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Retirement Planning

Open Q&A for Physicians & Healthcare Professionals

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Chris recently hosted an “Ask Me Anything” open Q&A webinar for physicians and healthcare professionals. In it, he answered questions that participants brought to the meeting, such as:

  • Should I contribute to my Roth 403(b) or should I contribute to a tax-deductible 403(b)?
  • What should I be doing from a tax planning perspective if I am simply employed by a hospital?
  • How do I know how much I need to save for retirement?
  • Given that this has been a rough year, what should I be doing with my investment portfolio and how can I combat inflation?

Watch the recording here:



Is Your IRA Creditor Protected?

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Physicians, like anyone else, commonly get personal and business loans. As part of getting a loan, a promissory note and security agreement are usually included and signed with little review or thought. Unfortunately, in signing these documents, it’s possible for your IRA assets to be inadvertently pledged as part of the transaction.

The ruling in the Florida case, Kearney Construction Company, LLC v. Travelers Casualty and Surety Company of America, held that a debtor’s personal IRA, which is normally protected from creditors, was no longer protected because it was pledged when the IRA owner signed a blanket security agreement granting the lender a security interest in all the debtor’s accounts. Mr. Kearney had executed a promissory note and signed the blanket statement before filing for bankruptcy.

The UCC-1, a standard security agreement lenders file to record their security interest in assets, had generic blanket collateral language and granted the lender a security interest in “all assets and rights of the pledgor.” Because of this, the court says it was enough to grant a valid security interest in an IRA.

Since giving a security interest in an IRA is considered a prohibited transaction for tax purposes, the result is disastrous on two fronts. One, a pledged IRA is deemed immediately terminated, and a taxable distribution occurs; and two, the IRA loses its tax-exempt status and is no longer qualified as a creditor-exempt asset under Florida law.

While many believe this case was wrongfully decided and the Florida legislature is actively trying to fix it, we need to be aware of this decision in planning any current and future financing transactions. A few simple moves and awareness can prevent you from being in a bad situation like Mr. Kearney.

To avoid this situation, any pledge agreement signed going forward should be clear that retirement accounts and other creditor-protected assets are not pledged. The next question becomes, where does this leave debtors who executed blanket pledges in the past?

This now leaves physicians in Florida and perhaps other states who have signed these blanket pledge statements (which includes anyone who has a mortgage, credit card, or other loans) in a state of flux, questioning if their IRAs have lost their tax-exempt status and are no longer creditor protected.

So, what can be done to correct the past? Here are a few untested suggestions:

  • Renegotiate the security agreement with the lender to provide clarity. This should be done with great care.
  • Refinance the debt and negotiate a new security pledge agreement to provide clarity on the IRA and other creditor-protected assets.
  • Rollover your existing IRA to an ERISA-Sponsored Plan (i.e., 401(K)) 
  • Set up a new IRA and roll over the existing IRA. It is unclear how the new IRA is treated from a creditor protection standpoint since funded with a possibly tainted IRA. 
  • Use your IRA to purchase creditor-protected assets. 
  • Do a Roth conversion.
  • Do a lifestyle withdrawal from your IRA. This will allow you to place new earned income into other creditor-protected vehicles.

Before implementing any strategy, please consult an attorney or tax advisor. While we wait to see if legislation fixes the issue, any security agreement should be closely reviewed by legal counsel and provide for language to exclude any tax-advantaged assets. Going forward, pledging assets should be done with great care. If not, you may end up losing your IRA and incurring a large tax bill.

 

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

The situations or opinions mentioned in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing. 

Benefits of Becoming an Independent Contract Physician

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Considering an independent contract physician position can be scary. After all, as an independent contractor, you’ll be solely responsible for paying your taxes, the cost of medical malpractice insurance, and maintaining health and other benefits.

It’s natural to fear the unknown, but before you choose to remain a W-2 employee simply because it seems easier and more comfortable, educate yourself on the advantages and disadvantages of transitioning to an independent contractor role.

Employee vs Independent Contractor – What’s the Difference?

When you’re a big healthcare employee, your pay is a salary, and earnings are reported on tax form W-2. Income taxes tend to be fairly straightforward since your employer withholds all federal, state, and local income taxes (if applicable) along with your portion of FICA and Medicare tax. Employers also cover their portions of the FICA and Medicare tax.

Plus, your employer usually offers a nice a la carte menu of benefits like health, group life, and disability insurance. Employers also might cover the costs of certain business expenses like professional licensing and medical malpractice insurance. For these reasons, being an employee is easy. 

