Making Your Retirement Plans Fit

Many physicians mistakenly shy away from establishing a Tax Qualified Retirement plan. Over the years we have heard numerous reasons for this, the most popular being fear of the loss of control to a big corporate trustee, being forced to give large sums of money to their employees and exorbitant fees to keep a plan running. While these concerns are real, they aren’t entirely accurate…let me explain.

Retirement plans can be divided into two categories:  Qualified and Non-Qualified. Let’s focus on the Qualified plans, since these are designed to offer the greatest income tax savings. 

Retirement plans are designed and controlled by the business owner(s). There is rarely a need to have anyone other than the owner(s) in a position of control. This includes the overall plan design as well as the underlying investment selections, although most owners choose to have outside help with the investment selection.

At a cost typically under $2,000 to set-up, and frequently half of that annually to maintain, the tax savings realized by establishing the plan is often greater than the maintenance and cost for employees combined!

Qualified plans can be divided in two groups:  Defined Contribution Plans (Profit Sharing, Money Purchase, Cross-Tested) and Defined Benefit Plans.

As the name would indicate, the Defined Contribution plan revolves around a specified contribution level, a percentage of compensation. One common myth with retirement plans is that “What I do for myself I must do for all my employees.” There are some plan designs that operate in this manner…everyone is treated equally. However, New Comparability plans utilize a series of testing formulas so that the benefits are equitable, not equal. The person making more money usually gets a greater contribution. In essence, the lion’s share of the contribution goes to the person making the greater income!

Defined Benefit plans forgo the specified contribution calculations, in favor of solving for a target amount of income at retirement. This type of plan favors those closer to retirement since there are fewer years in which to accumulate the necessary wealth. A medical practice population where the physicians are older than most of the employees is ideal and can allow for substantial plan contributions with most of the dollars going to the older owners!

So why go through this headache? A Qualified Plan is an excellent tool to utilize in converting business wealth to personal wealth. You can often accomplish multiple objectives using a well designed plan.

Consider this, maybe you have other objectives in addition to saving money for retirement or getting a tax deduction. Maybe you need to find a way to fund a Buy Sell Agreement, or you wish to enhance your estate plan using retirement plan assets. Since a retirement plan can be funded using many different assets classes, it can accomplish many things! Yes, a retirement plan can invest in stocks, bonds, mutual funds, cash and CD’s but in addition, it can invest in a host of insurance based products for the benefit of the physicians, their spouses and all their employees. You can use the same dollars more than once:  by contributing towards retirement income, funding pre-retirement death benefits for a shareholder’s agreement for the partners, providing funding in the event of the loss of a key man, and/or liquidity for estate planning needs!

Fast forward...you now have a creative plan that favors you and your family, gives that extra tax-deduction you been craving, provides for your family’s security or pays estate taxes if you die early, and doesn’t cost an arm and a leg to maintain…you’ve accumulated a sizable amount of wealth that Uncle Sam hasn’t gotten his hands on, yet, but you aren’t ready to die...what’s next?

If not planned properly, these assets left to your heirs, can be seriously confiscated by the ravaging effects estate and income tax. For many physicians, misjudging the value of their estate, which includes retirement assets, can result in double taxation of the assets being passed on to their children (estate tax and income tax). This can result in leaving as little as twenty cents on the dollar to their family, with the rest going to the tax man. 

So just how do you spend all this money? As you are probably well aware, the dollars you spend from a retirement plan are taxed as ordinary income in the year you take it. Many individuals fall prey to the notion and myth that all individuals will be in a lower tax bracket at retirement. While that may be true for some people, most that have spent their working years building a medical practice and creating wealth will likely be in the same or an even greater tax bracket at retirement. By integrating complementary strategies, it is often possible to create a more tax advantaged means of accessing these dollars. 

Many individuals don’t examine the efficiency of distribution of these assets until it’s time actually to use them. That is likely a mistake. There can be many advantages to outlining some possible exit strategies as early as possible. It doesn’t mean you have to use them, but it’s nice to know you have some excellent options for down the road.

As always, should you have any questions, concerns, or require additional information regarding a new or existing retirement plan, do not hesitate to contact us at 516-677-6240, email us at info@HDCI.biz, or visit us on the web at www.HDCI.biz.

By Jay E. Hochheiser, CFP
Hochheiser, Deutsch & Company, Inc.
516-677-6240, e-mail: info@HDCI.biz