the funds converted from your traditional IRA to a Roth.

For a conversion to make financial sense, two important factors must apply. You generally want to do a Roth conversion when your current tax bracket is lower than you anticipate it will be in the future. The most obvious scenario here is when you delay Social Security until age 70 and you are currently in a 10% or 15% tax bracket. It’s highly possible that Social Security and RMDs all kicking in at the same time may put you into the 25% tax bracket. Moving as much money at the 15% bracket prior to age 70 can make a lot of sense. It’s also important that the money to pay the taxes needs to come from a taxable account.

Assessment

As with all financial strategies that are crammed into a 600-word article, there are variations and nuances I am not able to go into. If you think one of these strategies may apply to you, don’t try it on your own. First get advice from a competent tax advisor or financial professional.

Conclusion

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Contact: MarcinkoAdvisors@msn.com

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http://www.CertifiedMedicalPlanner.org

***

The New DOL Rule Survey

A Conversation?

[By Rick Kahler MS CFP®]

I recently learned about an unexpected response to the new Department of Labor rule which mandates that all financial advisors and brokers act as fiduciaries (that is, in the best interest of the consumer) when dealing with customers’ retirement plans.

This means brokers will be discouraged from selling high fee and commission products to a customer’s IRA or similar retirement plan. The ruling may force many brokers to revamp for IRA products that have lower fees and commissions.

The Survey

However, according to a J. D. Power survey as reported in Financial Planning, customers are not happy with their brokers charging them lower fees. While the survey found that the clients of fee-only advisors were “generally more satisfied with what they pay their firm,” it also found that commission-based clients are going to leave in droves if their advisors switch to a lower-cost, fee-only model.

Let me get this straight

A broker who until now has owed no fiduciary duty to the customer, and who sells high fee and commission products to that customer, will now be forced by their company to place the consumer’s interest first. When dealing with the customer’s IRA, the broker cannot receive commissions and can only earn a lower fee. The broker places a low-fee product in the client’s IRA.

The result?

The client is so upset they will take their business to another firm.

According to J. D. Powers, that is correct. Their survey says around 60% of the customers of brokerage firms that may have to switch to fee-only when dealing with customer’s IRAs will “probably” or “definitely” take their business to another firm.

***

***

I am imagining the following conversation between a customer and a broker

Broker:

“Because of the new DOL regulations I can no longer sell you a high fee and commission variable annuity to be owned by your IRA. To comply with the ruling, my company has eliminated the 7% upfront commission on this annuity; we will now charge you a 1% annual fee. They also reduced the annual management expenses from 3% to 1%. Plus, now any advice I give you or product I recommend must be in your best interests.”

Customer:

“So you are eliminating the upfront 7% commission and replacing that with a 1% annual fee, which means 7% more of my money immediately goes to work for me in the investment, right?”

Broker:

“That’s right.”

Customer:

 “And instead of the upfront commission you are charging a new 1% annual fee, but reducing the annual management costs of the investments from 3% to 1%. So I’ll still make an additional 1% every year I own this, in addition to saving 7% up front, right?”

Broker:

“That’s right.”

Customer:

 “And further, you’re now going to look out for my best interests rather than the best interests of your company.”

Broker:

 “Yep.”

Customer:

“This is ridiculous. I’m outta here!”

Broker:

“Where are you going?”

Customer:

“To find a firm that will continue to sell me high commission, high fee products for my IRA and that will work against my best interests!”

Broker:

“You probably won’t find any. Every financial company selling investment products to IRAs has to comply.”

Customer:

 “I’ll find someone, somewhere. Goodbye!”

Assessment

This defies all logic. I can only make up stories as to why the survey found the majority of brokerage customers would leave. Might some believe the new fees would cost them more than they currently pay?

My best assumption is that there was no explanation of what “fee-only” or “fiduciary” meant. So, if the results of the J. D. Power survey don’t make a lot of sense to you, join the crowd.

Conclusion

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Proposed IRA Changes in the Obama Federal Budget

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Reviewing Potential IRA Changes 

Rick Kahler MS CFP

By Rick Kahler CFP® http://www.KahlerFinancial.com

The President has fired the first warning shot indicating that politicians are eying the tax advantages of the Roth IRA. For years I’ve strongly encouraged maximum funding of Roth IRAs & 401(k)s.

Physician-Clients have sometimes expressed concern that politicians would someday retroactively change the rules and strip the plans of their tax advantages. I’ve seen that concern as a possibility (for example, in 2008 Argentina confiscated the assets in IRAs and 401(k)s and replaced them with less than desirable Argentinian Government Bonds), but not much of a probability. 

With the introduction of the President’s 2016 budget, the probability of losing some Roth IRA tax benefits has increased.  

Each February the President submits a budget to Congress which is about far more than spending requests. It also contains scores of proposed changes to existing tax laws. One such proposal in the current budget would eliminate two tax advantages of the Roth IRA.  

The first change would require required minimum distributions (RMDs) for Roth IRAs as well as traditional IRAs.  

Currently, one of the benefits of a Roth IRA is not having to take RMDs. At age 70 1/2, owners of traditional IRAs are required withdraw a certain percentage annually, often around 4%. They must pay the tax due and, if they don’t need the funds for living expenses, must invest the remainder in a taxable account. The RMD denies them the option of leaving the money in the tax-deferred environment of the IRA and further compounding.  

Under the President’s proposal, owners of Roth IRAs will need to start withdrawing funds annually at age 70 1/2. While there won’t be any taxes due because contributions to Roths are post-tax, it will remove the funds from the tax-free environment, decreasing future returns by up to 40%. That’s a big deal. 

The second proposed change would eliminate tax-deferred inheritance of IRAs (sometimes called “stretch IRAs) for anyone except spouses. All other inherited IRAs would need to be dissolved and the funds distributed and taxed within five years after death. This will really impact Baby Boomers counting on their parents’ IRAs to assist them with their own retirement needs. 

Other budget proposals would also end Roth conversions to any after-tax IRAs, limiting them to IRAs where the contributions were before taxes. This would prohibit taxpayers with earnings above the traditional and Roth IRA threshold from making non-deductible contributions to a traditional IRA and then doing a Roth conversion. 

The final proposal would limit new IRA contributions for total retirement savings totaling over $3.4 million. This includes the aggregate total of IRAs, 401(k)s, and any other pension plan balances. Once the total reaches $3.4 million at the end of the tax year, no new contributions are possible. 

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Capping IRA Growth?

To many Americans, especially the youth, this looks like a cap they will never see in their lifetime. Yet consider what $3.4 million will be worth in purchasing power 40 years from now, when today’s 30-year-olds will have to start RMDs. If inflation maintains its historical average of 3%, in 40 years $3.4 million will have the purchasing power of just over $1 million today. If someone wants to be assured they will never run out of money in retirement, $1 million only provides $30,000 a year of retirement income.

Capping IRA growth is another big deal.

Assessment 

These are a few of the tax changes proposed by the President’s budget. The chances for any to become law in 2016 are remote, given that Congress is currently controlled by Republicans. However, the proposals do signal the current thinking of lawmakers. In considering their retirement planning, taxpayers would be advised to pay attention to such signals.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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

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Year End MEGA Tax Planning “Tips” for Physicians

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For Medical Professionals … and Us All

[By PERRY D’ALESSIO CPA] http://www.dalecpa.com

A SPECIAL ME-P REPORT

perry-dalessio-cpaYear-end tax planning is especially challenging this year, for EVERYONE, because Congress has yet to act on a host of tax breaks that expired at the end of 2013. Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these tax breaks until the very end of this year (and, possibly, not until next year).

For Individuals

These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70- 1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.

For Businesses

For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year write-off for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.

Bigger Earners

Higher-income-earners, like some doctors, have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an un-indexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears; a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and net investment income (NII) for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

The additional Medicare tax may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward year end to cover the tax.

For example, an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year. He would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000.

Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over-withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s income won’t be high enough to actually cause the tax to be owed.

