Watch Your Nest Egg's Financial Health

Physician's Money Digest, April15 2003, Volume 10, Issue 7

Private practice physicians are accustomedto covering financial risks that affect thehere and now, but many are unable toadequately cover financial risks after retirementbecause of low contribution limits on traditionalretirement investments. Recently, financial firstaid has surfaced in the form ofdefined-benefit (DB) plans.

A result of recent federal tax lawchanges, these plans are designed forhigh-income, self-employed individualsand owners of 1-to-5-person businesses.They have the highest tax-deferred contributionceiling of any current retirementplan. Specifically, the new law letsphysicians shelter up to $100,000 ormore per year for retirement, dependingon their age. That's a sharp contrast tothe maximum of $40,000 a year theywere previously allowed to contribute toa tax-deferred retirement plan.

GOOD PLACE TO INVEST

The self-employed are solely responsiblefor their retirement plans. But inmany cases, their nest eggs are shrinkingdue to low investment returns and thetight contribution limits of traditionalretirement plans. Baby boomers looking to makeup for lost ground need flexible retirement vehicles.

Off-the-shelf DB retirement plans can be anattractive alternative for private practice physicians.This new type of plan offers the same tax deductionand sheltering benefits as the more familiarcustomized plan. But the lack of customization andlegal fees, more flexible investment options, andlower initial cost and administrative maintenancemakes the DB plan more appealing to small businessowners and entrepreneurs. Money that growstax-free in a DB plan helps to offset losses whenthe market is doing poorly.

A doctor who would benefit mostfrom such a retirement plan wouldmatch the following criteria:

  • Is age 45 or older.
  • Typically earns at least $75,000annually and is a business owner with 5or fewer permanent employees, is self-employed,has a second occupation inwhich they work for themselves, is consideredan independent contractor, orreceives self-employment compensationfrom an organization or individual whois not the regular employer.
  • Expects to continue in this occupationor business for at least 3 years.
  • Has sufficient income from allsources combined to afford a contributionof a substantial proportion ofearned income to a DB plan each yearuntil retirement.
  • Is part of a dual-income householdwhere a second income contributes to investments.

FEATURES TO INVESTIGATE

These off-the-shelf plans not only let physiciansmake high tax-deferred contributions, allowingthem to catch up at a faster rate, they also allowphysicians to invest conservatively.That's especiallyimportant, since age is a significant factor indetermining retirement savings. When choosing aDB plan, private practitioners should also askthemselves the following questions:

  • Does the plan permit tax deductions for contributionsup to $160,000 per year?
  • Does it let investments grow tax-deferred?
  • Can investments be rolled into an IRA accountat the plan's termination to retain tax shelter?
  • Do they restrict a physician's selection ofpossible investment vehicles?
  • Are there low initial setup and annual administrationfees (ie, under $2000)?

Because many restrictions can apply, and thesize of the deduction is influenced by several variables,including the physician's age and assumedrate of return, it is advisable to consult with aninvestment professional to set up the plan. Aninvestment professional should work with you todetermine the following variables:

  • The percentage of your current compensationthat you'd like designated to a retirementbenefit. (For example, the maximum allowedbenefit is $160,000 a year. You can use up to$200,000 in compensation to calculate that);
  • How much you will need to fund it; and
  • How much you will need to contribute annuallyto reach your retirement goals.

Especially at a time when equities are not performingup to their previous high levels, a DB plancan be the golden opportunity private practicephysicians are looking for to help accumulate orrebuild wealth and provide for the golden years.

Mark Weimer is presidentof Metavante 401(k) Services, Inc, a unit of Metavante WealthManagement that specializes in administering self-directed 401(k)plans and high-dollar tax-deductible plans. He received his degree ineconomics from Stanford University and is a member of the AmericanSociety of Pension Actuaries. He welcomes questions or commentsat 800-236-3282 or visit www.metavante.com.