6 Figure High Contribution Retirement Plans for Doctors Business Practice
When the public gets ill, doctors are the first individuals to look for. We rely on physicians to take care of us in our time of need and to keep us healthy.
But who is taking care of our doctors?
What are the available retirement plans for a doctors business?
When it comes to retirement, doctors are in an interesting predicament. Often, they aren’t prepared because they are late to the game. This is typically because doctors do not start earning higher income levels until they are in their mid-thirties. As a result, the retirement goals for physicians calls for a higher contribution rate. In some cases, this could mean 20-30% of pre-tax income will be invested toward retirement.
This post will outline the high contribution options for doctors to help you determine which is best for your needs.
Remember: Retirement saving can often be a confusing process. If you have questions, do not hesitate to give us a call. We can connect you with the right professionals to help provide retirement advice for doctors.
Self Employed Retirement Plans Calculating Your Retirement Needs
This should be a priority on everyone’s retirement planning list; however, it is particularly important for physicians to take the time to calculate their retirement needs, as they have a multitude of savings options from which to choose.
According to D.C.-based research organization, Employee Benefit Research Institute (EBRI), 44% of individuals that performed a retirement needs assessment made positive behavioral and financial changes as a result. In fact, 52% reported increasing their savings and 10% reported researching additional savings methods.
Calculating your retirement needs is an important first step toward saving for retirement. Just as with life insurance, you don’t want to pay too much now and find you don’t need it later, but you also don’t want to end up under protected.
How do I start a high contribution plan?
Your first step – and the most important – is to be realistic about your savings options. The first thing you should prepare for is a hard truth: you may not be able to retire when you want to retire. This is especially true for physicians. Becoming a doctor takes a lot of schooling ad, by the time residencies and internships are completed and you’re earning money, you are most likely halfway to the “average” retirement age – and in student loan debt. As wepreviously mentioned, physicians don’t typically begin making higher incomes until well into their mid-thirties. This makes early retirement virtually impossible and may push back your projected age of retirement. One option for many physicians is to continue working.
Remember: every year you work helps you achieve your retirement goals. For every year you work, you accumulate more assets and are one step closer to comfortable retirement. You can also increase the pace of your pre-retirement investing by looking in an unlikely place: the housing market. Downsizing or selling a second home plays a large role in the retirement plans of many physicians of course, the downside to this is that the housing market may not always be as strong as it currently is, which makes this an unreliable savings plan.
Your second step is to seek help. We recommend sitting down with a financial advisor when planning for retirement. A financial advisor will be able to help you take your age, income, debt and future plans into consideration and can help set you on the right track toward saving for retirement.
Types of Defined Benefit Plans for Doctors: High Contribution Savings Plans
So, you’ve calculated your needs and are ready to start looking at retirement plans. But which high-contribution retirement plan is right for you and your pratice?
The type of plans available will vary from physician to physician, based on his or her employment status. For example, W-2 doctors – whose employer withholds taxes might find a 401(k) is a good potential savings option. Self-employed doctors receiving 1099 incomes (as independent contractors) will have more options for high contribution plans available to them, such as SEP IRA, profit-sharing plans, cash balance plans or solo 401(k) accounts. Below, we’ve outlines some of the most popular options that are high contribution plans for doctors.
Self Employed Retirement Plans: Physician’s Retirement Plan Options
If you own your own medical practice or are a principal in a medical group, you have the option to choose which pension plan you will use for tax-deferred accumulation of retirement funds. A popular option for this scenario is a combination 401(k)/profit-sharing plan. In this hybrid plan, employees can start adding contributions to a 401(k) account. Occasionally, practices offer a matching contribution to encourage participation. The profit-sharing aspect increases the contributions that employees receive.
Age-weighted profit sharing plans
Profit sharing plans are another type of retirement plans for doctors who own a medical practice(s). Because older employees have less time to build their portfolio, larger contributions will be added to their retirement accounts. This could mean reducing the amount added to other employees or the practice’s contributions will need to increase. This type of retirement plan is less advantageous to a medical practice, however, due to cost. Age-weighted plans require the hiring of an actuary as well as the filing of IRS documents.
Defined-benefit (DB) plans
Traditional pension plans allow for larger contributions to be made to your account. Some defined benefit plans are designed to pay out a set retirement income, which is determined by an actuary. the drawbacks to defined benefit plans are that they are often complex and require a lot of administrative work. Additionally, defined benefit pans require a large contribution annually – from both employees and employers. As a result, this type of plan is best for profitable medical practices with few employees.
Simplified employee pension (SEP) plans
In terms of administrative work, a simplified employee pension plan truly is, well, simple. At the time of set-up, you may have to fill out a form; however, there are no further reports required and no annual tax filings with this type of plan. These types of plans are flexible; however, for employers they can be expensive.
For example: whatever a company contributes to the employer’s account, it has to contribute the same to all eligible employees.
If you are the only full-time employee of your medical practice, then this type of plan makes sense. This type of plan allows for larger deductible contributions than other plans, because of make contributions as an employer while deferring income as an employee.
Simple IRA and Simple 401(k)
SIMPLE stand for Savings Incentive Match Plans for Employees. These retirement plans come in two options: SIMPLE IRAs and SIMPLE 401(k)s. Both plans require little-to-no administration. A SIMPLE IRA allows participants to direct their own investments – up to 100% of their income – and is beneficial for those who have relatively low income, but want to contribute a sizeable amount to a retirement plan. With a Simple 401(k) plan, the contributions are lower and an employee can withdraw the account balance at any time.
Roth 401(k) plans
The only eligibility requirement for this type of account is having earned income; however, your contributions might be limited if your income is too high. At any time, employees can take tax-free withdrawals on a Roth IRA account. After 5 years, his type of account also allows employees to take tax-free withdrawals of earnings on contributions.
How much should a physician contribute to their plans?
We get several question frequently and, unfortunately, the answer is not always clear.
A doctor’s contribution – just as with retirement contributions of any employee – will vary based on a variety of factors. These could include debt, standard of living, retirement estimation, age, risk and current income.
What you should know about building your retirement portfolio is that it does not have to be a complicated procedure. A trusted financial advisor will be able to help you calculate your retirement needs and direct you on how to begin building your portfolio accordingly.
Overwhelmed? You aren’t alone. Our financial advisors can help you determine which high contribution plan is right for your future planning. We know you have many options and we believe that saving for retirement should not be a hassle.