The Checklist[s]

I’ve have compiled a checklist of additional actions, for ME-P readers, based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them.

***

Next-Gen Physicians

[Future High Income-Earners?]

***

Year-End Tax Planning Moves for Individual Medical Providers 

Realize losses on stock while substantially preserving your investment position. There are several ways this can be done.

For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

Let’s consider the following:

  • Postpone income until 2015 and accelerate deductions into 2014 to lower your 2014 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2014 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2014. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2015 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
  • If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2014. If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by re-characterizing the conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA, if doing so proves advantageous.
  • It may be advantageous to try to arrange with your PHO, medical group, clinic, hospital or employer to defer a bonus that may be coming your way until 2015.
  • Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2014 deductions even if you don’t pay your credit card bill until after the end of the year.
  • If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2014 if doing so won’t create an alternative minimum tax (AMT) problem.
  • Take an eligible rollover distribution from a qualified retirement plan before the end of 2014 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding isn’t viable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2014. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2014, but the withheld tax will be applied pro rata over the full 2014 tax year to reduce previous underpayments of estimated tax.
  • Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2014, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes in the case of a taxpayer who is over age 65 or whose spouse is over age 65 as of the close of the tax year. As a result, in some cases, deductions should not be accelerated.
  • You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions (i.e., certain deductions that are allowed only to the extent they exceed 2% of adjusted gross income), medical expenses and other itemized deductions.
  • You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
  • You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70- 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2014, you can delay the first required distribution to 2015, but if you do, you will have to take a double distribution in 2015-the amount required for 2014 plus the amount required for 2015. Think twice before delaying 2014 distributions to 2015-bunching income into 2015 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2015 if you will be in a substantially lower bracket that year.
  • Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • If you are eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2014. This is so even if you first became eligible on Dec. 1st, 2014.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2014 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

***

Target MD

[Future IRS Targets?]

***

Year-End Tax-Planning Moves for Medical Practices & Physician Executives 

  • Medical practices, clinics and businesses should buy machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby secure a half-year’s worth of depreciation deductions for the first ownership year.
  • Although the business property expensing option is greatly reduced in 2014 (unless legislation changes this option for 2014), don’t neglect to make expenditures that qualify for this option. For tax years beginning in 2014, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
  • Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit-of-property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2014.
  • A corporation should consider accelerating income from 2015 to 2014 where doing so will prevent the corporation from moving into a higher bracket next year. Conversely, it should consider deferring income until 2015 where doing so will prevent the corporation from moving into a higher bracket this year.
  • A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation alternative minimum tax (AMT) exemption for 2014. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.
  • A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2014 (and substantial net income in 2015) may find it worthwhile to accelerate just enough of its 2015 income (or to defer just enough of its 2014 deductions) to create a small amount of net income for 2014. This will permit the corporation to base its 2015 estimated tax installments on the relatively small amount of income shown on its 2014 return, rather than having to pay estimated taxes based on 100% of its much larger 2015 taxable income.
  • If your business qualifies for the domestic production activities deduction for its 2014 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2014 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2014, even if the business has a fiscal year.
  • To reduce 2014 taxable income, consider disposing of a passive activity in 2014 if doing so will allow you to deduct suspended passive activity losses. If you own an interest in a partnership or S corporation consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

Assessment

These are just some of the year-end steps that you can take to save taxes. So, contact your CPA to tailor a particular plan that will work best for you. We also will need to stay in close touch in the event Congress revives expired tax breaks, to assure that you don’t miss out on any resuscitated tax saving opportunities.

Conclusion

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The Superior Retirement Account – Will that be Traditional or Roth?

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Weighing the Costs

Lon Jeffries[By Lon Jefferies MBA CFP®]

As an informed investor and reader of this ME-P, you’re likely familiar with the difference between a traditional IRA/401(k) and a Roth IRA/401(k).

While the traditional account enables you to postpone taxes on both the income invested and its growth until the funds are withdrawn, a Roth account does not provide an initial tax benefit but investment growth is tax free. So which is better?

Let’s answer the question with some simple math. Suppose an investor in the 25 percent federal tax bracket invests $1,000 of pre-tax income, obtains an 8 percent annual return over the next 10 years, and is still in the 25 percent tax bracket in the future. Would this investor profit more investing in a traditional or a Roth account?

As the chart below illustrates, the investor in this scenario would end up with the exact same amount in either a traditional or a Roth account.

So does the decision to invest in a traditional or Roth retirement account not matter? Not so fast.

Constant Tax Rate
Traditional Roth
Initial Tax Bill (25%) $0 $250
Invested Amount (after-tax) $1,000 $750
Future Investment Value $2,159 $1,619
Future Tax Bill (25%) $540 $0
After-Tax Value in 10 Years $1,619 $1,619

Lower Tax Bracket in Future

Let’s assume our investor will have a reduced income when she retires in 10 years, causing her to be in the 15 percent tax bracket in the future. Perhaps the worker is in her prime earning years and will have less income during retirement. In this scenario, due to the up-front 25 percent tax bill, investing the funds in a Roth would lead to the same after-tax value of $1,619. But investing the funds in a traditional account would allow the full $1,000 to experience growth for 10 years, with a reduced future tax bill of 15 percent, leaving $1,835 of after-tax value in the account. This investor would benefit from delaying taxes into the future when she would be in a lower tax bracket.

Lower Tax Rate in the Future
Traditional Roth
Initial Tax Bill (25%) $0 $250
Invested Amount (after-tax) $1,000 $750
Future Investment Value $2,159 $1,619
Future Tax Bill (15%) $324 $0
After-Tax Value in 10 Years

$1,835

$1,619

Higher Tax Bracket in Future

On the other hand, if the investor was in the 15 percent tax bracket this year but expected to be in the 25 percent bracket during retirement (potentially a young employee expecting his earnings to rise), paying taxes now at 15 percent would allow $850 to be invested, which after 10 years of 8 percent growth would be worth $1,835 tax free.

Higher Tax Rate in the Future
Traditional Roth
Initial Tax Bill (15%) $0 $150
Invested Amount (after-tax) $1,000 $850
Future Investment Value $2,159 $1,835
Future Tax Bill (25%) $540 $0
After-Tax Value in 10 Years $1,619 $1,835

Roth Advantages

What if you expect to pay a comparable tax rate both now and in the future? A Roth account offers several advantages in this scenario.

First, as taxes have already been paid on a Roth account, the government doesn’t require investors to take required minimum distributions (RMDs) from these accounts, whereas RMDs are required from traditional retirement accounts beginning at age 70½. Without RMDs, Roth accounts can grow tax free for the investor’s entire lifespan.

Additionally, upon death, Roth accounts pass to an investor’s heirs without any tax liability, while those who inherit a traditional retirement account must pay taxes on the assets.

***

IRA

***

Second, money withdrawn from a traditional retirement account before the investor is 59½ may be subject to a 10 percent penalty. Yet contributed funds to a Roth account (but not the growth on the contributed funds) can be withdrawn at any time without penalty. While withdrawing funds before retirement isn’t advisable, the added liquidity of the Roth account can prove useful in emergencies.

Finally, even if your income is expected to remain constant, investing in a Roth account allows you to lock in your taxes at today’s rate as opposed to taking the risk that national tax rates might be raised in the future.

If you’re unsure how your future tax bracket will compare to your current rate, diversify. Nothing prevents you from having both a traditional and a Roth retirement account. This not only allows you to hedge your bets, but puts you in a position during retirement to take distributions from your tax-deferred account in low-income years and from the tax-free account in years when you are in a high tax bracket.

Assessment

http://www.utahbusiness.com/articles/view/weighing_the_costs/?pg=1

Conclusion

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Some US Federal Budget Proposals

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Government Shutdown Hoopla for Retirees, Inheritors and Savers

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFPLost in the hoopla over the government shutdown, defunding Obamacare, and raising the debt ceiling are some proposals contained in President Obama’s budget that will have a significant impact on retirees, inheritors, and savers.