However, everything has a downside. First, your take-home pay, on an after-tax basis, might be significantly lower when working as an employee versus contracting as an independent physician. Secondly, you’re stuck with employer-provided benefits, whether or not the options are good. For example, your employer may only match a small percentage of your 401K contribution. Plus, you’re unable to deduct any employee business expenses incurred but not reimbursed on your tax return, as a result of 2018 tax changes. Employee business expenses may include travel, books, meals, office supplies, or vehicles. Conversely, independent contract physicians can deduct a plethora of expenses, giving them a definite tax advantage.

As an independent contract physician, your pay is reported on Form 1099-NEC. The company paying you does not withhold taxes, so you receive the gross pay agreed upon in your contract. So, taxes are more complicated and require quarterly estimated tax payments. Additionally, you’ll be responsible for paying self-employment taxes. You’ll also need to seek out your own health care coverage as well as disability, life, and medical malpractice insurance. That said, you’ll be able to deduct certain business expenses like vehicles, business meals, business travel, continuing education, and office expenses against your gross income.

As an independent contract physician, you’ll file a Schedule C on your income tax return after receiving the Form 1099-NEC. However, you may decide to operate your practice through an S-Corporation or other business entity, which will make your tax filings more complex but potentially offer additional tax advantages. Note that Congress recently put forth proposed legislation to curtail S-Corporation benefits so you’ll need to explore this option further. 

In addition to the deductions already mentioned, self-employed health insurance, 401K contributions, and half of your self-employment taxes are also deductible. While being self-employed might entail some up-front hassles, you may realize higher after-tax income in the long run. Remember, increasing income is generally never the easiest path to take.

Benefits of Independence

One key benefit of being an independent contract physician is simply the word “independent.” When you oversee your own destiny, the freedom to design the benefits and retirement plans that work best for you and your family exists. When an employer provides benefits, you’re limited to their offer because it’s usually part of the entire compensation package and is cheaper than declining and paying for your own benefits on an after-tax basis. As an independent contract physician, you don’t have to settle for inferior benefits.

Medical Malpractice Insurance Cost

One of the biggest concerns when contemplating an independent contractor route is the medical malpractice insurance cost. In our experience, though, the increased compensation realized more than covers the after-tax cost of medical malpractice insurance and other benefits. Most companies that contract with independent physicians have negotiated preferred third-party arrangements to provide medical malpractice insurance and other benefits at favorable rates.

Health Insurance Cost

Another fear we hear is health insurance costs a lot more. While your health insurance costs will likely be greater than within a large group plan, remember the following: 1) You now have the ability to choose the right plan for you and your family, 2) You have the ability to choose a high deductible plan and make tax-deductible contributions to an HSA, and 3) You can deduct your health insurance premium on a pre-tax basis. As an independent contract physician, you’ll have the flexibility and control to design your own benefit plan, including its cost.

Cost of Other Benefits

Finally, many doctors share their fear that other benefits, such as group disability and life insurance, will cost more or be unobtainable. For physicians with certain pre-existing medical conditions, that might be true. However, if you’re relatively healthy, these insurances tend to be more cost-effective over the long run when purchased independently. Since you own and control your insurance choices, you won’t need to worry about losing benefits should you choose to switch your contract to another company.

Business Perks of Independence

Again, one of the main perks of owning your business and contracting with a company is the control you have. You decide what benefits to purchase and when to terminate the ones you do not need, what retirement plans to implement and how much to contribute, what the best business structure is for your operation, plus how and who you should hire in your business. There is a lot of value to control!

There are tax perks, too. You can choose your retirement plan and contribute the maximum contribution if you so choose. This is a big advantage – as an employee, you’re subject to how much your employer wants to contribute. Plus, you can have multiple retirement plans, such as a 401K, and a defined benefit plan allowing for larger annual contributions than if you were an employee. And certain expenses paid for with after-tax dollars are now deductible on a pre-tax basis.

Did you know that if you have a child over the age of 14, you can employ them in your practice?  If you employ your child, you can deduct their wages and related costs from your taxes, too. Depending on your business structure, you may or may not need to pay payroll taxes. In most instances, your children will pay little or no income taxes on their wages. Generally, the benefit works out to saving about 20-30% per year in taxes. For example, if you pay your child $12,000 and your net savings is 30%, you will save about $3,600 in income taxes. 

Additionally, your child is eligible to contribute the earnings to a Roth IRA, which allows them to get a jump on retirement savings. That said, the greatest benefit is the ability to teach your child work ethic and responsibility. 

