Physicians Must Consider Non-Traditional Deferred Compensation Strategies
Released on = January 26, 2007, 3:10 pm
Press Release Author = Shazaaam
Industry = Healthcare
Press Release Summary = Do you ever get the feeling that medicine is nothing like what it was 20 years ago? One of the most common comments we hear from our doctor clients is "Being a doctor is so much more about being a business person and doing paperwork than it is about helping people who are sick."
Press Release Body = PHYSICIANS MUST CONSIDER NON-TRADITIONAL DEFERRED COMPENSATION STRATEGIES
David B. Mandell, JD, MBA Keith L. Mohn, CLU, CHFC
Do you ever get the feeling that medicine is nothing like what it was 20 years ago? One of the most common comments we hear from our doctor clients is "Being a doctor is so much more about being a business person and doing paperwork than it is about helping people who are sick."
As authors of two books on financial planning, including one specifically for physicians, we have had the opportunity to speak with thousands of doctors of various ages over the past decade. What we have seen is that two doctors of the same specialty with similar incomes can have very different income levels in retirement. Why? Three reasons why two physicians may have very different qualities of life in retirement exist. They are:
1. Devastating Incident (Lost lawsuit or divorce)
2. Poor Investment (Bad limited partnership, medical center, or real estate endeavor)
3. Lack of Attention to Taxes
We wrote Wealth Protection, M.D. to help physicians protect themselves from lawsuits and divorce. Since this small article space does not afford us the space to adequately discuss the importance of, need for, and strategies of asset protection planning, we are offering a copy of the book to all subscribers for free (plus $8.95 shipping and handling). Once you protect yourself from lawsuits, you can address point number 2 - don't make any terrible investments. Unfortunately, we have heard stories of dozens of bad investments (Nigerian 419 plans, international currency arbitrage theories, Ponzi schemes, real estate partnerships, and others). Rather than focus on this issues, we would like to focus on point #3 - Taxes.
Taxes and Your Retirement
Though most physicians have a retirement plan of some kind (IRA, profit sharing plan, money purchase plan, 401(k), etc.), the vast majority of doctors fail to utilize other nontraditional tax reduction strategies. In states like New York and California, almost 50% of your income may go to taxes. Once we invest our after tax earnings, we all pay taxes on realized gains, interest payments and dividends. When you consider that one-third to one-half of your earnings go to taxes and then twenty to fifty percent of your investment gains are taken by the IRS, it's no wonder why it seems so hard to save enough for retirement.
What Can You Do?
If you want to increase the amount of money available to you for use in retirement, you have to consider strategies that:
. Reduce income taxes;
. Grow your investment on a tax-deferred basis; and
. May be accessible on a tax-free basis.
Nontraditional Qualified Plans
Everyone has had some experience with traditional retirement plans. What most physicians don't realize is that the IRS actually allows doctors to "Catch-Up" on retirement savings. It doesn't matter if your retirement plan balance is low because of a lawsuit, divorce, poor investment decisions, or because you started saving late in your career.
If you are over the age of 45 and you are behind, you may be able to make a significant tax-deductible contribution to a defined benefit plan. These plans can allow for contributions of $75,000 to $100,000 for doctors under age 50 and can be over $400,000 for 60-year-old physicians who qualify. At these very high contribution limits, you can catch up pretty quickly.
Nonqualified (NQ) Plans
Many doctors want to save for their retirement, but don't want to pay too much for the employees who have to be covered in a "qualified" plan. Because these plans are not subject to the various qualified plan rules, NQ plans take many shapes and forms. Some are explicitly compensation plans that provide some long term retirement benefits and present tax reduction benefits to the key employee(s). Other plans are aimed primarily at a goal other than compensation.
Why NQ Plans Are So Attractive
The outstanding benefit of NQ plans over qualified plans is that NQ plans need not be offered to employees. This means only the doctors who want to participate can, making the costs of these plans relatively inexpensive for the physician-owners. Other benefits include the absence of penalties for withdrawals prior to 59 � and the lack of burdensome compliance requirements. For these reasons, NQ plans can be extremely attractive.
