Retirement Planning for Doctors: Why It’s Tougher Than You Think

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8 steps you should be taking to retire on time with the lifestyle you desire

It may be hard to believe that retirement planning can be tough for doctors – after all, the medical profession is one of the most lucrative careers one can choose. But there are more than a few sob stories of doctors who retired and then were forced back into practice by unforeseen financial difficulties.

Here’s why: Despite their high income, many doctors don’t max out their retirement plans and save enough for the future. Since physicians don’t typically hit their earning stride until their mid-30s, many get a late start on retirement saving. And during their first 10 years of practice – when compound investment growth makes the biggest impact on retirement accounts – doctors are burdened with student loan payments, the cost of establishing a practice, childcare expenses, and mortgage payments that make maximizing contributions to retirement plans a challenge.

After years of low-income internships and residencies, many doctors also feel entitled to big rewards when they finally start earning an attending’s salary. But overspending on fancy cars, big houses, and the latest gadgets drastically impact what’s left to sock into retirement accounts.

At the same time, it can be hard for young doctors – fresh from their residencies and excited about their new careers – to recognize the potential for future burnout that causes more than half of physicians to chase early retirement and wish they had saved more. A Becker’s Hospital Review report asserts that doctors are 15 times more likely to suffer burnout than any other profession.

But no matter the reason for not saving enough, the clock is still ticking. Let’s take a look at eight steps doctors should be taking to ensure they’re ready to retire on time while maintaining the lifestyle they desire.

  1. Set a realistic goal. It may be hard to envision retiring from a job you just worked so hard to land. But in order to retire in the manner you choose, you need to set a date so you can understand how much you need to save to meet it. That means thinking through the where what, and when of retirement. If, later on, you decide to work for longer, your savings will simply err on the right side of the equation.
  2. Track your monthly spending. A surprisingly large number of new retirees have never used a budget or measured what they spend. But knowing how much goes out every month isn’t just important – it’s essential. Keep a spending journal or use software like Mint.com to track monthly spending. Remember to include what you spend on credit cards and all the personal expenses you run through your practice, from medical insurance to cell phone bills. Chances are you’re going to be surprised to discover what you actually need to maintain your lifestyle – and it’s better to be surprised when you’re still working.
  3. Consider other factors that will drain your savings. Now that you know how much income you’ll have and what you’ll spend, you’re all set, right? Wrong. If inflation is only 3 percent, your cost of living will double during the first 25 years of your retirement. The deferred taxes on IRAs, 401ks, and annuities may also gobble a third of what you withdraw from your retirement accounts. Long-term care is another added cost that’s important to consider. All of these factors should be included in your retirement plan.
  4. Erase your debt. Debt-free except for your mortgage is still a lot of debt. Your retirement income may vary from year to year, but your mortgage remains constant – and that can lead to trouble. Refinancing a mortgage – or getting a new one if you move – can be tough after you retire. Choosing to drive your debt to zero before you retire is always a wise course of action.
  5. Review the cost of running a practice. If running your practice is draining your finances and making it hard to save, it’s time to see where you can cut back. Perhaps a smaller space can help the practice justify its costs. Merging with another medical professional in the community is also an avenue to consider, as splitting the cost of running the business will let you save more.
  6. Plan for family emergencies. Of course, you want to be there when your family needs you – and there’s a good chance that at some point, aging parents or adult children may call for help. By carefully considering what support could be needed for both generations of your family in advance and padding your nest egg accordingly, emergencies will be less likely to knock your retirement off track.
  7. Don’t let a broken promise change the game. If you intend to rely on income from sources other than your own savings for retirement, you need to plan for the possibility that they may not come through as expected. Changes can be made to Social Security and Medicare, and financially-strapped organizations may fail to deliver the full pensions they promised. Your retirement planning needs to ensure that a broken promise doesn’t leave you in financial straits.
  8. Focus on long-term benefits. If you don’t have time to keep track of the market, individual stock trading and high-risk investments aren’t the best fit. Instead, invest as much as you can into available retirement accounts, such as 401(k)s, health saving accounts (HSAs), and individual retirement accounts (IRAs) where you can choose options that offer long-term gains. Automating payments into these accounts eliminates the temptation to spend the money instead of saving it.