While this article provides an overview of factors to consider when making the leap from employee to independent contract physician, you’ll need to think through your personal situation and prepare a unique comparison. 

At Rx Wealth Advisors, we specialize in advice and consultation to Physicians exploring independence. We can assist in preparing an analysis that will help you make an educated decision. Feel free to reach out to us for a second opinion. Call us at 412-227-9007 or email croe@rxwealthadvisors.com.

 

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Practice-Owning Physicians: Beware of This Retirement Tax Trap

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As a practice-owning physician, one way to save on taxes is to implement a retirement plan. As a financial professional, I have given this advice hundreds of times to business-owning professionals.

However, if you’re not aware of it and don’t plan for it, there is a tax trap looming that can cost you, as a practice-owning physician, a lot of time, headaches, and money. 

Rx Wealth recently consulted on a physician practice’s retirement plan and ran into a major retirement plan issue many physician business owners overlook. In one specific case, a physician and their spouse each had separate businesses and were greater than 80% owners. Each business provided a 401(k) plan for their separate employees. Because the physician and their spouse had a minor child, their separate business ownership is attributed to the minor child, creating common ownership amongst the two businesses, known as a “controlled group.” Therefore, the separate 401(k) plans need to be treated as one plan for tax compliance testing. Moreover, the two plans we reviewed provided different benefit levels for employees, adding the potential for the plans to be disqualified for tax purposes.

Before getting too concerned, know Congress understood situations will exist where each spouse owns a distinctly separate, unrelated business. Congress thus designed rules to avoid your business being considered owned by your spouse and vice versa. If you meet an exception, your retirement plans will not be treated as one plan across the businesses. The exception exists when the following are true:

  • Each spouse owns no actual ownership in the other’s business;
  • Neither spouse is an employee, director, or participates in management;
  • The company does not derive earnings from passive sources, such as royalties, rents, dividends, interest, or annuities; and
  • No restrictions exist on either spouse’s ability to sell shares in their respective business that are favorable to the other spouse or minor child.

For example, If Dr. Smith owns a practice and Attorney Smith owns a law firm, and neither is involved in any way with the other’s practice, there is considered no controlled group; each retirement plan will be considered separate. However, if Dr. & Mrs. Smith live in a community property state, the spouses have a community property ownership in one another’s business. Thus, they have actual ownership, not attributed ownership. 

However, if you and your spouse have a minor child,  Congress failed to create an exception similar to a spousal exception for your minor child to be excluded as an owner of either you and your spouse’s business through family attribution. This is the retirement tax trap for the unwary.  When you have a minor child, a controlled group may be created unknowingly.

What is a Controlled Group?

Congress set forth rules to determine if businesses are part of the same group for the purposes of applying retirement plan rules. We tax people affectionately refer to these rules as the “controlled group rules.” (1)

A controlled group is created when two or more businesses connected through common ownership have the same five or fewer individuals that own at least 80% of the stock of the corporations. Family attribution applies, so stock owned by a parent, grandparent, child, or spouse is often deemed owned by another related person. For instance, stock you own in your business is also deemed to be owned by your minor child.

Under the controlled group rules, two or more employers related through common ownership are deemed a single employer for retirement plan testing purposes. These rules often require controlled group members to cover their employees with the same 401(k) plan in order to pass annual compliance testing. 

Why Evaluate Plans for a Controlled Group?

When evaluating retirement plans for tax compliance, a determination needs to be made if the two businesses are considered part of a controlled group. If a controlled group exists, the plans must be evaluated as one plan to ensure compliance with the tax law. 

Should a plan fail its compliance testing, the IRS may disqualify the plan. It is imperative to make an accurate controlled group determination and cover the proper employees with the proper benefits.

These rules exist to prevent physicians and business owners from splitting their business into two companies and enriching themselves with generous retirement plans while providing employees in a second business with either less generous or no retirement plan. 

Controlled group rules are generally straightforward. A 401(k) provider, along with your financial advisor and attorney, can assist in determining controlled group status. The issue arises typically inadvertently because of a failure to provide necessary information to the 401(k) provider about the two businesses. 

So, what happens if you inadvertently fall into this tax trap? Well, no worries. The IRS is not looking to disqualify plans for mistakes as long as they are remedied. The IRS  puts forth several avenues to fix mistakes.

A Path to Fixing Retirement Plan Non-Compliance

The IRS lays out two paths to fix a plan failure. 

First, an employer can adopt a corrective amendment up to 9.5 months following the close of the plan year in which the failure occurred in order to expand plan coverage retroactively. However, since new 401(k) plan participants cannot retroactively contribute, the business must make up the employee contributions and any employer contributions the business should have made for all plan participants.