Most of the President’s proposals are aimed at enforcing higher taxes on savers who maximize their retirement plans. This is a way to raise revenue for government entitlement programs, like subsidies for health insurance, Medicare, and Social Security.

Retirement and Retirees

Back from last year is his proposal to cap contributions to IRA’s and 401(k)’s when the balance reaches a level determined by a set formula which is tied to interest rates. The proposal sets the cap at $3.4 million initially. As interest rates rise, the cap will lower. When a saver’s IRA balance hits the cap, he or she will not be allowed to make further contributions to any retirement plan.

This will mostly affect savers who terminate employment and roll large accumulations from profit-sharing plans and lump-sum distributions from defined benefit plans into their IRA’s. It will shut down their ability to save into the future.

Taxes and Inheritors

The President has yet another plan to end tax-deductible contributions for upper income earners. Only 28% of a contribution would be deductible for any taxpayer whose bracket exceeds 28%. For a taxpayer in the highest bracket, this means a tax increase of about 50%.

Another of the President’s proposals would end the ability of anyone other than a spouse to inherit a tax-deferred IRA. Under the proposal, all non-spouses inheriting an IRA would have five years to terminate the IRA and pay income taxes on the distributions. This proposal really impacts Roth IRA conversions, as most parents convert traditional IRA’s to Roths with the intention of leaving their children a non-taxable sum of money that can continue to grow tax free during their lifetime. If the President’s proposal passes, many older savers will discover that the intentions behind their Roth conversions have been nullified.

Forced Savings and Savers

While President Obama wants to cap what successful savers can stash away in retirement plans, he also wants to force employees to save for retirement. Employers will be required to open IRA’s for every employee and to fund the plan at a minimum of 3% of the employee’s pay, unless the employee specifically opts out. The employee can contribute more than 3%, up to the $5,000 cap for those under 50 and $6,000 for those over 50.

Of course, savvy savers and ME-P readers know most of us need to be saving 20% to 50% of our salaries, depending on our ages, so saving just 3% of pay won’t amount to much in the way of retirement income.

Good News

On the positive side, the President wants to end required minimum distributions on IRA balances under $75,000. This will reduce some paperwork for savers with smaller IRA’s who are not making withdrawals.

Typically, most retirees with small IRA’s are those with less savings anyway, who need to take withdrawals from their IRA’s to make ends meet. So it’s doubtful this rule change will have much impact.

Finally, the President proposes letting inherited non-spousal IRA’s enjoy the same benefit of a 60-day rollover window on any distribution, similar to what they can do with a non-inherited IRA. This will simply eliminate a lot of confusion, as most people don’t understand the 60-day rollover provision does not include inherited IRA’s.

Shutdown[US Federal Government Shut-Down]

Assessment

Of course, whether any or all of these proposals make it into law is anyone’s guess. Anyone whose retirement and estate planning includes saving in IRA’s will want to keep an eye on these provisions as the budget moves through Congress.

Conclusion

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A New IRA Withdrawal Limit Proposal

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Capping Tax-Advantaged Retirement Plans?

By Rick Kahler MS CFP® ChFC CCIM http://www.KahlerFinancial.com

Rick Kahler CFP“Max out your retirement plans every year” has long been standard advice I’ve given to working adults, and all medical professionals, who want to secure a reliable income when they retire.

Individual Retirement Accounts (IRAs), along with 401(k), 403(b), and profit sharing plans offered by some employers, are among the most accessible ways for middle-class workers to provide for retirement and build wealth.

If a proposal in President Obama’s budget plan is approved by Congress, however, retirement plans may no longer be the first and best stop along the road to financial independence.

The New Proposal

The proposal would limit a person’s total withdrawals from all tax-advantaged retirement plans to the amount it would cost to purchase an immediate annuity paying $205,000 a year. And, it appears to not be indexed for inflation. The articles I’ve read and my own calculations suggest this would mean capping retirement accounts at around $3 million.

From the sketchy details available so far, the proposal appears to target traditional IRAs and other tax-deferred retirement plans. Contributions to these accounts are made with pre-tax dollars, and the earnings in the account are not taxed until they are withdrawn.

Since 58% of Americans don’t have any retirement plan, my guess is they will pay little attention to this proposal. Saving $3 million dollars seems well out of reach. While that may be true in today’s dollars, it most likely will not be true in future dollars.

If inflation over the next 40 years matches that of the past 40, a $3,000,000 IRA in 2053 will be equal to $575,000 today. If today’s 25-year-old, retiring then, wanted to be sure the money would last another 40 years, the IRA would provide an income equivalent to about $1,500 a month.

Tax-Advantaged Retirement Plans

Even in today’s dollars, the $3 million maximum isn’t as unreachable as it may seem. Employees can currently contribute a maximum of $5,500 per year ($6,500 for those 50 and older) to Roth or traditional IRAs. Small business owners and the self-employed may have SIMPLE (savings incentive match plan for employees) or SEP (simplified employee pension) IRAs. The maximum annual contribution is currently $17,000 for a SIMPLE and $51,000 for a SEP. A self-employed plumber, business owner, or doctor who was a conscientious saver with a diversified portfolio could certainly accumulate $3 million over a lifetime.

Or, suppose the wife of a small business owner, or doctor, was a self-employed counselor with her own SEP plan. If he died at age 58 and she inherited his IRA, the combined totals could easily put her over the $3 million cap.

###

MD Retirement planning

Unclear Options

It isn’t clear how the proposal would equate the withdrawal rate with the cap. One possibility would be to raise the required minimum distribution amount, which would erode the value of an IRA more quickly.

Another option would be to penalize excess accumulations with a hefty tax of 40% or more. Of course, the President could follow in Argentina’s footsteps and just confiscate any amount over the cap.

Any of these would add to the diminution of retirement plans as a vehicle for income during retirement.

The Caveat

The proposal includes this statement:

“But, under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.”

Assessment

Apparently we, as individual citizens, are not considered capable of defining “reasonable levels” of retirement saving for ourselves. The real goal of this plan appears to be wealth distribution, instead of encouraging more Americans to save and provide for their own retirement.

More:

If this proposal is passed, retirement plans will play a much smaller role in many middle class Americans’ golden years.

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Conclusion

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Gold as an Investment Option for Medical Professionals?

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Gold in That There IRA

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Here in the Black Hills, home of the historic Homestake Mine, we know a gold rush when we see one. The last few years have tempted investors to take part in a modern gold rush. The precious metal is thought of as a safe harbor for investment capital during times of economic and political unrest and chaos.

Holding Gold

There are many ways to own gold, including holding an interest in it via a financial medium like a mutual fund or an Exchange Traded Fund (ETF). Those who want gold as protection against political or economic turmoil, though, probably are thinking of owning physical gold.

Since Americans’ savings and investing rates are so low, most folks don’t have any extra funds to put into gold. Their only investment vehicle may be an IRA. Yet IRAs are specifically excluded from owning collectibles, metals, and coins.

There are exceptions, however: U.S. gold coins minted by the U.S. Treasury, or bullion bars or coins of a fineness of 995 parts per 1,000. Several non-U.S. minted gold coins meet that standard. The key here is that the coins or bars must be in the physical possession of a qualified trustee. That means gold you stash in a safe or bury in the back yard does not qualify.

Most banks, brokerage firms, or mutual fund companies are not interested in holding physical gold, so finding a qualified trustee can be difficult. You must do a reasonable amount of due diligence to be sure the trustee you find is really trustworthy.

The Trustee 

A trustee needs to arrange for the shipping, handling, and storage of your gold. For this reason, you will certainly pay much higher fees than you would for normal stock, bond, and cash investments. The fees can amount to hundreds or thousands of dollars annually.

Even if you are willing to pay the high fees, first ask yourself, “What’s the point?” The reason most folks want to own physical gold or silver is to have “real” money available in case of an economic crisis or political uprising. How does owning physical gold in an unknown location that may be thousands of miles from you fulfill that requirement? Wouldn’t owning an ETF like GLD actually accomplish the same thing, only without the high costs? Yes, it would.