Of course, a successful retirement plan not only helps you save money but saves on taxes as well. Here are five tax-savvy options for doctors to consider that can form the foundation of a solid retirement plan:

  • Tax-deferred retirement plans for doctors who are employees. Doctors who receive a W2 showing wage or salary can defer income by maximizing contributions to a workplace retirement plan, such as a 401(k) or 403(b). These plans allow account balances to grow tax-deferred and qualified distributions are taxed as ordinary income when withdrawn during retirement – when the doctor is most likely in a lower tax bracket.
  • Tax-deferred retirement plans for self-employed doctors. Self-employed doctors and doctors who receive income reported on Form 1099 – including those who moonlight – have other options for retirement savings. These include SEP-IRAs, which enable participants to contribute more tax-deferred income to a traditional IRA than they could outside the plan; and one-participant 401(k) plans, which mirror traditional 401(k)s but are for single-owner practices or practices that only employ an owner and spouse.
  • Tax-qualified pension plans for physician employers. Doctors who are self-employed may establish defined benefit (DB) plans, and doctors who are employees may be fortunate enough to work for an organization that offers one. Traditionally known as pension plans, DBs offer a fixed, pre-established benefit for retirement. Layering a defined benefit plan on top of a defined contribution plan like a 401(k) can enable doctors to substantially increase their own ability to save for retirement while costing little in additional contributions to other staff.
  • Tax-advantaged personal retirement accounts for doctor families. Doctors who receive earned income from employment and their spouses who are younger than 70 ½ may contribute to an IRA. Keep in mind, however, that contributions may be non-deductible or partially deductible if the doctor or spouse are covered by workplace retirement plans as well.Options for tax-advantaged personal retirement accounts include traditional IRAs, spousal IRAs, and HSAs. Many doctors exceed income limits for Roth IRAs, where earnings and withdrawals are tax-free. But they may be able to make backdoor contributions by first contributing to a traditional IRA and then converting it to a Roth IRA, although that requires careful planning to avoid unnecessary taxation.
  • Tax-efficient investments in taxable accounts. Doctors who max out contributions to their tax-advantaged retirement accounts can continue to invest in securities that are inherently tax-efficient. That includes tax-exempt bonds that can be federally or doubly tax-free if owned by a doctor who lives in the state where the bond was issued, as well as low-cost index funds, mutual funds, and stocks from U.S. corporations and certain foreign corporations that are taxed at favorable capital gains rates.

Practicing medicine is rewarding, challenging, and, in many cases, exhausting. Prioritizing savings today ensures that you can retire when you feel ready without making major adjustments to your lifestyle. A certified public accountant can help a physician design and execute a plan for a sustainable, secure, and comfortable retirement that helps them enjoy their golden years.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact on their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning, and to find out how we can help your business exceed your expectations.

A Doctor’s Guide to Estate Planning

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Learn how to create and structure an estate plan specific to physicians

A good and specific estate plan is especially crucial if you’re a doctor, for a few different reasons. As a physician, not only do you need to consider protecting your often-larger estate but you also need to ensure your medical practice is protected along with your assets, both before and after your death.

Here are the basics of what physicians need to know about estate planning.

Estate plan considerations for doctors

There are a few different purposes of creating an estate plan, no matter your profession. These include:

  • Tax planning, helping to minimize estate or inheritance taxes paid out at the time of your death
  • Protection of assets from the long and often expensive probate process
  • Ensuring assets are distributed according to your wishes at the time of your death

For doctors, an additional concern is structuring your practice properly. One thing every physician needs to think about is medical malpractice coverage. Doctors aren’t protected from this liability just by creating an LLC or corporation, unlike other businesses. When your coverage isn’t enough to actually cover malpractice costs, you are personally responsible for those costs. If that were to happen, whoever is suing you or creditors could then go after your assets – even after you die.

