If you’re like most physicians you are in a relatively high tax bracket (or with any luck, you soon will be). You are also in a very lawsuit-intensive profession, with a lot of trial attorneys gunning for your assets, along with the assets of your malpractice insurance carrier!
While we’re big believers in using life insurance strategies to solve a lot of financial problems, physicians should also take a close look at setting up their own solo 401(k) plan – which is easier than ever to do!
Here’s how it works:
You would set up a solo 401(k) plan as your own employer and employee. You can do this as the owner of your own corporation or LLC (recommended) but you can also set this up as a self-employed independent contractor as well.
As soon as you do so, you begin to qualify for a tax credit of up to $500 each year for the first three years, which is designed to offset any expenses you incur to set up the plan.
And then it gets good.
Once the plan is set up, as your own employee, you can make salary deferrals of up to $18,000 per year for 2016. If you’re age 50 or older, that limit goes up to $23,000.
At the same time, since you’re also wearing the employer hat, you can make employer matching contributions of up to 25 percent of eligible compensation (as defined in your plan) per year.
Put the two together and you have the makings of a powerful engine for saving on taxes while taking assets off the table and putting them in a vehicle that is nearly invulnerable from seizure by creditors. Why? Assets in a 401(k) are not held in your name. Instead, the investment company holds the assets in trust for your benefit. Anyone suing you or your practice won’t be able to attach your 401(k) assets in a judgment.
But wait: There’s even more!
The solo 401(k) platform also allows you to choose the Roth system of taxation rather than the traditional tax-deferred 401(k) model. So if you believe you will be in a higher tax bracket in retirement than you are today, you can give up making your current contributions pre-tax, in exchange for tax-free growth and tax-free income in retirement. Unlike regular 401(k) plans, the Roth is exempt from required minimum distributions. So you can let your contributions compound tax-free for as long as you live.
In this regard the Roth 401(k) is similar to permanent life insurance, though without the life insurance component.
401(k) Loans
When you are your own 401(k) plan sponsor, you have the option to set up your plan to allow for loans from your 401(k). You can use this money for anything you like. You have up to five years to pay back the loan with interest, or the IRS will deem you to have made a distribution and will assess taxes and penalties, if applicable.
However, if you’re running your own independent medical practice, that’s a handy feature to have. Many small businesses of all types run into short-term cash crunches of all kinds, and medical practices are no exception.
The solo 401(k) is a terrific option if you are a solo practitioner or you operate a company with no employees other than your spouse.
If you do have other employees, however, you can still set up a SEP IRA, SIMPLE IRA or regular 401(k) plan and still get many of the same benefits, though in each case you must also include your employees in the plan.
If you cannot afford to include employees, you can also max fund a life insurance-based plan for yourself and your spouse, using a whole life or universal life insurance policy. These have even more flexible loan provisions, in most cases (as long as they aren’t modified endowment contracts) and also allow for tax-free growth on any cash values.
Want to know more? Give us a call today at 866-899-7318. DoctorDisability.com is a leading expert in financial planning and protection specifically for physicians. Based in San Clemente, California, President and CEO Charles Krugh is a Certified Financial Planner with more than 15 years of experience working with people in the medical industry.
We look forward to working with you.