If you want to own gold, my strong suggestion is to own the GLD ETF and avoid all the high fees. The total cost of purchasing GLD is probably about $10.

Other Options 

Other options are mutual funds that purchase gold mining stocks, which is probably a better way to participate in the gold market. This is because of the leverage factor. In a rising market, the cost of mining gold is much lower relative to the market value of the gold. So if a mining company pays $1,000 to mine an ounce of gold and can sell it for $1,500, the company—and you, as an owner of its stock—make $500 per ounce. Gold could stay at that same price for a year and your company would continue to make a 33% gross profit.

However, if you owned the physical gold and it stayed at the same price for a year, your profit would be 0%. You would only make that same $500 profit if the gold appreciated from $1,500 to $2,000 an ounce.

Assessment 

Of course, the reverse is also true. If gold turns downward, you will stand to lose much more owning the mining company than the physical gold. That’s why I recommend owning gold, like any other asset, only as part of a diversified portfolio of investments.

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Asset Protection Fundamentals for Physicians

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Don’t Leave Yourself Unprotected

By Nicholas Efthemis CFP® http://www.cornerstonefinancialwny.com

The largest concern facing physicians today is how to protect their wealth against the proliferation of malpractice claims and extraordinarily high jury verdicts. Malpractice insurance has become so expensive that physicians are greatly reducing their coverage.

Even worse, some carriers are dropping physicians that have poor claims history. When meeting with physicians my message is a simple one. Take action and do so now. Constructing a complete asset protection plan is the single most critical step towards attaining financial freedom. Physicians work hard and long hours to create wealth, and are potentially one medical malpractice claim or general negligence claim away from financial catastrophe. Detailing every asset protection strategy is beyond the scope of this article, however I will review some important concepts you should know.

Good asset protection will prevent lawsuits. Conversely, the more personal assets that remain unprotected the more likely an attorney is willing to go after you. In fact, a physician with very high malpractice coverage and unprotected assets has a target on his back. This can be avoided through lower policy limits and a complete Asset Protection Plan.

What is the Best Asset Protection Plan?

The best Asset Protection Plan for a physician or any high net worth client removes all assets from the client’s name. The worst plan has all the assets in the client’s name. You will need to work with a specialized attorney to find the ideal plan for you. In many cases your largest asset are the funds in your retirement plan or IRA. The good news is that creditors cannot reach ERISA qualified plan assets. Common ERISA plans include:

1. 401(k) 403(b) Plan

2. Profit Purchase Plan

3. Money Purchase Plan

4. New Comparability Plans

5. Defined Benefit Plan

Keep in mind IRAs are not considered ERISA qualified plans and have no federal protection from creditors. Many individual states have protected IRAs in part or in full. In my state, New York, IRAs are fully protected. If you live in a state where they are not you should seriously consider moving the money into an ERISA qualified plan. This can be accomplished even if you are retired.

What about my house?

It is never a good idea, from an asset protection standpoint to own property in just your name. If you get sued the property is almost entirely at risk. Owning the marital home jointly with your spouse can be effective. You will protect the home from each other’s individual creditors (though not joint creditors). You should not title many assets as tenants by the entirety for several reasons. Physicians suffer a higher divorce rate than the already high national average of fifty percent. Should a divorce occur you will have ensured the spouse will receive half of that asset. Also, you do nothing to protect the asset against joint creditors.

How should my other assets be held?

You will need to consult a specialized asset protection attorney. Most effective plans involve the use of a corporate structure, limited liability company, or family limited partnership. Keep in mind that the entity you choose will have its own unique asset protection and tax consequences.

  • Sole proprietorships and partnerships are the worst way to own a business. If a sole proprietor is found negligent in his duties for the business that injures a third person, the sole proprietor is personally liable. If a product or employee harm a third person or someone is harmed on the premises, the sole proprietor is personally liable. With a partnership you have all of the above risks coupled with a partner who can cause you even more liability.
  • Limited Liability Companies (LLCs), Family Limited Liability Companies (FLLCs) and Family Limited Partnerships (FLPs) are the most commonly used tools by asset protection specialists today. A creditor attempting to obtain assets of a debtor when the assets are in a LLC will likely have very limited success. In fact, a charging order is the only remedy a court can give a creditor. A charging order does not allow creditors to sell assets of the LLC or force distributions of income. It also cannot transfer interest in the LLC to the creditor. A creditor who obtains a charging order against an LLC may in fact receive a K-1 for income they never did and may never receive.

What should I consider holding in an LLC?

I advise my physician clients to consider holding rental real estate, after tax investment accounts, planes, boats and any personal assets of value in an LLC. Unless you are single and your home is titled in your name alone, the marital home may not be a good candidate for transfer to an LLC. By doing so, you forego the capital gains exemption of $250,000 per spouse. Brokerage accounts can be owned by an LLC, and when constructed correctly you will have full ability to invest as you desire. The investments within the account would then be protected. Assets such as planes and boats may be best held in their own LLCs to protect the rest of your estate from their unique risk profiles.

Example:

  • Personal Residence $750,000 Tenants by the entireties
  • Vacation Property $300,000 LLC #1
  • Investment Account $900,000 LLC #1
  • 401 (k) 2,400,000 ERISA plans are federally protected
  • Boat $55,000 LLC #2

Assessment

The topic of asset protection is vast and complicated, but I hope to break out additional topics such as off-shoring, accounts receivable leveraging, fiduciary duties, and insurance in subsequent articles. My hope is that I have given you enough ideas and motivation to act now. You cannot wait until there is an issue. It is critical that your financial planner, attorney and accountant are all very knowledgeable on asset protection. Do not rely on a generalist to navigate such a complex yet critical issue.

About the Author:

Nicholas Efthemis is a Certified Financial Planner™ who helps physicians plan wisely and live fully by creating a financial plan that helps them focus on their medical practice and live a better life.

Conclusion

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For Financial Success – Doctors Must Outsmart their Brains

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On Behavioral Economics 101

By Rick Kahler CFP® MS ChFC CCIM http://www.kahlerfinancial.com

By Dr. David Edward Marcinko MBA http://www.CertifiedMedicalPlanner.org

How’s this for a convincing excuse not to save for retirement? “I can’t help it. The human brain is programmed for financial failure.”

Why?

Emotional Decisions

An estimated 80 percent of our decisions are made emotionally. As all doctors are aware, our brain is divided into three sections. The upper brain, or cerebral cortex, is where we reason. The middle brain, or limbic system, is where we react to emotional impulse. The lower brain – basal ganglia – is what regulates the operations of the body.

Limbic System

The limbic system, where our emotions reside, functions to move us toward pleasure or away from danger. Feelings like fear or anger can cause us to move away from a perceived danger, while feelings of joy or pleasure can impel us toward a perceived benefit or reward. This aspect of our brain serves us very well when it comes to physical danger or life-enhancing decisions like choosing a mate. It isn’t quite so much help when we need to make financial decisions.

The Scenario

Suppose you and your spouse are talking about spending $5,000 on a trip to the Bahamas. Your middle brain lights up. It sees you sitting on a beach, it feels the light breeze twirling your hair, it hears the sound of the waves rolling onto the sand, and it can practically taste the Piña Colada you’re sipping.

Now, suppose you’re discussing putting that $5,000 into an IRA instead. What does your limbic system see, hear, feel, or smell? You writing a check? A brokerage statement? There’s no particular pleasure response for your emotional brain to get excited about. No wonder it’s going to urge you away from the IRA and toward the trip to the Bahamas.

Decision Making

When we’re faced with decisions, the option with the greatest emotional payoff tends to win. This is how our brains are wired to make financial decisions in favor of our short-term pleasure rather than the delayed gratification that is in our long-term best interest.