Research from the American Medical Association shows that over a third of doctors have been sued at some point during their careers, so this is nothing to shrug off.

Another consideration that’s especially important for physicians is what will happen to your medical practice if something happens to you, whether you die or become incapacitated or disabled.

Let’s look at how these considerations can be addressed with a good estate plan.

What will an estate plan look like?

An estate plan sets forth a variety of wishes that you create based on what you want to happen after you die or become incapacitated. The basic components include:

  • Choosing and naming beneficiaries
  • Appointing individuals to control assets
  • Naming guardians for minor children

These steps ensure that your estate doesn’t enter probate. But what does that mean, exactly?

1.  A will isn’t always enough

If you have failed to create a will (also called having died “intestate”), or if a family member or friend decides to contest your will, your estate will enter probate court. This means that the court will make decisions about how your assets are distributed, and the court will name an executor.

This process can take many months and sometimes up to a couple of years, especially for the larger estates that doctors often leave behind. According to research conducted by EstateExec, the average time to settle an estate was 16 months in 2018. And very large estates of over $5 million took almost three times as long.

Court fees will likely be taken out of the estate when all is said and done. Your already grieving family members will have to deal with this long, complicated process, and emotions and conflict can run high.

Unfortunately, a will on its own isn’t enough for your estate to avoid the lengthy probate process.

2.  Setting up a trust

Setting up your estate plan properly will help your estate avoid probate. Consider setting up a living trust, even if you have already created a detailed will. A trust further protects your estate from entering probate because trusts are much harder to contest. Those wishing to contest a trust would have to show that either a) you were incapacitated when you set forth your wishes or that b) the documents are inconsistent or flawed in some way.

Living trusts are managed by an appointed trustee and, for doctors, this should be a trustee that can also manage your medical practice temporarily upon your death until it’s sold.

There are two types of living trusts:

  • Revocable trusts. A revocable trust is one that you can continue to alter or revoke while you’re still alive. Upon your death, the trust becomes irrevocable, meaning your beneficiaries cannot make any changes to your wishes.
  • Irrevocable Trusts. If you set up an irrevocable trust, you will give up control of your assets while you’re alive by setting a plan in stone. You essentially give up your rights of ownership to the trustee.

While there are benefits of each, there are a few important downsides as well. With a revocable trust, you don’t have to pay gift taxes on transfers, but you don’t get other tax benefits. And because you still own the assets in a revocable trust, creditors could go after those assets if you were to be sued for malpractice.

With an irrevocable trust, you may have to pay gift taxes on transfers, but you get many more tax benefits, including avoiding the capital gains tax. Perhaps more importantly, because you don’t own the rights to the funds in irrevocable trusts anymore (as they’re managed by a trustee), creditors can’t go after those assets in a lawsuit. And they’re not included when determining estate taxes.

3.  Compiling cash and liabilities

Another good idea estate planning practice for physicians is to create a net worth statement and list of life insurance policies. This list is just a compilation of your assets and your liabilities – everything you own and owe. This will include bank accounts, cash, securities, real estate, student loans, credit card debt, mortgages, and more. Your net worth is determined by subtracting your liabilities from your assets.

Creating this list, along with gathering copies of your life insurance policies, will better allow those taking care of things after you’re gone to determine things like taxes owed if any.

Understanding the new tax law

It’s important to keep up with tax law changes as well when estate planning, as these affect how much estate, death, or inheritance taxes will be incurred. On a federal level, tax planning isn’t as big of a concern because few doctors have had to pay estate taxes and, with increased exemptions recently implemented, this is even more common. But some states impose their own taxes in these areas, so make sure you know your state’s tax laws.