Types of NQ Plans
While we will limit our discussion here to a number of popular types of NQ plans, we hope that this discussion furthers your interest in NQ plans and how they may play a role in your overall financial plan.
1. Compliant Split Dollar Plans
Split dollar plans have been the primary type of NQ plans in the corporate work place for the last 40 years. In fact, nearly all Fortune 1000 companies compensated their key executives with some type of split dollar plan. In the last two years, however, the IRS has changed the rules significantly regarding split dollar plans. Unfortunately, many advisors who do not practice in this area on a daily basis operate under the misconception that split dollar plans are now "dead". Nothing could be further from the truth.
Under the new tax scheme, it is certainly more difficult to implement a split dollar plan for public companies. However, for private businesses, including all medical practices, split dollar plans can still be a viable option. In fact, given the low interest rate environment that we currently enjoy, now is a perfect time to implement a split dollar plan for a medical practice. Physicians can take advantage of this low interest rate (which affects the tax treatment of the structure) and enjoy significant retirement wealth accumulation without offering it to any employees. Thus, we highly recommend that you look into the option of compliant split dollar plan before the interest rate environment changes.
2. Asset Protection NQ Plans
In many circumstances, the central goal of a NQ plan may be asset protection for the practice assets. Nonetheless, the retirement tax benefits accrued for the key physicians are substantial. Most popular in this arena are the plans that asset-protect a practice's accounts receivable (AR).
In these plans, the AR is typically leveraged (in some cases sold). If leveraged, tax benefits include potential tax deduction of the interest on the loan, plus the creation of an NQ investment fund with loan proceeds for the benefit of each participating physician. This way, the AR can be "leveraged" to provide a further retirement benefit for each participating physician, and perhaps to fund a buy-out for physicians when they retire. However, in this type of NQ plan it is crucial that both asset protection and tax issues be properly negotiated. In 90% of the plans that we have reviewed, there are significant pitfalls lurking in such plans. If this type of plan is of interest to you, we encourage you to contact us
3. NQ Plans Involving Outside Vendors
While certainly the rarest type of NQ plan, those involving outside vendors do exist. One that we are familiar with involves a vendor that may purchase AR (as above), provide medical consulting services to medical practices, or may even provide business lending. These transactions are independently evaluated by the physicians and are often extremely beneficial to the medical practice regardless of any NQ plan that may attach to it. In other words, a practice engages an outside firm to provide one of the above services, and as an incentive to do so, these firms will institute a NQ plan for the physician client. While the details of such NQ plans are beyond the scope of this article, suffice it to say that, in the right circumstances, these plans can be a double win for the physicians in the practice - getting the service that they need to run their practice, and enjoy a significant NQ retirement benefit.
Conclusion
Nearly every successful physician should consider a NQ plan. Qualified Plans give a maximum benefit of $40,000 per year, and they must include virtually all employees. This often makes qualified plans extremely expensive for the physicians and does not allow for significant retirement wealth accumulation. NQ plans do not require any employee participation and, therefore, are relatively inexpensive to implement. If building your retirement wealth is an important goal for your financial plan, we highly recommend you investigate options for NQ plans.
For a 40% discount on Jarvis & Mandell's new book, Wealth Protection M.D., or for an audio CD on Asset Protection please call (800) 554-7233 or email info@wealthprotectionalliance.com.
David B. Mandell, JD, MBA is an attorney, lecturer, and author of Wealth Protection, MD. He is also a co-founder of The Wealth Protection Alliance (WPA) - a nationwide network of elite independent financial advisory firms whose goal is to help clients build and preserve their wealth. Keith L. Mohn, CLU, CHFC is a financial consultant and lecturer, and President of Benefits Solutions Group, LLC, in Keego Harbor, Michigan, a full service financial consulting and planning firm specializing in working with high net worth individuals, business owners and medical professionals. Mr. Mohn has been servicing the financial needs of medical professionals since 1983, is a member of The Wealth Protection Alliance and can be reached at 248-681-9320.
Web Site = http://www.benefitsolutionsgroup.biz
Contact Details = Benefits Solutions Group, LLC
Office Address: 3477 Orchard Lake Road Keego Harbor, MI 48320
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