Travis Flandermeyer, MBA and Phil Messuri, MS, CFP®, of The Doctor’s Financial Resource understand the acute pressures doctors in our state face today—chief among them the demanding schedules faced on a daily basis.
Today, we’d like to talk to you about a topic that we promise will be worth your time: deferred income.
For years, The Doctor’s Financial Resource has provided financial and retirement planning for doctors in New Mexico, with a focus on individual investment planning and life and disability insurance guidance. This insider’s perspective gained from working in medical offices and or working with medical clients has proved invaluable.
Through our consultations, we’ve found that many doctors have not taken full advantage of their opportunities to defer income—and maximize their savings—by using a few straightforward strategies.
Let’s start with the basics and address a common misconception: that the expenses of setting up a deferred income plan are daunting. This simply isn’t the case. Low-cost options with very little up-front administrative expense, such as a SIMPLE IRA, offer low barriers to entry with many of the benefits that come with more complex 401(k)s.
The administrative expenses may not make sense for a relatively young practice that cannot yet contribute the maximum limit on a 401(k). As mentioned, the SIMPLE IRA is a deferral option that has low, if not zero, administrative costs, and is easy to set up. The maximum contribution to a SIMPLE IRA in 2016 is $25,000, or $28,000 for participants over age 50.
When your practice is fully maximizing its contributions to the SIMPLE IRA and you could contribute more, you may want to consider graduating to a 401(k). Administrative expenses are higher and it may require an annual tax filing, but your ability to customize and defer more money are factors to consider that can offset the administrative fees. For example, Practice owners have some control over the structure of their 401(k)s and can define contributions to employees and even disproportionally reward specific lower-paid key employees. They may also structure the plan to allow for maximum contributions by the business owner or highly compensated participants. The maximum possible contribution to a 401K in 2016 is $53,000, or $59,000 for participants over age 50.
For the practice that is already maximizing its 401(k)—and particularly for doctors who are within 10 years of retirement—a defined benefit plan may also be worth discussing. A defined benefit plan is more complex than the other options discussed; however, it also has higher annual limits depending on age and income of the participants (pre-tax contributions can exceed the other strategies mentioned, in addition to what may be contributed to a 401(k)).
This type of plan, as well as 401(k)s, are often overlooked by advisers. If your advisers are not fully exploring all of the ways to reduce your taxable income and tax liability, then we recommend proactively researching your options. The Doctor’s Financial Resource would be happy to set up a meeting to discuss your options on an exploratory basis, without commitment or expectation. Please feel free to contact us if you have any questions or would like us to help you determine if there are any further opportunities to help you save your hard-earned money.