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:
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:
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:
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.