Retirement and the Path to Take
Retirement, the word that every working person longs to attain, yet seems so far off in the distance. Well, experts advise that it is never too early to begin planning for your future as a retired physician. The Ambulatory M&A Advisor takes a look at some of the options available in the retirement plan market, the pros, the cons, and even some thoughts from outside of the box.
Joseph D. Brophy, owner and operator of Joseph D. Brophy, CPA, and PC says that when it comes to making the decision of selecting a retirement plan, there are quite a number of options.
Arlene K. Mose, CPA, MS Taxation runs her CPA practice in California and states that there is a variety of retirement plans, but they are all related in concept that the contribution is tax deductible most of the tine and deferred for withdraw at a later date. The benefit of these plans is that the contribution is generally made while the physician is in a higher tax bracket. An additional benefit is that the growth within the plan is also not taxed until withdrawal, which presumably happens when you are in a lower tax bracket.
“They are all a little bit different in how money can be contributed. They also have slightly different funding dates, and slightly different rules regarding withdrawals. All of these rules are set by statute, The participant doesn’t have a whole lot of say in those rules. They are what they are. You either play or you don’t,” Mose says.
Brophy goes on to describe in further detail of the types of accounts that physicians can open for retirement.
“You can get into something as simple as an IRA account, which has a normal limit of $5,500 annually, which goes to $6,500 if you’re over 50. Then you go to a simple deferral limit, which is $12,500, then you can go all the way up to a 401K or a defined benefit type of plan,” Brophy says.
According to Brophy, the typical plans at a business level that people look for are either defined contribution or defined benefit.
“With a defined benefit plan, you can have much larger limits on the available deduction for retirement savings which is a good thing if you’re a surgeon in your 50s, college is paid for, and you’ve got the extra dollars. You can afford to put more aside for retirement and defined benefits may be a good thing,” Brophy says. “But, if you are a young doctor paying off your school loans, and still making a good living, you may look at something like a 401K depending on whether you have employees or don’t have employees.”
According to Brophy, the rule is, the earlier you get started, the better off you are for retirement.
“A young doctor just out of school will frequently look at retirement planning and say “Well, I have got to pay off school loans first,” which is understandable. However, they lose years of growth in their plan,” Brophy says.
Brophy explains that the time a physician begins saving for retirement makes an enormous difference in the growth of a plan. A doctor in his early 30s who begins his plan will have a much better chance of reaching his goal than a doctor who starts at 50 with his plan, Brophy says.
“To quantify it, which we can do, we would have to select a year the physician starts a savings program and what his anticipation is,” Brophy says.
According to Brophy, the rate of investment varies from plan to plan and situation to situation.
Brophy says the amount It would depend on the type of plan selected by the physician and at what point in their career the investment begins.
“The maximum they can do is $18,000 a year on a 401K deferral if they are under 50. If, however, they need a defined benefit plan, they may be able to get $50,000 to $80,000 dollars a year into their retirement plan, but they would have to do it with certain commitments, as to doing it every year. It’s not an annual election. So, it is material to the doctor how he starts this out,” Brophy says.
Not everyone in the industry seems to be on board with selecting an official retirement plan as a physician.
Donald Kimes, MD, owner of A Plus Urgent Care explains that in his opinion, it may be better for physician owners to invest in themselves and their business, rather than rely on the market to preserve their future.
“The retirement plan market has not done the best job in terms of morally and ethically representing people’s best interests anymore,” Kimes says.
Brophy explains that in the instance where self-investment was the “plan,” a physician would look at the actual results from their own investments individually, outside of a plan. However, Brophy advises that physicians understand they can do a self-direct plan or self-trustee plan, which will allow him to do similar investments, but within a plan.
“Most physicians, when they look at the cash, or requirement of a contribution, look at the after-tax effect, whereas investments made outside of the plan are pre-taxed. You end up with a substantial increase in the available investment, by doing it within a retirement plan. Let’s say he’s in effectively, a 40 percent bracket outside of the plan. Instead of investing $10,000, he can invest $14,000 by doing it within the plan because of the tax effect, allowing him tax deferred growth on a substantial increase in the capital base. For most physicians, that is a more pragmatic way of dealing with retirement,” Brophy says.
Outside of an initial plan like Brophy describes, Kimes offers further advice.
“The best advice I can give to anybody is to retain as much self investment from the standpoint of investing into your own practice. Doctors can do that. My form of investment is that I own five urgent cares and I am continuing to grow. Most of all, they are mine. It’s a lot of work and every penny I get I put into me. I am seeing a much better return on investment than the market could ever afford,” Kimes says. “I encourage doctors to be as much capitalistic entrepreneurial, and invest in themselves if they are intending on retiring with any form of peace of mind.”
Brophy explains that there are also tax benefits of the contribution that can be significant.
“It varies because if the doctor is already covered by a plan at work, he may or may not be eligible to have a separate plan of his own. He may be stuck with non deductible IRA contributions as an example, if he’s already got a plan at work,” he says. “One thing that does not dramatically vary, is that if you begin earlier in your career, you will almost invariably have substantially more, double, or even triple at retirement.”
As in all financial decisions there are some downsides to retirement plans. Brophy says one of which is a tax burden when taking money out of a plan. One way to avoid this issue is to time the payout to receive it when you are in a lower bracket after retirement. Brophy explains that normally there is a planning option that affects the rate going in, and the rate coming out of the investment in the plan. Once again, the results vary based on the case by case basis.
“There are risks in any type of retirement plan if you invest the plan assets into the market. All of these items have risks, but then, real estate has risks as well. It’s not the plan you have at r’isk, it is how you have invested it. If you are really, really, risk adverse, you could just put all of your plan assets into cash,” Mose says. “This might be your self-protective instinct at work here, but when carried too far, you run the risk of missing out on potential market gains or having a less-than-optimal financial plan.”
Mose also states that investing in your own business and becoming entrepreneurial is also a great strategy, but may also involve more hours of work and would definitley require the additional desire to manage professional and staff, supervise HR and payroll issues, insurance claims, and cash flow managment issues.
“Sometimes there is just less hassle to buying shares of a good company, without the multitude of worries that come with running a business. I believe it all depends on a person’s risk appetite, which depends on their state of life and commiments,” Mose says.
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