Portfolio CHECK-UP

Name: Dr. Ronald Smith

Residence: Virginia

Age: 37

Family: Married, 2 children ages 7 and 9

Years in practice: 9

Type of practice: Internal medicine

Annual income: $275,000 (practice); spouse, $100,000

Savings: Not applicable

Financial concern: Dr. Smith and his wife currently have a combined income of approximately $375,000. Even though he is age 37, he has not implemented any type of defined-contribution or defined-benefit plan for his practice. He is seeking to establish such a plan to accumulate savings for retirement and to generate a needed tax deduction, as he and his wife are in the highest tax bracket and currently have no significant tax deductions. Dr. Smith is the sole employee of his practice. Under a defined-contribution program (eg, a 401(k) pension and profit sharing program), he realizes he can get a tax deduction of up to $40,000. He would like to generate a greater tax deduction if possible.

The Finance Professor's Solution

Under a 412(i) defined-benefit plan, depending on how it is structured and the financial instruments used, he can contribute anywhere from approximately $73,800 to as much as $111,700 annually on a pretax basis. The reason for the disparity in contributions is as follows:

The above plan makes a great deal of sense; however, such a plan may not be feasible for an employer who has several employees, because these types of plans do not allow the employer to discriminate. In other words, if Dr. Smith has several employees, he would have to provide similar benefits for all eligible employees, which could be very expensive for his practice. Also, it must be noted that these plans require a minimum of 5 years for funding.

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.