The secret to overcoming that self-defeating programming is to give our limbic system something to get excited about that supports saving for the future. Successful savers and physicians and all investors learn to link emotional rewards to their financial goals.

On Choices Revisited

Let’s take another look at the choice between an immediate tropical vacation and putting money into an IRA. Someone committed to investing for the future may imagine the same tempting beach scene. What they do, however, is see it happening once a year, or even every day—in the future. They imagine themselves enjoying that beach as one of the rewards of saving for their financial independence.

It’s also possible to trick the limbic system with negative images. Another saver might vividly imagine her-self as a bag lady, living out of garbage cans and sleeping on park benches, if she doesn’t write that check to her IRA. This isn’t nearly as much fun as imagining situations that reward investing, but it has the same effect of adding emotional impact to a financial decision.

In either case, the goal is to create an emotional charge from imagining the IRA contribution that is stronger than the image of spending the money today. The scene with the greatest emotional impact wins.

This is one reason it’s important for us to spend some time defining our life aspirations. Having clear images of what we want in the future makes it easier to imagine ourselves there. It helps us link strong emotional rewards to mundane activities like writing a check to an IRA.

Assessment

The human brain may be programmed for financial failure, but we have the ability to change that programming. With a little effort, we can rewire our brains for financial success.

Conclusion

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Doctors and Gift Annuities

On the ACGA Support for Tax Initiatives

By Children’s Home Society of Florida Foundation

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A Senate Finance Committee hearing was held on October 18th, 2011 to discuss potential changes in the tax law relating to charitable deductions. Conrad Teitell, volunteer counsel to the American Council on Gift Annuities, prepared a statement for the record that was submitted to the Senate Finance Committee.

Teitell outlined five principles for considering changes to charitable deductions; including the following:

1. Tax Incentives – A reduction in tax incentives would harm a broad spectrum of Americans served by charities.

2. Current IRA Rollovers – The option for an IRA rollover up to $100,000 per IRA owner over age 70½ will expire on December 31, 2011. This should be made permanent.

3. IRA Nonitemizer Deduction – For IRA owners over age 70½ who do not itemize (about 70% of taxpayers), the IRA rollover functions in a manner similar to a nonitemizer deduction. While the IRA transfer is not deductible, an IRA owner’s taxable required minimum distribution is reduced by the amount of the qualified charitable distribution (QCD). This reduces taxable income by the amount of the IRA rollover.

4. Expanded IRA Rollover – The IRA rollover should permit the transfer from an IRA trustee to a charitable organization for a charitable gift annuity or to a trustee of a charitable remainder trust.

5. Decreased Federal and State Support – Budget cuts at both the Federal and the state level are frequently targeting social services and the most vulnerable citizens of our nation.

Teitell also outlined a proposed “All-American Charitable IRA Rollover Act of 2012.” His proposed bill permits the current tax-free distributions to charities of $100,000 per year for IRA owners over age 70½.

Expanded Rollover

However, he advocates an expanded rollover that would enable IRA owners over age 59½ to make QCDs up to $500,000 for a charitable gift annuity or to a charitable remainder trust. The QCD would be available for a one life gift annuity or CRT, or two lives for an IRA owner and spouse.

Assessment

QCDs would not be deductible charitable gifts, but they are also not included in taxable income. A QCD is permitted for a public charity gift, but not for transfers to a donor advised fund or supporting organization. All payments from a life income agreement will be ordinary income.

Conclusion

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How I KISS My IRA [A Prudent Checklist]

Simplified Retirement Thoughts for Physicians in 2011

By Dr. David Edward Marcinko MBA CMP™

www.CertifiedMedicalPlanner.com

[Publisher-in-Chief]

As a reformed certified financial planner and stockbroker, and current CMP™ professional charter holder for more than a decade, I am always amazed at how complex and convoluted some medical colleages and other folks make IRAs and their retirement planning.

So, please allow me to offer this brief checklist of advice on how to KISS your IRA in 2011!

What to have in an IRA?

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
  • mutual funds that expect to hold stocks short term.

What not to have:

  • 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)
  • investments in individual foreign securities or mutual funds that hold primarily foreign securities.

Activities to avoid:

  • borrowing from the account
  • 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

So, what’s in your IRA, doctor? Do you have a Keep It Simple and Sane [KISS] checklist? 

Conclusion

And so, your thoughts and comments on this ME-P are appreciated. Do you KISS your IRA like me? Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Should the Government Mandate 401(k) Annuities?

About the Guaranteed Retirement Accounts Proposal
By Robert Giese
bob.giese@chsfl.org

Recent hearings in the House and Senate have focused on the need for 401(k) and IRA accounts to provide better retirement income. Vice President Joe Biden referred to these discussions in the White House Task Force on the Middle Class. He suggested creating “Guaranteed Retirement Accounts [GRAs].”

The guaranteed retirement accounts may replace conventional 401(k)s and could eventually provide annuity income to individuals.

Response to GAO Report

In response to a White House request, the General Accounting Office (GAO) released a report on April 28, 2010 that discussed some of these retirement issues. The GAO noted that a couple age 62 has at least a 47% probability that one of the two spouses will live to age 90. While life expectancy is in the mid-to-late 70s when one is born, the age at maturity increases as we grow older. Therefore, the average retirement age couple in America has a reasonable prospect that the survivor will live to be age 90.

GAO reports that Social Security is the primary support for lower income retired Americans. For the median retired person, Social Security is expected to provide approximately 47% of retirement income. The balance will come from savings or investments, a qualified plan such as a 401(k) or IRA and retirement earnings from employment.

Better than Conservative Investments?

The GAO report notes that an annuity may provide more income than a conservative investment, such as a bond or CD.

Assessment

Republican lawmakers this week wrote a letter to Treasury Secretary Timothy Geithner and expressed concern about the guaranteed retirement accounts. They noted that a number of the witnesses before the various committees would “dismantle the present private-sector 401(k) system” and replace it with the GRA.
Their letter expressed concern and opposition to any effort to “nationalize” the 401(k) system. The Republican lawmakers continued by noting that over 90% of households have a favorable opinion of 401(k) or IRA accounts.

Conclusion

And so, your thoughts and comments on this ME-P are appreciated. Is this new vehicle really better than a bond or CD? Is it the correct vehicle for a long-term retirement strategy? Is it even appropriate for physicians and medical professionals?

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Tax Efficient Investing

Friends and ME-P Readers,

By Sean G. Todd; Esq, M.Tax, CPA, CFP®

Summer is here for sure in Atlanta—90 degrees plus day after day. I’ve been enjoying the fresh sweet corn, a BLT and a large glass of sweet tea at dinner—now that is a fine meal. Why do I share this with you — because at mid-year, I think from time to time we have to step back from all that we are involved in, concerned with, and what we think is important to actually appreciate all that we have and not overlook the small things. Which brings me to the topic of this Medical Executive-Post and not overlooking the small things—like taxes. As a physician-investor, you have to keep an eye on the impact taxes have on your investment portfolio because it is what you keep after taxes that counts.

Of the Markets

During my last post—I indicated that I was not sure if the recent reprieve in the markets was sustainable. And, we did experience a mild reversal recently. But, did you know that doing nothing is actually doing something? I’m pretty certain that the past investment strategies are not going to work going forward and I share these with ME-P readers as to why I believe this is true; and how best to position your portfolio going forward. Other professionals agree—the rules have changed — have you changed anything? Let’s move on to the real reason you continue to read our posts: To be able to make the right long-term decision during these difficult times. In this post we need to focus on the importance of tax-efficient investing.  We are confident that you and your friends and colleagues whom you choose to share this ME-P will benefit from the information discussed, as well.