At the beginning of 2018, the Tax Cuts and Jobs Act was put into place. There are a couple of points to know as you’re creating your estate plan.

First, the act doubled the federal estate, gift, and generation-skipping transfer (GST) tax exemptions – now up to over $11 million and double that if you’re married – increasing based on inflation until 2025. (At the end of 2025, these exemptions will revert back to $5 million, indexed for inflation.) This means that until the exemptions “sunset” on December 31, 2025, you can take advantage of higher gifting and asset transfers without transfer tax consequences.

Unless your estate is above the exemption threshold, you will not owe federal estate tax. (The gift, estate, or GST tax rate, is still 40 percent – so avoiding it is a big deal.) This increased exemption is a huge win for physicians with large estates.

But if you do have an estate that’s still over the exemption amount or if you live in a state that implements a lower exemption, there are still steps you can take with estate planning to help lower your taxes. One strategy is to give away assets before you die. You can give away excess funds to family members or charities without using any of your estate tax exemption. This helps decrease your estate size for tax purposes.

An irrevocable trust, mentioned above, can also help. You can transfer assets into the trust that are then not included in your estate and can be only be used according to the trust agreement.

It’s always a good idea to work with a legal professional who has specific expertise and a tax advisor when estate planning. Get in touch with our team at Provident CPAs and Business Advisors today. We can help you minimize the amount of tax you pay as you determine your succession planning.

The TCJA is in Full Effect: How Physicians Can Keep More Money

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The new tax law made it easier for many doctors to pay less, but not everyone will benefit. From charity to children, here are the decisions which could affect how much income doctors retain in 2019

Doctors are frequently exhausted by their duties and find focusing on their taxes difficult – and MD Magazine highlighted just how vulnerable physicians can be when it comes to paying out come April: “Experience shows that most doctors overpay in taxes and sometimes pay in excess of $125 for every $100 they were required to pay according to the law.” Poor choices and lack of information may cost thousands of dollars in potential tax savings under the current law.

The law in question is the Tax Cuts and Jobs Act (TCJA) of 2017. It does have its critics but for the most part, the TCJA was welcomed by the majority who would pay less in taxes. Doctors are part of that crowd but on closer inspection, the TCJA wasn’t a windfall for every physician.

For example:- doctors in the highest tax states such as New York or California lost their state income tax deductions. This was a result of the State and Local Tax deductions being limited to $10,000 for joint filers. Physicians with the “wrong” zip code ended up with an increase in tax bills.

This is important since our two example states top the national rankings for the most physicians employed in America, according to the Bureau of Labor Statistics. And beyond those areas, an even greater number of physicians could benefit from sharpening their tax awareness in 2019.

Consider how much you earn vs. how you make it

The 1099 tax bracket of locum tenens trumps a W2 wage. Since W2 earnings are the highest taxed of the two, it may be in your best interests to become a free agent (this needn’t be a total career shift since you may be able to form a small business while serving with a primary employer).

There are other advantages of going your own way can bring. You may be eligible for an income pass-through deduction if your total taxable income is less than $207,500 or $415,000 if married, which could qualify you to receive a tax deduction of up to 20 percent of your business income.

You will also be able to capitalize on tax-deductibles for work; a long list that could save you plenty. Some self-employed physicians choose to employ their family members in their practice. This decision can also go some way to saving on income tax, especially if the employees are children.

Tax strategy for homeowners

Doctors may want to think twice before refinancing in 2019. The TCJA impacts deductions on mortgages obtained after Jan. 1, 2018, meaning only the interest on the first $750,000 of debt is deductible. Owning your home does offer other perks which can save on taxes, however.

Advanced tax strategy can leverage U.S. Tax Code Section 280A(g) and let you rent out all or part of your home, tax-free, for two weeks every year. The same rule allows physicians to partially or wholly rent out their property to their business, allowing for tax-free income and a business tax deduction.

