Name: Brent Shapiro, MD
Residence: Central Florida
Family: Married; no children
Years in practice: 6
Type of practice: Plastic surgery
Annual income: $180,000
Savings: $50,000 in a Roth IRA
Financial concern: Dr. Shapiro is currently contributing $3000 to a Roth IRA. He needs to start saving aggressively for retirement and could also utilize a tax deduction. His accountant has advised him against implementing any type of defined contribution plan; it would be too costly since he would have to make contributions on behalf of his employees. He'd like to know what options are available to him.
The Finance Professor's Solution
First of all, having requested a census of his practice, it was determined that a 401(k) Safe Harbor Integrated Profit-sharing Plan may be worthy of consideration. The annual contributions for Dr. Shapiro and his employees would be as follows:
From the above table, you can see that it will cost Dr. Shapiro $45,219 to fund a benefit for himself of $40,000 annually. But consider the alternative. Because Dr. Shapiro and his spouse are in the highest tax bracket with essentially no deductions, if Dr. Shapiro bonused himself $45,219, he would have to pay taxes of approximately $15,827 (assuming a 35% tax bracket), which would leave him with only $29,393 after taxes. Depending on how and where he invests this money, it may or may not be protected from creditors. Because it costs his practice $5219 to fund for his additional 2 employees, which becomes tax-deductible to his practice, it really only costs him $3393 on an after-tax basis to fund for his employees.
In summary, for a net after-tax cost of $3393, Dr. Shapiro is able to fund a benefit that provides a savings advantage of nearly $11,000 annually and is protected from creditors.
For more information, call Mr. Kosky at 800-953-5508 or visit www.assetplanning.net.
Thomas R. Kosky and his partner, Harris L. Kerker, are principals of the Asset Planning Group in Miami, Fla, specializing in investment, retirement, and estate planning. Mr. Kosky teaches corporate finance in the Saturday Executive and Health Care Executive MBA Programs at the University of Miami.