Why Tax Efficient Investing is Important

Physicians and all investors have experienced some turbulent times over the last 12 months and it appears more rough waters lie ahead. As a physician-investor, you are unable to control the markets but there are certainly things you can control and should. One of these is taxes. Given the level of government spending, additional tax revenues will be needed which equates to higher taxes. You cannot plan your taxes on April 15th but you have to implement a tax strategy plan during the year so you can capture the benefit on April 15th. With increased taxes on the horizon, tax-efficient investment is going to be more important than ever. Brokers or the 1-800 do-it-yourself brokerage firms are not licensed to give you tax advice, but CPAs and EAs, are. The old saying goes, “It’s not what you make, but what you keep after taxes that counts”. This statement will become even more important going forward.

Returns Lost to Taxes

Have you thought of the impact on your portfolio that taxes have on your investment returns? Good financial advisors should as these are still some of the most important decisions you face as an investor.

Take for example a physician-investor in the top tax bracket earned an average return of 15% on actively managed mutual funds in a taxable account from 1981 to 2001. After taxes, average return dwindled to roughly 12% – which means our investor lost an average of 2.4% in return to taxes (the numbers reflect a compound rate of return). Investment return lost to taxes don’t just affect mutual fund investors — you have to look at your entire holdings in your taxable accounts and how you manage your investments, because, investors in individual stocks and bonds are vulnerable too. Like I indicated, you do have a lot of control over your taxes and should actively control them given the significant impact on your total investment return. Something for consideration: Diversification and asset allocation are great tools for helping to reduce portfolio volatility, but we’re still going to be subject to the short-term whims of the market, no matter how diligent we might be in setting up our portfolios and selecting our individual investments. One of the areas that we have the greatest degree of control is the area of tax-efficient implementations. Doesn’t it make sense that where we can exercise the most control, we do so?

Tax-Efficient Investing is More Important than Ever

Work with me here. If we assume that over the next 20 years annual compound returns for the broad stock market average between 8% and 10%, and bonds average about half that, then average portfolio returns would be less than what we enjoyed over the last 20 years. What this actually means is that any return lost to taxes will be a much bigger deal. In other words, losing 2.4% per year to taxes may not have seemed like much if you were making 15-20% annual returns. But if you only expect to make 9% on your investments, keeping as much of that return as possible, can be vital to achieving your long-term goals. The real impact– 2.4% tax impact will cause you to lose 26% of your 9% gain. Thinking you got a 9% gain but your real after-tax gain is only 6.6%. This is a big annual difference and a significant compound difference.

The second reason tax efficiency is more important than ever is because of the changes to the tax rules in 2003. A notable provision: the 15% tax rate on qualified dividend income. Often a missed opportunity! Previously it might have made sense to hold dividend-paying stocks in a tax-deferred account such as an IRA instead of a taxable account. Either way, dividends were taxed at your ordinary income tax rate between 28% and 39.6% prior to 2001. The thought was the IRA offered tax-deferred potential growth.

Currently, qualified dividends in a taxable account are taxed at a maximum rate of 15%. Those save dividends would be taxed at the ordinary rate—currently as high as 35% when withdrawn from your tax-deferred account. As a result, the value of putting dividend-paying stocks in taxable accounts has grown significantly.

What Investments Go Where?

I need to speak in general terms here, investment that tend to lose less of their return to income taxes are good selections to go into taxable accounts. With that said the opposite should be true: Investments that lose more of their return to taxes could go into tax-deferred accounts. Here’s where tax-smart investors might want to place their investments.

Taxable Accounts Tax-Deferred accounts – Traditional IRAs, 401(k)s and deferred annuities
Ideally place…
Individual Stocks you plan to hold more than one year Individual stocks you plan to hold one year or less
Tax-managed stock funds, index funds, low turnover stock funds Actively managed funds that generate significant short-term capital gains
Stocks or mutual funds that pay qualified dividends Taxable bond funds, zero-coupon bonds, inflation protected bonds or high yield bond funds
Municipal bonds, I bonds Reits

DISCLOSURE: This assumes you hold investments in both types of accounts. A different set of rules would apply if you held all your investments in a taxable account or a tax-deferred account.

In general, holding tax-efficient investment in taxable account and less tax-efficient investment in tax-advantaged account should add value over time. It appears that the above serves as a simple set of guidelines to go by but there are additional considerations before making the above allocation.

Additional Considerations

Reallocation of your Portfolio

To maintain your strategic asset allocation will cause additional tax drag on return, to the extent you rebalance in taxable accounts. You may want to focus on your rebalancing efforts on your tax-advantaged accounts, including your taxable accounts only when necessary. Keep in mind, adding new money to underweighted asset classes in also a tax-efficient way to help keep your portfolio allocation in balance.

Active Trading

Active trading by individuals or by mutual funds, when successful tends to be less tax efficient and better suited for tax-advantaged accounts. A caveat: Realized losses in your tax-advantaged accounts cannot be recognized to offset realized gains on your tax return.

Liquidity Preference

If an investor wanted liquidity, then they might be holding bonds in their taxable accounts, even if it makes more sense to form a tax perspective to hold them in tax advantaged accounts. In other situations, it may be impractical to implement all of your portfolio’s fixed income allocation using taxable bonds in tax-advantaged accounts. If so, compare the after-tax return on taxable bonds to the tax-exempt return on municipal bonds to see which makes the most sense on an after-tax basis.

Estate Planning Issues

One cannot overlook the estate planning issues in deciding which account will hold a given type of investment. Also, what is the philanthropic intent of the doctor or investor? Stocks held in taxable accounts receive a step-up in cost basis at death (something heirs greatly appreciate) which is not the same for tax-advantaged accounts. Additionally, highly appreciated stocks held in taxable accounts more than a year might be well-suited for charitable giving.

Roth IRA

This type of account might just be an exception to all of the above. The rules are different when investors involve a Roth IRA. Since qualified distributions are tax free, assets you believe will have the greatest potential for higher return are best placed inside a Roth IRA, when possible.

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. Tell us what you think. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, be sure to subscribe to the ME-P. It is fast, free and secure.

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Paradigm Shift to “Defined Health Contributions” from “Defined Health Benefits” Plans

What it is – How it Works

By Staff Reporters

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In the past, according to Robert James Cimasi MHA AVA CMP™ of Health Capital Consultants LLC in St. Louis MO, many employers had defined retirement benefits for employees. Today, most retirement benefits are in the form of 401K plans where companies make defined contributions, effectively shifting the financial risk of paying for retirement to employees.

Defined Health Contributions

Defined health contributions are similar to employer-funded defined retirement contributions like 401K plans. Currently, employers pay for some portion of about half of Americans’ health insurance. Traditional employer-funded plans are those for which the employee simply fills out a form; that is, an employer will offer one or possibly two health insurance plans, and the employee fills out application paperwork. The employer administers the plan and may charge the employee a portion of the monthly premium or pay the entire premium themselves. A defined contribution plan allows companies to shift the financial risk of paying for rising health insurance costs.

Defined Health Benefits

Although part of the “benefit” of a health benefit plan is that the employer also takes care of all the administrative paperwork related to the insurance, companies are increasingly uninvolved in the administration process, opting instead to let the employee decide which plan out of many choices suits them best. For example, if an employer typically spends about $5,000 per employee per year on health benefits, the employer would use that money as a “defined contribution.” The employee then has $5,000 to spend per year on benefits, but instead of using the employer-defined health plan, the employee may choose from a variety of HMOs, preferred provider organizations PPOs, or other health plans. If the insurance premiums rise above this amount, the employee must make up the difference.

dhimc-book24Defined Contribution Package

Many employers are currently offering a defined contribution package to their employees. The definition of “defined contributions,” however, can range from one in which employers are completely uninvolved in the administration of benefits and simply give their employees cash or vouchers for the amount contributed that they can use to buy coverage, to a more “defined choice model” where employers offer a variety of health options at differing price levels along with a premium dollar contribution, and a variety of other options in between.

Risk Shifting

Thus, defined contributions shift the financial risk from the employer to the employee. Defined care is not a replacement for managed care, but will probably cause managed care to adapt under these new systems. That is, HMOs, PPOs and other managed care plans still appear to be the main choices in a defined care environment, so they are in fact a part of the system.