How the TCJA impacts saving for children

Doctors who’ve opened a custodial account for their children as either a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) will lose out on tax. This defeats the original bonuses of such accounts. Parents who chose these would sidestep the attorney fees associated with establishing a trust, while the assets passed to the child enjoyed the lower tax rate for minors.

Opening a 529 that ensures that funds go toward your child’s future education could be a suitable alternative. It’s tax-free at the federal and state level and tax-deferred as it grows. The contributions themselves aren’t deductible, but any expenditures for qualifying educational purposes are (up to $10,000 a year for attendance, tuition, or enrollment).

How to maximize charitable donations

The standard charitable deduction is currently $24,000 for married physicians. You’re best advised not to make regular donations of smaller amounts to your favorite cause; rather, one large donation with a break in-between. Another option is donating securities from a taxable account. There’s no capital gain on the sale and the gift is tax deductible.

Your individual needs affect your strategy

You can generally assess the TCJA’s impact by using this tax calculator from the Tax Foundation which allows you to create a custom scenario to see how tax reform will affect you or your family. Mortgage, Trust, and 529 options have pros and cons dependent upon your present circumstances and future goals. This is what makes speaking to a qualified tax advisor so important.

Tax law is notoriously dense and it’s subject to changes that many individuals don’t always know about. A qualified CPA will always be abreast of revisions and use this knowledge to save you every penny they can.

Provident CPA and Business Advisors offer a wide range of services in tax planning, accounting, and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.

Should You Restructure Your Medical Practice After the New Tax Law?

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Converting from an S corp to a C corp isn’t a decision to make lightly

Now that the dust has settled from the rollout of the Tax Cuts and Jobs Act (TCJA), medical practices structured as pass-through entities are facing a dilemma: Since the tax reform significantly reduces the tax rates imposed on C corporations’ taxable income, is it beneficial to switch your structure?

The answer depends on several factors.

Since the release of the Internal Revenue Service’s (IRS) “check-in-the-box” regulations in the 1990s, U.S. businesses can choose whether they want to be taxed as C corporations or pass-through entities like S corporations, sole proprietorships, limited liability companies, or partnerships, subject to certain requirements. A wealth of variables may factor into this important decision, including state laws, creditors’ rights laws, securities laws, and, of course, tax laws.

Traditionally, doctors have preferred pass-through entities, with only a quarter of medical practices filing as C corps. That’s largely because of the double taxation that plagues C corps – once at the corporate level and again for any dividends reported on a doctor’s individual or joint return.

But the new tax reforms offer an enormous tax break for C corps – slashing the old maximum tax rate of 35 percent to a flat 21 percent. The TCJA also repealed the corporate alternative minimum tax (AMT) intended to ensure that corporations pay a minimum amount of tax by limiting or eliminating certain deductions, credits, and other tax preference items.

Pass-through entities also received a significant tax break with a 20 percent Qualified Business Income deduction that reduces the top federal tax rate on their income from 37 percent to 29.6 percent. Profits from pass-through entities are taxed according to the owner’s personal tax rate.

But here’s the thing: the QBI deduction is only temporary – it’s on the books through the end of 2025 – while the C corp tax relief is a permanent cut. And, of course, a 21 percent tax rate is better than 29.6 percent.

Also, doctors who own medical practices – as well as other skilled service providers – can only qualify for the pass-through break if they earn no more than $415,000 a year for a married couple filing jointly or $207,500 for a single filer. Skilled services are defined as any trade or business where the principal asset is the reputation or skill of one or more if its employees or owners.

Owners of pass-through entities who don’t fit the new law’s definition of a specified service trade or business aren’t subject to the same income limits to qualify for the tax break.