Should the mistake not be discovered within 9.5 months, a second path is available. On this path, the employer must go through the IRS’s Voluntary Compliance Program. When a Voluntary Compliance Program correction is necessary, though, employer fines can apply.

Not correcting a failure can result in plan disqualification should an IRS audit uncover the issue.

What This Means For You

It can be costly not to understand the rules regarding controlled groups and retirement plans. While mistakes are fixable, ensure testing is done each year. Further, alert your 401(k) provider if your spouse owns a business. And if you are a little overwhelmed or think you may have an issue with a retirement plan, please reach out to us for a complimentary call.

(1) See Internal Revenue Code Section 1563.

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

How Independent Contract Physicians Can Supercharge Their Retirement Savings

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Have you considered that you might not be in the retirement plan that gives you the best benefit?  

As an independent contract physician, you need to think about and plan for your own retirement. Because of your time in medical school, you naturally got a later start at building wealth than other professionals.

Given the late start, physicians need to be aggressive in their savings. Through our years of experience working with doctors, Rx Wealth has learned that the “magic contribution number” for physicians is usually between 30% to 40% of their gross income. This will allow you to become accustomed to a lifestyle that lets you fund your retirement and build the wealth you are entitled to as a doctor. 

Although saving 30% to 40% of your income seems like a lot, your level of earning as a physician should still afford you to have the lifestyle you desire and deserve. And, adopting a proactive, goals-based approach to building wealth will allow you to pursue a happy, stress-free retirement.

Generally, your savings begins with retirement plan contributions, so let’s take a look at your options. The numbers below reflect IRS contribution limits for 2021, so if you’re reading this article at a later date keep in mind that the specific contribution limit amounts may have changed.  

The SIMPLE IRA

The SIMPLE (Savings Incentive Match Plan for Employees) IRA is an easy-to-operate individual retirement account where a self-employed doctor can invest their retirement savings.

A SIMPLE has the following benefits:

  • Easy and inexpensive to set up and operate.
  • Contributions are pre-taxed.
  • The maximum contribution per year is $13,500, and $16,500 if you are over age 50.
  • May work well for young doctors in early earning years who are limited in the amount they can contribute.
  • No need for tax filings.
  • Wide selection of investments.
  • The plan provides a layer of asset protection.

However, the SIMPLE has the following disadvantages:

  • Participating causes any “backdoor” Roth IRA contributions to be partially taxable.
  • You can contribute less than other retirement plans.
  • If you have employees, you must make contributions for them.

The SEP IRA

The SEP (Simplified Employee Plan) IRA offers the chance to save your retirement money simply. The SEP IRA will only ask for a pre-tax contribution from you.

The SEP IRA has the following benefits:

  • Easy and inexpensive to set up and operate.
  • Only the employer or you, as a self-employed individual, can make contributions.
  • Contributions are limited to 25% of annual employee compensation or $58,000. When self-employed this is based on self-employed earnings; if you operate as an S Corp, it is based on the wages you pay yourself.
  • You have control of your investments and generally have a wide selection.
  • No annual tax filings are required.
  • The plan provides a level of asset protection.

However, SEPs comes with the following disadvantages:

  • Elective salary deferrals and catch-ups over age 50 are not permitted.
  • It is considered an IRA; thus, participating will cause backdoor Roth IRA contributions to be partially taxable.
  • You must make employee contributions if you have employees other than yourself.

401(k) & Solo 401(k) Retirement Plan

A 401(k) and a Solo 401(k) retirement plan are the same plan, with one exception. The Solo 401(k) is for only a single employee or self-employed doctor and is ideal for doctors who conduct their practice through a sole proprietorship, single-member LLC, or an S Corporation and serve as their practice’s only full-time employee. 

A Solo 401(k) has the following benefits:

  • If you are under 50, your maximum annual contribution limit will be $58,000 — $19,500 as your elective contribution and $38,500 as an employer contribution. If you are over 50, your maximum annual contribution limit is $26,000 as an employee and $38,500 for the employer, totaling $64,500.
  • Solo 401(k) plans are easy to open, and most custodians have standard documents you can use to set up the plan.
  • Most custodians do all tax reporting for the plan.  
  • Since this is a 401(k) plan and not considered an IRA, you can do a backdoor Roth IRA contribution.
  • Provides the doctor a level of asset protection against creditors.