Assessment

Another challenge with a defined health benefit program is that the concept of risk-pooling becomes more difficult. In traditional employer-sponsored plans, rates are usually based on the pool of employees; a chronically ill employee who tries to find insurance independently may face rates drastically higher than if they had participated in an employer-sponsored plan.

MORE: www.CertifiedMedicalPlanner.org

Conclusion

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The Gay Doctor Dilemma

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Understanding Domestic Partnership Problems

[By Staff Reporters]fp-book16

Legal Strangers

In spite of many changes to state laws and with a few exceptions, for all intents and purposes, unmarried physician couples are still considered strangers to one another. The unmarried partner has no right to make health care decisions, no right to Social Security survivor benefits, and no inheritance rights without proper documentation. An unmarried partner generally has no standing to seek damages for the “wrongful death” of a spouse, nor any standing for any other contractual rights.

Tax Treatment

Unmarried couples do not get the same tax treatment—such as the ability to file a joint tax return—as do married couples. While this may not necessarily mean higher taxes for married couples, it can make deductions difficult to determine for unmarried couples. Nor can an unmarried couple use the spousal Individual Retirement Account deductions for a nonworking spouse. An unmarried couple may not use a family partnership for tax purposes.

Non-Tax Benefits

Unmarried partners do not have the benefits that spouses have when a relationship ends or one partner dies. Domestic partners may not receive alimony or child support, except in special cases. A partner may not receive pension rights, and generally will not receive employer benefits, except in certain companies and municipalities. One partner who is forced to quit practice when the other partner is transferred may not receive unemployment benefits, while a spouse can. Unmarried partners may not qualify to get residency status for a non-citizen partner to avoid deportation.

Estates and Gift Problems

Estate tax law allows married couples an unlimited deduction for estate and gift tax purposes. Unmarried couples do not get this benefit, and may be taxed on what would otherwise be a tax-free transfer. If one partner dies intestate (without a will) the couple’s joint property would not necessarily go to the survivor. A married couple can give away $26,000 per recipient each year without gift tax consequences, but an unmarried individual with a high income is limited to $13,000, per recipient per year, even when living with a partner.

Personal Benefits

Domestic partners may be kept from visiting a partner in a prison or in the hospital or any other place restricted to “immediate family” members. Without specific legal permission, such as a durable power of attorney, the blood relatives of the partner who is ill can keep the domestic partner from seeing his or her mate. Except in a few municipalities and companies, domestic partners may not be eligible for bereavement leave when one partner dies.

Conclusion

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About Healthcare Employee Cash-Balance Plans

What they Are – How they Work

By Staff Reportershuman-drones

Motivated by cost savings, an increasing number of hospitals, healthcare systems and large healthcare organizations are converting their traditional legacy defined benefit pension plans to cash balance plans. While the trend seems sudden, it is not surprising. Healthcare related companies are reaping substantial savings from cash balance plans. And for the most part, younger doctors and other employees are enthusiastic about the plans.

However, older employees (age 50 or above) realize  that in switching from a traditional defined benefit [legacy] plan to a cash balance plan, their retirement benefits decreased, initiating an onslaught of overwhelmingly negative publicity. Indeed, several years ago, Congress rushed to pass legislation requiring employers to provide benefits computations to affected employees.

Overview

Even though many defined-benefit plans are under/over-funded, they are calculated on an actuarial basis and are quite costly to maintain. And because plan costs can vary from one year to the next, budgeting is difficult.

However, if a healthcare company terminates a pension plan, replacing it with a defined contribution plan such as a profit sharing plan, all employees must be 100% vested, any surplus is subject to income tax, and a portion of the surplus is subject to an additional excise tax even if all of it is transferred to a succession plan. A cash balance plan is a pension plan, so the change is viewed as an amendment to the pension plan. This is true even though in many respects the cash balance plan operates like a defined contribution plan.

The Cash Balance Planfp-book13

A cash balance plan works in the following manner: The sum accrued in a hospital’s employee’s defined benefit plan is converted to a lump sum cash value; the employer agrees to make specified contributions to the employee’s account based on compensation; and the account earns a specified rate of interest, say 5%. The employee receives regular statements showing the current cash value of his or her account. [The amount is listed as a lump sum amount even though it is usually paid as an annuity].

If the hospital or other employer already has a defined benefit pension plan and converts it to a cash balance plan, there is no tax on the surplus. The reason, as noted above, is that a cash balance plan is treated as a pension plan. Thus, the employer merely amended its pension plan and can use the existing surplus to provide the required contributions, which are usually less than the actuarial costs of maintaining a traditional pension plan. And, in the former bull market this recent decade, many employers did not have to make contributions at all. Today, of course, the opposite may be true.

Example

Let’s say the average earnings on an investment is 15%, and the rate of interest payable to the plan is 5%. In recent years, many funds have earned 15% or more if they invested in an index fund. It was thought that, if continued, it would be quite some time before some employers are required to make any contributions out of their own funds. Not so today, however.

Clearly, the savings can be substantial, and the costs of maintaining the plan are easily budgeted for. These advantages convinced some public utilities, telephone companies, financial, hospitals and healthcare institutions to convert their plans to cash balance plans.  

Impact on Employees

The cash balance plan is actually a hybrid plan—a cross between a traditional defined benefit pension plan and a defined contribution plan. But one of the key differences between the cash balance plan and a defined benefit plan is the manner in which the benefits are calculated. In a traditional defined benefit plan, an employee’s retirement benefit grows slowly in the early years and more rapidly as he or she approaches retirement. By contrast, a cash balance plan increases growth in the early years and decreases growth in later years of employment.

Youngsters

Younger healthcare employees usually liked the change; before the recent financial meltdown. Their accounts were portable; they grew quickly; and could be rolled over into an IRA or into a new employer’s plan. And, their account balances were listed as lump sums, so they know precisely how much they’ve accumulated. Today unfortunately, they have mostly been decimated.

Oldsters

Older healthcare employees initially liked the concept because the values of their pensions (on an actuarial basis) were converted to dollar amounts so they could see how much had accrued in their accounts without having to calculate an anticipated pension award. But, after further review, it was evident that upon retirement the cash bonus plans would yield smaller pensions than the defined benefit plans. Opinions differ today?

Health Workers in the Middle

When a hospital or similar entity converts from a defined benefit plan to a cash balance plan, employees their late 40s may see their pensions reduced by 25% or more while older employees see reductions of up to 50%. If the formula for calculating benefits under the defined benefit plan is 2% times years of service, and high-five compensation, then each year of service increases an employee’s pension. More importantly each time high-five compensation increases, the amount is accrued back to the employee’s original date of employment. So, as a hospital employee gets older, the high five-has tremendous impact. An employee who is age 60 can actually accrue most of his or her pension in the last five years of employment.

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No “Mo”

Cash balance plans don’t have that type of momentum [“Mo”]. The company contributes a certain amount based upon compensation and a specified interest rate. Usually, the interest rate is based on the 30-year treasury rate (approximately 2.5%).

Closing the Gap

Some employers are offering a grandfathered benefit designed to reverse the penalty for older workers. For example, employees within 10 years of retirement (usually age 65) will receive the greater of the cash balance plan or the pension under the original plan. This reduces the cost savings for the company.

Some employers increase the contribution percentage for employees based on age (i.e., 7% of compensation is contributed for employees aged 40—rather than the standard 5%—and 9% of compensation for those aged 50).

Assessment

Finally, some hospital employees are offered special “sweetners” in the form of additional lump sum credits when converting from an existing plan to a cash plan. The best benefit provides that all existing employees will receive the greater of the old plan or the new plan upon retirement. Only a small number of employers typically adopt this approach.