The challenges of C corps

So, what’s the hesitation about switching from a pass-through entity to a C corp? For one, there’s still that pesky matter of double taxation to consider. At C corp status, income is first taxed at the entity level rate of 21 percent, and then dividends are taxed to the individual at up to 23.8 percent. Once both taxes are paid, the effective tax rate of a C corps can actually be higher than a pass-through entity – especially if the owner can claim the QBI deduction.

It is, however, worth noting that C corp dividends are only taxed in the year they are paid. That means substantial tax savings could await medical practices that convert to C corps if they invest a high percentage of their profits back into the business as equipment or other property as part of a long-term strategy, instead of distributing them as dividends.

C corp structures also tend to make practice sales more problematic – something to consider as more and more doctors increasingly give up their independence to join larger groups or hospital systems. The double taxation generally makes asset sales by corporations less tax-efficient for sellers. If it is likely that your practice will be sold soon, retaining the pass-through structure may be wiser than converting to a C corp.

Another important consideration is that laws are never “permanent.” While the reduction to the maximum corporate tax rate was written for longevity, it could change, for instance, if Democrats win back the Senate and vote through alterations. At that point, converting back to a pass-through entity from a C corp could be quite complex.

Legal loopholes that lower your taxes

Skilled tax advisors may be able to find legal ways to help high-income doctors qualify for the lower pass-through tax rate. For instance, they may consider converting their office building into a real estate investment trust and charging themselves rent, thus reducing their income.

Of course, there also can be workarounds to avoid the double taxation of C corps for doctors and other professional service providers whose income is too high to qualify for the pass-through deduction. One tactic, while complex, is slicing the business into two or three separate entities to take advantage of the reduced corporate rate and other aspects of the new law. For instance, real estate or medical equipment could be owned by a C corps while practice income stays in an S corp to avoid being double taxed.

Practice owners can also extract money from a C corp by taking advantage of an array of tax-free benefits that are not generally available in pass-through entities. In a C corp, benefits such as health insurance and educational assistance are paid with pre-tax dollars; in an S corp, individuals pay taxes on their income before paying for benefits.

In fact, benefits costs are treated as wages for S corp owners, so they don’t interfere with their ability to claim the self-employment deduction on their personal returns.

There’s also a special benefit for owners of small C corps to exclude most – if not all – gains from the sale of corporate stock. Although this perk has existed since 1993, the previously high tax rate of C corps prevented most doctors from choosing this structure and taking advantage of this benefit.

Making the change

Changing from a pass-through entity to a C corps is relatively easy – in fact, if your practice is based in a state that allows for “statutory,” or streamlined, conversions, it can take less than a week if the process goes smoothly. Only about 15 states don’t allow this practice, including Arizona, New York, and Pennsylvania.

In most cases, the transformation is tax-free – but special circumstances could apply that could lead to a taxable event, so it’s wise to consult with a tax advisor before converting. That said, the cost of hiring lawyers and accountants to help with the process can add up; thus, it’s also important to tally your potential savings ahead of time to make sure you won’t wind up spending more money than you save by restructuring.

Also keep in mind note that the tax-free transition door only swings one way, so doctors need to do their homework and make sure restructuring is the proper path before walking through it. Converting back to a pass-through entity if you’re unhappy with the results could come at a hefty tax price. And read this carefully: The IRS only allows one change in your tax election every five years – unless the previous election was for a newly-formed entity or more than half the business’s ownership interests have changed.

So, what’s the right answer?

Switching from a pass-through entity to a C corp is not a decision to make lightly, and ultimately also involves many factors that have nothing to do with taxes. But the major changes enacted by the TCJA can make this option worth exploring under certain circumstances – especially for medical practices that don’t qualify for the 20 percent QBI deduction or want to maintain a long-term re-investment strategy in the business.

Of course, every medical practice will have unique circumstances to consider before contemplating such a significant change. Qualified tax advisors can help you carefully consider the pros and cons of converting, conducting extensive calculations and projections that help you make the best long-term choice for your practice.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact on their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning, and to find out how we can help your business exceed your expectations.