Look This Limit Gift Horse in the Mouth

September 16, 2008
Ellen Rabinowitz

Physician's Money Digest, January31 2003, Volume 10, Issue 2

Physician-investors now have the opportunityto put away more money forretirement than ever before. New annuallimits allow you to contribute 33% moreto your retirement plan each year. Ofcourse, contributing more money to yourretirement plan means you'll retire withmore money—something everyone wantsto do. So, who would want to complainabout an increase in their retirement contributions?The people who may findthemselves caught between a rock and ahard place: physicians.

AN EXPENSIVE INCREASE

Because of the increase in retirementcontributions, you and your partners maybe faced with some difficult decisions. Youwill need to figure out whether youshould reduce bonuses or base take-homepay in order to increase retirement plancontributions. Some practices may be ableto comfortably withstand a pay cut inexchange for long-term tax and retirementbenefits. There could be problems,however, if your practice includes ayounger partner who is not able to affordmore retirement savings at the presenttime or if your retirement plan took abeating from the recent stock market.Each practice is unique. Always keep inmind that what works for one practice,may not work for the next one, or yours.

Private Practice

Success

A recent article in (888-941-4488; www.smartpracticemanagement.com) states that physicianshave 2 obstacles to consider when trying tomaximize their retirement contributions:freeing the additional money allowed perpartner and making the additional contributionsto employees'retirement accounts.

The tax code requires allocating employercontributions to all participants in auniform manner, with the majority of practicesmaking contributions based on a percentageof salary. This means that if 2physician partners decide to contribute15% of their compensation to their ownretirement accounts, they must also contribute15% of the plan-eligible employees'salaries to their respective accounts.As salaries increase, contribution amountsinevitably increase as well—a costly factof life for business owners.

BENEFICIAL ADDITIONS

Private Practice Success

Fortunately, the new tax rules includeprovisions that allow business owners (ie,practice owners) to shift a larger percentageof the contributions to the peoplemost responsible for their business'success—the physicians. Following are 2 illustrationsfrom the article, which explain age-weighting andnew comparability, 2 cost-effective waysto maximize your retirement plan contributions.In addition, don't hesitate toconsult a pension expert. They can helpyou set up a plan that utilizes either ofthese 2 approaches:

•Age-weighted plans —This approachallows you to weight your contributionstoward older plan participants (usuallythe partners). The basic rationale behindthis approach: A 25-year-old employeehas 30 more years to save for retirementthan a 55-year-old employee. Additionally,notes the article, those monies have30 more years to compound and grow.Given the shorter time period to planfor retirement, a 55-year-old should bepermitted a higher percentage of deductiblecompany contributions towardtheir retirement.

•New comparability —With this approach,business owners can set up retirementplans with 2 or 3 levels of contributions,based on factors like age, length ofservice, and job category. A points systemcan be created that allocates larger contributionsto senior, long-term, and professionaljob classifications. In a practice, thistypically means the partners.

Adopting an age-weighted or new-comparabilityplan can reduce theamount that goes to employees, whichmay lead to problems with your staff. Thearticle recommends that you time yourpension plan change to correspond withemployee pay raises to minimize or avoidan actual dollar loss for your employees.

In addition, it's a good idea to talk to apension expert, even if you can't afford toincrease your plan contributions at thepresent time. They can set up an age-weightedor new-comparability plandesigned to reduce or slow the growth ofyour employee retirement contributioncosts.