Doctors Betrayed by Traditional Financial Strategies: Part 1 of 2
The financial challenges and risks physicians face are unique and therefore demand specialized guidance and advice.
As authors of books and articles, we regularly interact with publishers, editors, and talk show hosts. Radio and television stations, book and magazine publishers, and internet content editors are looking for material for their “average” reader. In general, they fear that providing content generated for a few high-income readers will “alienate” their average readers and the advertisers who pay good money to reach a specific audience. Who is their “average reader”? Typically, they are defined in the parameters below:
1. The average American family, whose annual income tax liability is less than 12 percent.
2. The 98 percent of American families who will never owe any estate taxes.
3. An employee, not an employer, who will likely never be sued and who has no control over the choice of legal entity or type of retirement vehicles the employer will utilize.
Practically, what this means for neurologists is that much of the financial advice you get from print and online media, and from large national firms, is often not appropriate for physicians.
Neurologists who follow advice that is generated for the masses and doesn’t take into consideration their unique challenges should see themselves as the patient who focuses on the results of his own ten-minute internet search over the specialist’s educated diagnosis based on decades of experience and the results of a personal exam and test results.
Due to the unique set of challenges physicians face, it is imperative to look for advisors who spend the majority of their time working with physicians. To take it a step further, if you are a high liability or high income specialist, you will want to work with a team of advisors who are acutely aware of these additional challenges. For example, an obstetrician has a much greater need for asset protection than a pediatrician and a surgery center owner has much greater tax challenges than a primary care doctor.
One hurdle that advisors who specialize in helping high-income neurologists face is the fact that the solutions we (as a group) espouse are appropriate for less than one percent of the families in the country. For that reason, doctors who insist on implementing only strategies they have heard over and over again in the media and from their colleagues will miss out on valuable opportunities. Once you embrace the fact that you are different and require “different” planning than your neighbors, you will have taken one very important step to significantly improving your financial situation.
Ahead, we will share a few examples of common mistakes physicians make when listening to bad, but common, advice. These include:
Mistake #1: “You Don’t Need a Corporation for Your Practice.”
Despite what some CPAs may say, in most cases the cost and aggravation of creating and maintaining a corporation (or often two corporations for most medical practices) is insignificant relative to the asset protection and tax benefits corporations offers physicians. With recent tax law changes and with many new proposals we will see over the next year, the benefits will be compounded. Though these corporate solutions can reduce taxes by $5,000 to $50,000 per year for the doctor, these particular strategies are outside the scope of this two-part article.
Mistake #2: Owning Assets in Your Name, Spouse’s Name, or Jointly with Your Spouse
We acknowledge that owning assets in your own name or jointly with a spouse are the most common ownership structures for real estate and bank accounts. This is okay for 95 percent of Americans. Hopefully, by now, you realize that you are not in that common group. You have potential lawsuit risk, probate fee liability, and estate tax risks that over 95 percent of the population does not have. That’s why, in most states, owning assets jointly can be a mistake. Something as simple as a living trust or a limited liability company can often solve these problems.
Mistake #3: Making a Bet on Qualified Retirement Plans… Without Hedging it
This is perhaps the single most important area of planning for neurologists to address once they understand that they are different. Typical retirement plans are great for rank-and-file employees because they force employees to put away funds for retirement. Employers may match some percentage of employee contributions (which is free money for the employee). The investment grows tax-free until funds are accessed in retirement when the employee is living on modest Social Security and these retirement plan funds.
As the employer, there is no “free money” for you; all the money that ends up in your plan account was yours to begin with. In fact, you are responsible for those matching contributions so the retirement plan does have some “friction” for you if you want to make any reasonable contribution on your own behalf. On top of that, you will not be living on $25,000 to $50,000 a year in retirement like your employees will. You will have taxable investments, much larger retirement plan contributions and greater Social Security income (maybe). In any case, you will be paying significant tax on your retirement plan withdrawals. Do you think that tax rates will be lower than they are now when you retire?
With rising costs for employees and a possibility that you may actually withdraw funds from your retirement plans at a higher tax rate than the one you received for the original deduction, the real benefit of retirement plans comes into question. When you add the potential costs and aggravation of complying with ERISA, Department of Labor and tax laws surrounding retirement plans and the fact that any unused retirement plan balances will be taxed at rates up to 80 percent, you may find that retirement plans are not all they are cracked up to be. A growing trend among successful doctors is to implement non-qualified plan that hedges the future tax risk of qualified plans.
Suggestion: Use Other Plans to Support Your Retirement
Non-traditional planning can offer higher income physicians opportunities to contribute significantly larger annual contributions. Whether you are using non-qualified plans or even a tool primarily designed for risk management benefits, like a captive insurance company, you could potentially enjoy tax benefits up to $100,000 to $1,000,000 or more annually. Most of these tools allow you access to the funds before 59½, will not force you to take withdrawals at age 70½ if you don’t need the money, and will not be taxed at rates up to 70 or 80 percent when you pass away. For these reasons, savvy neurologists utilize nontraditional plans more than traditional retirement plans.
Note: Non-qualified plans vary significantly in their design, scope and applicability. Some plans work great for smaller practices with one or two partners. Others work best in practices with three to 20 partners. Still others may work best for larger practices. To determine which one is right for you, contact the authors for a free no-cost consultation offered to readers.
To Be Continued…
More tips on tax reduction and other elements of financial planning that are specific to physicians and unnecessary for Average Americans will come in the subsequent part of this continuing article, to be published in the next edition. n
David B. Mandell, JD, MBA, is an attorney, author of ten books for doctors, including For Doctors Only, and principal of the financial planning firm OJM Group www.ojmgroup.com, where Michael Lewellen, CFP® serves as Director of Financial Planning. They can be reached at 877-656-4362 or firstname.lastname@example.org.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
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