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How to Save for Retirement with Asset-protected Tax-deductible Dollars


In order for a physician business owner to survive and thrive, they must focus on three tax issues: deductions, asset protection, and flexibility in plan design.

Many of us are consumed by the potential negative effects of "death and estate taxes" because of the estate tax repeal. But what about "life and income taxes?" Shouldn't we be just as concerned about President Barack Obama's pledge to raise income-tax rates on top earners?

High-income earners have been hit with a double whammy in the last two years - they have lost money in the stock market and they face the prospect of combined federal and state taxes that exceed 50 percent. My telephones have been ringing off the hook with clients who are justifiably alarmed. Entrepreneurs, business owners, consultants, professional service groups, people with significant real estate portfolios and sole proprietors filing Schedule Cs can and should do something to mitigate the effects of increasing income tax rates.

As a physician business owner, if you want to survive and thrive you need to take every deduction you can. You need to look at absolutely every opportunity to save money and minimize your taxes. It could make the difference between going out of business and losing everything you have built and worked for, versus surviving the current tough environment with a solid base to build upon.

The three tax issues that impact us all that these plans provide:

  1. Substantial tax deduction, even bigger next year; allows for no risk investing. The tax savings creates the biggest return there is no need to risk your assets;
  2. Asset protection (all assets inside the Insured defined benefit plan are protected from creditors pursuant to current federal law);
  3. Flexibility in plan design (who knows whether or not they will overhaul medical reimbursement). Where there are partners they can have different budgets and goals. The practice can put a plan in even where some partners participate and others do not.

While the likelihood of retroactive estate tax repeal appears likely, there will also most likely be an increase in income tax. If earners cannot save because their incomes are being eroded, then the capital base that forms the foundation from which to amass, build and grow an estate will not be a concern. It simply will not exist.

Right now doctors need to be concerned about further income erosion as the federal government threatens to increase our income taxes. What can they do about it?

There are opportunities for high-income earners to realize significant income tax deductions and tax favored asset accumulation using government approved insured defined benefit qualified retirement plans. These plans are of particular interest to those seeking tax deductions beyond their IRA and/or 401(k)/profit sharing plan limits.

Recent changes in pension tax law allow entrepreneurs, business owners, consultants, professional service groups, people with significant real estate portfolios and sole proprietors to make significantly larger contributions to a retirement plan design consisting of both a defined contribution plan (401[k] and profit sharing) and an insured defined benefit pension plan (a retirement plan consisting of managed assets and guaranteed life insurance product).

This plan design is attractive for a high-income earner in their early to mid 50s who wants to accelerate retirement savings over a limited time period (five to 10 years). Depending upon age and financial circumstances, high-income earners may contribute $150,000 or more annually in a plan that is fully tax-deductible and asset protected.

By way of example, a 52-year-old doctor was contributing $54,500 to her combined 401(k)/profit sharing plan, which is not very attractive for a client making in excess of $500,000 per year. In contrast, her potential income tax deductible contribution into an insured defined benefit pension plan was about $192,000, plus $22,000 to her 401(k), and $14,700 to a profit sharing plan for a total contribution of $228,700. Pursuant to new pension guidelines, eligible employees (if any) are provided a required benefit inside a profit sharing plan that is funded by the company. Life insurance in the plan generally provides more contribution potential for the doctor in relationship to the employees.

Professional service groups with clients seeking advice or recommendations about income tax savings need to be aware of the significant potential income tax savings available through a defined benefit plan. These savings could mean the difference between creating wealth and only dreaming about it.

Dana Goldinger Hollinger, JD manages Dana Goldinger Group, which focuses primarily on advanced wealth and business succession planning. A former attorney with experience in real estate and finance, she specializes in designing life insurance policies and capital transfer strategies that help to protect and maximize the assets of successful entrepreneurs and other high net worth individuals.

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