Five Tools to Build Retirement Wealth

Getting to a comfortable retirement is a leading financial goal for most physicians, including aesthetic specialists. To reach this goal, doctors may use several different planning tools throughout their careers. In this article, we will examine five leading retirement planning tools most often utilized by doctors.

1. QUALIFIED RETIREMENT PLANS

Aesthetic physicians who are employed and receive a W-2 can often participate in their employer’s retirement plan, which allows them to defer income by contributing to the plan.

For example, 401(k) plans are one type of qualified retirement plan (QRP), and are the most common option offered to physician employees of for-profit entities. Also, 403(b) plans work the same as 401(k)s, but they are offered by government and nonprofit healthcare organizations.

For practice owners, a QRP can also be very attractive, although owners need to be cognizant of the costs–particularly what it will cost them to fund the plan for employees. Working with an experienced advisor is essential–not only to determine which type of plan(s) may make the most sense (defined benefit plan, profit sharing plan, money purchase plan, 401(k), etc.), but also to run various funding formulas so that owners get the lion’s share of the benefits while also meeting requirements for employee contributions.

Properly structured plans offer a variety of benefits: You can fully deduct contributions to a QRP, funds within the QRP grow tax-deferred, and (if non-owner employees participate) the funds within a QRP enjoy superior asset protection.

In our experience, we find that nearly all physicians in private practice participate in QRPs. The tax deduction is hard to resist. For many physician-practice owners, however, the cost of contributions for employees, potential liability for mismanagement of employee funds, and the ultimate tax costs on distributions at least suggest that it would make sense to investigate another type of plan (that hedges the QRP) as an additional savings vehicle. For many, tool #2 provides that tax hedge.

2. NON-QUALIFIED PLANS FOR PRIVATE PRACTICE PHYSICIANS

Many private practice physicians want to save significantly for retirement but are limited by the funding rules of QRPs. Others, per above, are interested in a plan that hedges against their QRP and can be accessed tax-free in retirement. Non-qualified plans (Non-Q Plans) can be the solution for many doctors. Because these plans are not subject to QRP rules, Non-Q Plans do not have to be offered to any employees. Further, even among the physician-owners, there is total flexibility. For example, one doctor can contribute a maximum amount, the next partner could contribute much less, and a third physician could opt out completely.

The main drawback to Non-Q Plans is that contributions are never tax deductible. However, like a Roth IRA, they can be structured for tax-free growth and tax-free access in retirement. As such, Non-Q Plans can be an ideal long-term tax hedge against a QRP. Beyond these general ground rules, there is tremendous flexibility and variation with Non-Q Plan designs.

3. BENEFIT PLANS FOR SELF-EMPLOYED PHYSICIANS/OUTSIDE BUSINESSES

Physicians who receive income reported on Form 1099 (including doctors who “moonlight,” work locum tenens, or consult/speak in the healthcare industry) and self-employed physicians have other options to help save for retirement.

A SEP-IRA is a traditional IRA established under a Self-Employed Pension Plan document (often the Form 5305-SEP). Under the 2023 limits, physicians can contribute the lesser of $66,000 or 25% of compensation. In addition, physicians with a SEP may still be able to contribute to a separate traditional IRA or Roth IRA. Like other traditional IRAs, account balances can grow tax-deferred, and are taxed at ordinary income rates when distributed.

4. AFTER-TAX (ROTH) IRAS

Under 2023 limits, an individual’s total contributions to traditional and Roth IRAs cannot exceed $6,500 per year ($7,500 per year if over age 50). Physicians who are not covered by a workplace retirement plan may deduct pre-tax contributions while those covered at work can make non-deductible or partially deductible contributions, depending on their earned income and filing status.

Many physicians implement a “backdoor Roth IRA” by first contributing to a Traditional IRA and then converting the Traditional IRA to a Roth IRA. (Note: This tactic requires careful planning to avoid unnecessary taxation. Work with an experienced advisor on this.)

5. CASH VALUE LIFE INSURANCE

Above, we explained that Roth IRA contributions are made after tax, but then the balances grow tax-free and can be accessed tax-free in the future. If managed properly, a permanent life insurance policy can provide the same benefits. The category of permanent or “cash value” life insurance includes whole life, universal life, variable life, and equity-indexed life insurance policies. While the differences among such policies are significant, a deep dive into these distinctions is beyond the scope of this article. Regardless of the type of insurance product, the cash value of such policies grows tax free and can be accessed tax free during the insured’s life.

CONCLUSION

The top financial goal of nearly all physicians, including aesthetic physicians, is retirement on their terms, and the six retirement tools discussed in this article can play significant roles in achieving this goal. If building your retirement wealth is an important goal for you, an experienced advisor can help you investigate retirement planning alternatives and determine the best option(s) for you, your family, and your aesthetic practice. The authors welcome your questions.

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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice, or as a recommendation of any particular security or strategy. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.