A Solo 401(k) has the following disadvantages:

  • The plan may require annual tax filings, which will cost some additional money in tax preparation fees. Filing Form 5500 or a simpler version of Form 5500 starts when plan assets exceed $250,000. However, this disadvantage is more than offset by the higher pre-tax contribution limits versus other plans and the ability to do backdoor Roth IRA contributions.
  • Most custodians do not allow post-tax or Roth contributions to their standard plan.  
  • To make Roth or post-tax contributions, a custom plan needs to be created through a third-party administrator.
  • Custom plans cost about $1,000 to establish and $1,000 to $2,000 annually to maintain. 

In the opinion of Rx Wealth, there is nothing better than the Solo 401(k) retirement plan for the self-employed doctor without employees,

Cash Balance Plan

Have you maxed out your current retirement plan, but still looking for ways to save more pre-tax money? A cash balance plan may be just what you are looking for.

A cash balance plan acts like an “old school” pension plan and defines the benefits you are going to receive when you reach retirement age.  

A cash balance plan comes with the following benefits:

  • Allows for high annual contributions based on a doctor’s age. Depending on age, you may be able to contribute over $100,000 or more per year on a tax-deductible basis.  
  • Ability to supercharge your retirement savings.
  • Provides a level of asset protection.

However, a cash balance plan comes with the following disadvantages:

  • It takes a lot of work to set up and administer annually, so there are set up fees and annual costs that run from $2,500 to $3,500.   
  • An annual tax filing is required.
  • If a physician has full-time employees, contributions are required for employees.
  • It’s generally recommended that contributions be made for at least three tax years, and the plan is somewhat inflexible as to a required annual contribution.    

While this plan provides extraordinary benefits, it does come with some inflexibility and required annual contributions. If you have sufficient excess cash flow to commit over a 3-year period or longer, consider implementing this in addition to a Solo 401(K).  A combined 401(k) and cash balance plan will supercharge your retirement savings.

The SIMPLE IRA, SEP IRA, Solo 401(k), and cash balance plan are four retirement plans you need to consider in 2021 if you are becoming or are self-employed. And if you are already self-employed, you should make sure the plan you selected is giving you the best benefits.

If you feel you are not in the best retirement plan or are struggling to select which plan best suits you, please schedule a complimentary consultation with us.

 

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

4 Actions Doctors Should Consider for Their 401Ks Now

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By: Chris J. Roe, CPA/PFS

Wow!!

The past month has been very scary. As a doctor, the disruption to your daily lives, careers and finances has been monumental.

But what if someone said to you, “There is always a silver lining”. How would you respond? Opportunities generally present themselves when adversity hits. Do you want to be the one that misses opportunities?

Market volatility increased, and a dramatic market decline ensued. This decline was so rapid that even the most seasoned investors got a little scared. A sharp decline can easily cause panic in our decision making around investments.

As long-term focused financial planners for doctors, we have a very simple message for you. If you have a road map to where you want to go, “stay the course”. If you have no road map, you need one before taking any action. Acting without a road map, may cause you harm.

The short term may continue to be rocky and unnerving. But let’s talk positive and focus on actions you may take with your 401K that may benefit you in the long run.

  1. Increasing Your Contribution – If you are not maximizing your 401K contribution, now may be a good time to increase your contribution to get some more funds to invest. Remember, every little bit helps.
  2. Re-balancing Your 401K – Wait, seems a little counter intuitive but re-balancing back into stocks, especially the ones hardest hit, can be a great way to capture upside returns without changing your overall risk. You now get to buy stocks at a discount from where they were just a few short months back.
  3. Addressing Your Overall Allocation – We have all been there. Sometimes, it is easy to pick a target date fund, or you just took some advice for a colleague on which fund to pick. Now is the time to review your allocation and investment choices. Make sure they are right for you going forward. May even make sense to increase your exposure to stocks if you were just too conservative in the past.
  4. Converting your 401K to a Roth 401K – Not all employer plans offer this option, but if your employer does it may work out great for you in the long run. Given the value of your 401K is down, it may be the time to convert some of the account to a Roth 401K and get future tax-free grow on the converted assets. Remember, set aside the money to pay the tax due.

The above may not apply to everyone, nor is it a comprehensive list of all planning opportunities around your 401K. The most important thing you do now is to assess where you are and make sure you have a road map built to where you want to go.

If you want to chat about your situation, we are here to help.

Disclaimer:

2020 All Rights Reserved. This content is developed from sources believed to be providing accurate information, and provided by Rx Wealth Advisors, LLC for general informational purposes only. It may not be used for the purpose of avoiding any federal tax penalties and in no way is meant to provide specific tax, legal or financial advice.. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.