Jim, M.D., 48 & Meredith, 46
Jim is an anesthesiologist who recently transitioned to being an independent contract physician, and his wife Meredith is a high school teacher.
They have amassed a net worth of $3.25 million with liquid assets of $2.75 million and have no debt other than a mortgage and auto loans.
The couple has two children, ages 16 and 12, attending public school. They want to pay for college and ensure Meredith has sufficient assets and coverage if Jim passes prematurely.
With Jim’s recent shift to self-employment, they are concerned about what to do now that he’s given up employee benefits, selecting the right retirement plan, and determining how they should file their income taxes to ensure he is deducting all available business expenses to reduce taxable income. They are also considering forming a business entity to shield him from liability.
- Become financially independent when Jim is 60 years old with enough annual income to support their current lifestyle.
- Pay for 4 years of college education for their children.
- Minimize income taxes they are paying currently to build up their wealth quicker.
How Rx Wealth Advisors Helped:
- We formed an LLC for Jim to pay taxes as an S Corporation for his business. The LLC will pay him an annual salary and he will take the remaining money out as a profit. This saved him tax on FICA and local income tax.
- We had him form a solo 401(k) and roll over an existing 401(k) into it. Given his age, he can contribute $58K per year.
- We eliminated an old SEP IRA he had from a previous practice where he was employed and moved it into the new solo 401(k). This allowed him to begin contributing through a backdoor to a Roth IRA. We also formed a cash balance plan for him to allow him to defer an additional $120K plus per year. This brought his total pre-tax contribution to $178k — income that previously was not sheltered from taxes.
- We had him employ his son at age 16 to help with paperwork and business tasks, saving him a few extra thousand dollars in taxes each year.
- Because his son earned money, he is eligible to contribute to a Roth IRA and get started on his savings early.
- We worked with a third party to secure a high-deductible health plan for him and his family. This allowed for a $7k+ contribution to a Health Savings Account that will pay huge tax benefits during retirement.
- We placed new disability coverage on Jim which is far superior to his prior group coverage at his last employer which had terminated upon him becoming self-employed.
- We reworked his liquid and tax-deferred investments to locate assets to be more tax-efficient given their high-income tax bracket. We eliminated higher-cost, tax-efficient mutual funds in favor of lower-cost, tax-efficient investments.
- We eliminated the whole life policy purchased out of residency and exchanged it for a more efficient permanent policy that provides future long-term care benefits at an annual premium investment significantly less than he was paying.
- With the premium savings, we purchase a policy on Meredith to give her life insurance coverage with long-term care benefits.
- We eliminated the current non-convertible term insurance he was sold 10 years ago and replaced it with a new 20-year convertible term, and we obtained cost-effective term coverage on Meredith.
- We reviewed titling of all assets to ensure they are titled appropriately for asset protection.
- They had not updated their estate documents since their children were born. We began working with an estate attorney and have new documents in place, named a guardian for their children, and implemented trusts for their children in the event they pass.
- We ensured Jim and Meredith are contributing to Roth IRAs.
- We calculated their required 529 funding for each child and began to put money into 529 plans monthly.
- We refinanced their mortgage to a lower interest rate and a shorter term, saving them about $800 per month and over $144,000 in payments.
- We reviewed their prior years’ tax returns noting a few opportunities to save taxes going forward. We coordinated with their CPA on their new tax filings for business and personal and provided Jim with a checklist to ensure he is getting all his deductions for the business.
- We had a third party review their current property and casualty coverage noting some glaring gaps in the coverage should they be sued or get into an accident. We helped them obtain coordinated coverage for their home, auto, and excess liability.
- We set a plan for them to claim social security when they are 70 ½ and for Meredith to claim her teacher’s pension as soon as she is eligible for the maximum pension.
- We plan on Meredith taking the highest monthly pension amount since Jim will not need the income in retirement. We will plan on implementing a pension maximization plan.
Jim and Meredith are able to save significantly more on a pre-tax basis to ensure greater wealth creation over time.
Meredith is confident she and the children can live the lifestyle they are accustomed to and pay for the children’s college and family debts should Jim pass prematurely. The insurance has been reworked to be efficient and provide the proper coverage for Jim and Meredith. Their estate plan is up to date and their future inheritance to their children will be protected with trusts.
The couple’s assets are more secure from creditors, lawsuits, and unexpected events.
Their portfolio is more tax-efficient, enhancing after-tax returns to allow for greater wealth creation. Jim’s tax preparation and tax planning going forward are now in sync between us and the CPA to ensure nothing is missed.
Based on current savings and the action plan we set, Jim and Meredith will hit their financial independence date successfully.
Going forward, all aspects of their financial life will be coordinated and overseen by us, freeing them up to focus on free time and family.