When many physiciansstart practicing medicine,they are in significantdebt because ofstudent loans. And this debt can be anobstacle to saving money. Meanwhile,a number of experienced physiciansfind themselves perched on the brinkof retirement in need of retirementfunds. Fortunately, because there is arange of retirement plans to choosefrom today, physician-investors have avariety of options that can satisfy theirspecific savings needs.
Thanks to relatively recent tax reforms,some retirement plans offer thebest opportunities they've ever offeredinvestors. For example, the EconomicGrowth and Tax Relief ReconciliationAct of 2001 (EGTRRA) gave a significant boost to the dollar limits governingboth defined-benefit and defined-contributionretirement savings plans.
Defined-benefit plans offer fixedretirement benefits that vary accordingto the individual plan, but are generallybased on the participant's salary andyears of service. In contrast, defined-contributionplans provide no specificbenefit. Instead, retirement benefits arebased on the amount contributed to theaccount and its performance.
Depending on the structure of yourpractice and personal goals, one planmay be more appropriate for you. Let'stake a brief look at some of the options,which can help lower your current taxableincome and provide the potentialfor tax-deferred earnings.
With the rise in popularity of 401(k)plans, defined-benefit plans faded fromthe spotlight. They can still be anattractive option, though, particularly ifyour practice has few employees andyou're looking to accelerate their savingsprograms. Employees may be ableto set aside significantly more than theycould with a defined-contribution plan.
In 2004, the maximum annual bene-fit is $165,000, and the amount of yearlycompensation that may be consideredfor benefit purposes is $205,000. Bear inmind that defined-benefit plans can bemore complex and costly to administerthan other options.
One type of defined-contributionplan, the 401(k), often dominates discussionsabout retirement planning. Therefore,let's discuss one particular kind, theSafe Harbor 401(k). Let's also discuss asavings incentive match plan for employees(SIMPLE) IRA. Both of these savings plans are relatively simple and inexpensiveto administer.
In 2004, the elective deferral limit for401(k) plans is $13,000. Total contributionsare limited to the lesser of $41,000or 100% of a salary. Those aged 50 andolder may contribute up to $3000 more.Given the higher contribution limits, youcan defer more money into a SafeHarbor 401(k) than a SIMPLE IRA.While employer matches may belarger with a Safe Harbor 401(k),employees are also allowed to contributemore on their own behalf.
A SIMPLE is set up as an IRA and isrestricted to employers with fewer than100 employees. The employer cannothave another qualified plan in place andmust make matching contributions onbehalf of eligible participants—generallythe lesser of the amount deferred by theemployee or 3% of the employee's compensation.Employees may defer as muchas $9000 in 2004; those aged 50 or oldermay contribute an additional $1500.
Safe Harbor 401(k)s offer the samebenefits as a traditional 401(k), but mayallow participants to maximize their contributionswhile still satisfying nondiscriminationrules. With a Safe Harbor 401(k),matching contributions must be made foremployees. However, employers maychoose between the following two options:
Retiring from practice also posesmany business considerations. First andforemost, what will happen to the practice?If the physician is a partner, thereshould be a shareholder's or partnershipagreement. These contracts govern thewithdrawal of a partner and address thevaluation of the partnership share, as wellas the buyout conditions, including informationoutlining the amount the physicianwill receive and the payment schedule.Physician-partners should reviewthese documents every so often to makesure that the initial agreement sufficientlyreflects their most recent situation.
Those physicians practicing solo whoare considering retirement typically havetwo options: to sell or dissolve the practice.If a physician decides to sell, it is importantthat they obtain an accurate valuation ofthe practice and an agreement that outlinesthe price. This agreement should also listthe legal and business obligations of boththe seller and the buyer. Federal health careregulations (ie, the antikickback statute)govern the extent to which the seller maycontinue to conduct business with theirformer practice. If a physician chooses todissolve their medical practice, they mayhave to satisfy certain state requirements(eg, filing an article of dissolution and theappropriate tax forms).
Throughout your professional career,you will make numerous personal andbusiness decisions regarding your practice.Planning in advance will make a bigdifference. It is never too early to startplanning for retirement. The sooner youstart planning, the better off you'll bewhen it's time to put away your stethoscope.And when that time arrives, you'llbe grateful you had the foresight to saveyour pennies for a sunny, golden day.
is a managing partner of Gotham Financial Services in New York. He welcomes
questions or comments at 212-340-1050 or 212-253-4020 (fax).
Ori W. Pagovich