The Best Retirement Strategy For Physicians


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I often speak with physicians who are looking to improve their retirement situation. But more importantly, they are looking to save money on taxes. My goal is to help them with both. Let’s look at one cash balance plan example.

When it comes to retirement planning, there are many different solutions. If a physician has few or no employees, then there are a couple of ideal situations. It usually revolves around a 401k with a profit-sharing component along with a cash balance plan.

Most of my clients can quickly understand the mechanics of a 401k plan. But a cash balance is entirely different. Let’s take a closer look at a real-life example.

The Anesthesiologist

This example involves a 52-year-old Anesthesiologist. But in reality, it doesn’t matter what type of physician you are because the plan works for anyone (radiologist, oncologist, podiatrist, internal medicine, etc.).

He is married and has two children. He had saved approx $550,000 in retirement already, which was not enough based on his age and income. Like many physicians, he has lived a comfortable lifestyle and realizes now is the time to try to maximize his retirement.

This physician operated as an independent contractor. This works out well because he had no employees (other than himself). He had an S corporation structure and paid himself a wage of $220,000. He already had a solo 401k in place, and that is where he had all his retirement to date.

doctor retirement plan

Cash Balance Plan Example

There was no reason to change his solo 401k. This allows him to contribute up to $24,000 (including the $6,000 catch-up provision). Also, he had a profit-sharing component that will enable him to contribute another 6% of his W-2 wage into the solo 401k. Just leave this alone.

The 401k provision also allows for a Roth 401k. I would not usually recommend this for someone with such a high income. But it is still a nice option to have.

But the key then is to add a cash balance plan into the mix. Yes, you can have both a cash balance pension plan and a 401k profit sharing plan. In fact, the vast majority of cash balance plans also have a 401k plan attached. There are, however, a few considerations when you have both plans in place. Let’s take a look.

Combined Plans

A cash balance plan is a variation on a traditional defined benefit plan. It actually acts similar to a defined contribution plan (like a 401k) and a traditional pension. That is why it is often called a hybrid plan.

A cash balance plan creates an individual account for each participant and defines a specified lump sum balance. As a business owner, the cash balance plan allows for significantly higher contribution limits than you’d ever get with a 401k.

This can be a tremendous benefit to someone (like my physician client) who wants get get sizable amounts into retirement. The contribution limits for cash balance plans are based on age and income and can top $250,000 for some participants.

The Results?

So back to the client. We were able to put $24,000 into the 401k employee deferral and an additional $12,000 into the profit sharing plan. The profit sharing plan was limited to a 6% contribution as a result of testing limitations.

But the good part was that we were able to contribute $188,000 into the cash balance plan. The combined total was $224,000. Assuming a combined federal and state tax rate of 45%, this resulted in tax savings of $101,000. Not too bad for a physician looking to supercharge his retirement.

Cash balance plan example

Not only do cash balance plans offer exceptional retirement savings, but they also provide significant tax benefits. This is true for both the contribution amounts and the earnings on those contributions.

Now, this is just one cash balance plan example. Each client’s situation is different. But the goal is to make sure that you listen carefully to your client and craft a retirement plan design that suits their needs.

Paul Sundin

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