Discover actionable tips to grow your retirement nest egg.
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Doctors and consumers generally know it’s best to start saving for retirement as much as possible, as early as possible. A 2021 survey by the American College of Physicians member insurance program found about half of early-career physicians, those in their 30s and 40s, were behind where they would like their savings portfolio to be.
In 2021, inflation forced Americans to reconsider the value of a dollar, now and in the future. In the 12 months from January 2021 to January 2022, the Consumer Price Index for All Urban Consumers rose 7.5%, according to the federal Bureau of Labor Statistics. Doctors were left wondering how to put more money in their pockets to cover rising costs in the future.
Remarking on the ratification of the U.S. Constitution, Founding Father Benjamin Franklin noted that “in this world, nothing is certain except death and taxes.” Physicians spend their careers helping patients fight against the former. For their own financial health, they should consider ways to fend off the latter.
Discover actionable tips to grow your retirement nest egg.
Identify tax minimization strategies well suited for you and how to use them.
Understand the benefits and steps required to personalize your financial planning.
MEET THE PANELIST
Alexis E. Gallati, EA, MBA, M.S. Tax, CTP, founder and lead tax strategist at Cerebral Tax Advisors of Knoxville, Tennessee. Gallati is the author of the book “Advanced Tax Planning for Medical Professionals” and has written for Medical Economics®.
Reducing tax burdens puts more money
into physicians’ savings
Taxes are one of the biggest expenses physicians will have throughout their careers.
Failing to plan for them is one of the biggest mistakes they can make, says Alexis Gallati, EA, MBA, M.S. Tax, CTP, the founder and lead tax strategist at Cerebral Tax Advisors of Knoxville, Tennessee.
To start, there are two ways to save money.
Defense is cutting expenses and spending less. That is helpful but goes only so far, Gallati says.
Going on offense means creating a plan that reduces tax burdens to put more money in physicians’ pockets to make more money.
Gallati referred to the golf maxim: Drive for show, putt for dough. “Tax planning is definitely putting for dough,” she says.
Physicians should have a healthy respect for the Internal Revenue Service (IRS). Unwarranted fear and “audit paranoia” can be a huge mistake, Gallati says.
Audit rates are at historic lows. In 2019 the overall rate was half of 1% and the IRS tends to target small proprietorships in cash-heavy industries, Gallati says.
“The truth is, most experts say it pays to be aggressive and that’s because overall audit odds are so low that most legitimate deductions aren’t likely to wave red flags,” she says.
Physicians can consider forming their own small business entities. Most start as a sole proprietor and then grow, Gallati said.
The IRS recognizes partnerships, S corporations and C corporations. Each has its own regulations but doctors should approach them with the same goal of minimizing taxes paid. An S corporation can minimize self-employment tax and is a well-established, mainstream planning strategy for tax purposes. S corporations also have a low risk of being audited: Just 2/10 of 1% of S corporations and partnerships were audited in 2019.
Managing money through retirement is a cycle with three phases: the seed, the growth, and the harvest.
The seed is the initial investment in an asset or an account. Growth happens over time.
The harvest is money used to live on during retirement.
“You can pay or avoid taxes at each of these points depending on the nature of the assets you buy or the account you invest in,” Gallati said. “Which place is the best? Well, it depends on a lot of factors, most importantly including where your personal tax rates are at any particular point in your cycle.”
Younger physicians may have situations different from those at retirement age or beyond it.
Different investments – taxable stocks, traditional or Roth IRAs, nonqualified annuities, cash value life insurance, health savings accounts – have different tax advantages at each stage.
For example, with a traditional IRA, the seed and growth are tax free. But withdrawals — the harvest — are taxable.
Gallati says health savings accounts are a personal favorite because the seed, growth and harvest all are tax free for paying for qualified medical expenses.
Each investment needs research, but tax breaks may be available on the seed, growth or harvest. Take the break when it’s the best, Gallati says.
“You basically have to figure out where you’re at in your finances and you have to play a little bit of mind reader and have your crystal ball to know what tax rates are going to be like,” Gallati says. “Different people have different philosophies when it comes to what would end up being best.”
A home office — with family as staff — can be part of a physician’s retirement savings plan.
Hiring children is a favorite strategy, Gallati says, because it allows doctors to put away money for retirement for themselves and for their children.
The employees, 7 years and older, must earn reasonable wages and have their own job descriptions, time sheets and bank accounts. With the right amount of savings, time and investment growth, children may be millionaires themselves when they retire, Gallati says.
Home offices, along with mileage and meals, can serve as tax deductions for physicians.
Solutions & takeaways
Building a retirement nest egg consists of defense – cutting expenses – and offense – saving money to make money.
Physicians should respect the IRS but shouldn’t be afraid of creating a legal tax plan that minimizes taxes to maximize retirement savings.
Sole proprietorships, partnerships and corporations are small businesses that can help physicians reduce their income tax burdens.
Different investments offer tax breaks at different times – some when they start as seeds at the time of investment, some when they are ready for harvest, or withdrawal.
Consider hiring children to maximize retirement savings for yourself and for them.