Conclusion

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Physician Retirement Threats and Opportunities

Investing Vehicle Updates for Modernity

By Steven Podnos; MD, MBA, CFP®

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Most physicians count on their retirement plans for the bulk of their financial security. Yet, few of us understand the intricate workings of these plans, and are therefore misled or at the least miss out on a number of cost savings and benefits. Here are some examples to consider, especially during this time of financial upheaval:

1. Jim L, an endocrinologist in private practice, works with his wife as office manager and has four other employees.  Jim had a “free” prototype profit sharing plan with a well known brokerage and has been putting 15% of his total employee compensation away every year in order to fund about $35,000 dollars a year into his own plan.  He pays his wife $60,000 dollars a year in order to get a $9,000 dollar annual contribution for her, but at a social security cost of the same $9,000 dollars.  His plan is invested in a variety of “loaded” mutual funds and stocks at the brokerage, and he was not really sure how it was doing in terms of performance.

Change:

The plan was changed to a customized 401k/profit sharing plan using a Third Party Administrator at a cost of 2500 dollars.  Jim’s wife lowered her salary to $20,000 dollars, which saved over $5,000 dollars a year in social security taxes.  Yet Jim and his wife were now able to contribute over $65,000 dollars in pretax money (rather than $44,000 dollars in prior years.  His employee cost for the plan dropped from 15% of a $100,000dollar payroll to 6%, another annual savings of $9,000 dollars. 

2. Statewide Healthcare medical group had an insurance based “retirement” plan.  All of the investments allowed were wrapped in variable annuity/insurance wrappers with an annual expense ratio of between 2 and 4% annually. The plan was “free” to the group but did not allow any differentiation in benefits or contributions between the physicians and their employees

Change:

An unbundled 401k/profit sharing plan was designed that allowed physicians to contribute the maximum in salary deferral and profit sharing contributions. Using an age-weighted contribution formula, the physicians were able to put away 14% of their salary in the profit sharing plan as compared with a 5% contribution for employees.  The new investment portfolios carried an annual cost well below 1% annually and were actively monitored by a fee only fiduciary advisor, mostly relieving the group from the fiduciary responsibility for the fund investments.

3. Kirk L, an orthopedic surgeon employed his wife and 5 employees in a busy practice.  He is 55 years of age and looking towards retirement in ten years.  He had a reasonably well designed 401k/profit sharing plan advisor which let him and his wife put away about 70-75 thousand dollars a year with an employee cost of about 15 thousand dollars. He was beginning to worry about not having enough savings to make his retirement goal.

Change:

Kirk and two of his younger employees were switched to a new Defined Benefit plan, but also continued in the 401k salary deferral plan. Kirk’s wife and the remaining employees stayed in the old plan and his wife’s salary was reduced to lower Social Security costs.  With the new plan, Kirk and his wife are now putting away about $200,000 dollars in pretax contributions annually at a marginally higher cost for the employees.

Poorly Designed Retirement Plans

None of these stories are unusual, in fact they are typical.  Most physician retirement plans are poorly designed, expensive and misunderstood.  Few existing plans are updated to capture the many positive changes made in tax law over the last decade.  Many plans are shoddily designed to catch the “quick” dollar, with financially terrible consequences to the physicians.

Qualified Plans

And so, I’ll review the most common types of retirement plans available to medical practices and discuss the pros, cons and specific opportunities each type for most practices. Note that most of these plans are considered “qualified” plans by the US Government.  Being qualified means that contributions to the plans are allowed to be deducted as business expenses and that the plan assets are generally protected from creditors.  In exchange, the government requires extensive paperwork and mandatory contributions for employees on the lower end of the salary scale. 

1. SEP-IRA

The SEP-IRA allows a fixed percentage of salary (up to 25% of W2 income) to be contributed to individual IRAs of most employees (including the physicians). There can be no discrimination in what percentage of compensation is used between owner/managers and lower paid employees, making this a relatively expensive plan in terms of employee funding. There is no component of salary deferral by employees, and all plan funding is immediately “vested” (belongs to the employee immediately if they leave employment).

The advantages of the SEP plan include a minimum of paperwork and ease of setup. Generally, SEP-IRA plans are used by small family owned businesses with few to no outside employees. It does work well for physicians that act as Independent Contractors (no employees) such as many Emergency Room physicians.  However, an individual contractor with an income of less than around $170,000 dollars can actually put more pre-tax money away in a Self-Employed 401k plan.

2. SIMPLE-IRA

This plan is another relatively easy one to set up and administer. It allows companies that have less than 100 employees to open individual IRA accounts for employees. The employees may defer salary in amounts of $10,500-$13,000 (depending on age), and the employer supplies a “match.” All money in the plan is immediately vested. The match is generally (but not always) a dollar for dollar matching contribution of up to 3% of the employee’s compensation.

For example, a company owner with a compensation of 100,000 dollars would be able to defer salary in an amount of up to $13,000 (if age 50 or older), and then have the company “match” 3% or $3,000 more. A SIMPLE IRA plan is a good choice for small businesses in which the owners are highly compensated, and few employees wish to defer salary. The disadvantages of the SIMPLE-IRA are immediate vesting for the matched funds, and relatively low total amounts of contributions compared to other qualified plans. 

NOTE:

I have seen these plans work well in small practices that wish to avoid paperwork, have few to no employees that wish to defer salary, and who don’t mind the limited ability to make contributions.  Note one unusual feature of this plan, in that the 3% match has no limits. I have seen one physician with a small group of employees and an income of $600,000 dollars per year put away 13,000 in salary deferrals and another ($600K X 3%) 18K in the match at no employee cost!

3. 401k/PROFIT SHARING PLAN

This is by far the most common type of qualified plan in existence.  These plans actually have three components:

 

a)       401k salary deferral-In 2008, employees may defer between 15,500 and 20,500 dollars. This money and earnings on it are not subject to Federal income tax until withdrawn in retirement, and are immediately vested.

b)       A “match”-this is an optional part of the plan in which an employer may offer to contribute a matching amount of dollars to give employees an incentive to participate.  Matching funds are usually subject to vesting on a time schedule.

c)       Profit sharing-like the match, this is a discretionary contribution by the employer of up to 25% of payroll and usually subject to vesting.

 

It is crucial to have a skilled plan designer customize a 401K plan for your individual practice.  The most common abuse of these plans is the use of “cookie cutter” prototype plans used by brokerages and insurance companies. These prototype plans are for the convenience and profit of the person “selling” the plan, and are a solid negative for the practice. Customization allows the physicians to have maximal participation at the lowest employee cost.

There is also a self employed 401k option for small practices that have no full time employees other than the physician and spouse. They operate in much the same way, but with little expense and much less paperwork.

4. DEFINED BENEFIT PLAN

Once common, these plans are now rarely used by most companies. They are based completely on company contributions to a fund (no salary deferral) that are actuarially designed to produce a set benefit amount at retirement. All the risk for providing the promised benefit is the responsibility of the employer, which is an advantage when the major beneficiary is the physician. Defined Benefit plans work best for practices in which the physician/employee ratio is low and the physician(s) is approaching age 50 or older. The advantage of this plan is allowing much higher contributions on a pretax basis, with the disadvantage of higher administrative costs. These plans work extremely well for high income businesses employing one individual (plus or minus a spouse) who is nearing age 50 or over. However, physician practices that employ a spouse or physicians of different ages can often use a Defined Benefit Plan in conjunction with a 401k/profit sharing plan to great benefit as in example three.

Assessment

Doctors have a tremendous opportunity to review and enhance the retirement plan options. Although the article focuses on these medical professionals and related occupations, much of the material applies to other professional and business clients.  A relationship with a good Third Party Administrator [TPA] and some independent study are invaluable to your ability to perform this function well.

Conclusion

Dr. Podnos is a fee-only financial planner and the author of “Building and Preserving Your Wealth, A Practical Guide to Financial Planning for Affluent Investors” (available at Amazon.com and bookstores). He can be reached at Steven@wealthcarellc.com And so, your thoughts and comments on this Medical Executive-Post are appreciated.

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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Re-Managing Your IRA

Revisiting Retirement Planning, Yet Again!

Staff Reportersfp-book

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.

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