Tax Strategy for Physicians
A common mistake in do-it-yourself retirement planning is not understanding the numerous options available to save for and fund your retirement years. The mistake is not in the act of saving itself, but rather in the misallocation of dollars to taxable accounts before tax-advantaged accounts. That’s where tax strategy for physicians can help meet your retirement goals. With the proper advice, you may be able to save more than you think, by minimizing taxes as an efficient way to meet your goals.
Tax preparation alone is not adequate; developing a tax strategy to identify opportunities and efficiencies ahead of retirement is necessary.
Are you contributing to the right retirement plan?
Employer-sponsored, defined contribution plans (401(k), 403(b) and SEP plans) typically ask employees to contribute a percentage of current salaries into the plan each year. The retirement benefit will depend on the amount contributed, the investment return, and the number of years until the participant retires.
Self-employed individuals have the opportunity to implement cash balance and profit-sharing plans which can increase the retirement plan contribution limits. Benefits are generally taxable. Individual qualified plans include the traditional IRA and Roth IRA, which are subjects of slightly different tax benefits.
Check out the free guide “Three ways to know you’re ready to retire from medicine”
Tax Strategy for Physicians Tip = Know your Options
Knowing all options that are available may present an opportunity to not only contribute more annually to your retirement savings. Meanwhile, also reducing your taxable income.
For example, a self-employed physician currently participating in a 401k/Safe Harbor plan may have the ability to participate in 401k/Profit Sharing/Cash Balance plan. Therefore, they can contribute significantly more for retirement, and at the same time, create a greater reduction in taxable income.
In the example below, a physician client and his spouse earn $450,000 in 2018. They would pay $121,500 in taxes. By changing their 401k contribution type, they could save more than $103,200 compared to just $13,160.
How? By having an efficient tax strategy!
Here is the example:
BEFORE
Physician Client and Her Spouse:
2018 Total Income $450,000
2018 Total Taxes Paid $121,500
Current Contributions:
Physician Client $32,900 to 401k/Safe Harbor
Spouse $0
Total Pre-Tax Savings = $32,500
Tax Savings at 40% = $13,160
AFTER
Proposed Contributions:
Physician Client $205,000 to 401k/PS/CB
Spouse $53,000 to 401k/PS/CB
Total Pre-Tax Savings = $258,000
Tax Savings at 40% = $103,200
This hypothetical case scenario is solely an education exercise and does not reflect an actual client situation. Individual results will vary based on a difference in assumptions. CIG Capital Advisors and its affiliates do not provide tax, legal, or accounting advice. This material being presented is for informational purposes only and is not intended to provide, nor be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Next Steps to Implementing an Efficient Tax Strategy for Physicians
Identifying the optimal retirement account for your unique situation versus simply making your annual contribution to your existing plan can have an enormous impact. However, it requires planning and a sound strategy.
Planning an efficient tax strategy for physicians will help you create comfort and confidence in retirement. To help you assess customized opportunities for tax savings, email Brian Lasher to schedule a complimentary consultation with the professionals at CIG Capital Advisors.
