Portfolio CHECK-UP

Thomas R. Kosky, MBA

Physician's Money Digest, April30 2004, Volume 11, Issue 8

Name: Paul Riddle, MD

Residence: Florida

Age: 56

Family: Married; two grown children

Years in practice: 31

Type of practice: Family practice

Annual income: $300,000

Savings: No savings specified

Financial concern: Dr. Riddle is considering a staff position at a local hospital.Rather than being on the hospital's payroll, he is considering establishinghis own professional association (PA), which would contract with the hospitalto render professional services. He thinks this arrangement might allowhim greater latitude to establish a pension/retirement plan that specificallymeets his unique needs. He intends to have only himself and his wife Karen,age 52, as employees of the PA.

Dr. Riddle estimates that he has 9 years left to practice medicine. He wouldlike to retire when he turns age 65. He knows that he needs to make up forlost time where retirement savings are concerned and is seeking alternativesfor qualified retirement plans that will allow him to defer as much of hisincome as possible for tax purposes.

The Finance Professor's Solution

Based on his age and retirement time horizon, Dr. Riddle has the followingtwo options:

• Establish a defined-contribution 401(k) pension and profit sharing plan.This will allow him to defer $41,000 annually on a pretax basis, which will beadjusted for inflation. This plan is flexible. For example, if Dr. Riddle is unableto contribute to the plan one year, he may elect to forego funding the planthat year.

• Establish a defined-benefit plan that will allow him to defer up to $129,000a year for tax purposes for the next 8 years. Cautionary note: There is much lessflexibility regarding the plan's annual contributions. In other words, Dr. Riddledoesn't have the option of electing not to make a contribution in any given year.There are rigid guidelines for establishing such a retirement plan.Of course, if Dr. Riddle decides to employ anyone other than his spouse, eligibleemployees must be allowed to participate in the plan.

For more information, call Mr. Kosky at 800-953-5508or visit www.assetplanning.net.

Thomas R. Kosky and his partner, Harris L. Kerker, are principals of the AssetPlanning Group in Miami, Fla, specializing in investment, retirement, and estateplanning. Mr. Kosky teaches corporate finance in the Saturday Executive andHealth Care Executive MBA Programs at the University of Miami.