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Five ways physicians can build wealth

Medical Economics JournalJuly 10, 2018 edition
Volume 95
Issue 13

Preserve earnings, bolster tax savings and better plan for the future.

In advising doctors on how to optimally build and protect their wealth, financial specialists like me often make use of highly targeted “off-label” strategies for trusts, IRAs, 529 plans, health savings account and other vehicles with the objective of enhancing the effectiveness of these tools.

The following five strategies can be particularly advantageous in helping doctors preserve what they earn, bolster tax savings and better plan for the future.

1/ Cash Balance Plans
Simply put, cash balance plans offer physicians the opportunity to take larger tax deductions and accelerate their retirement savings. Cash balance plans are actually a type of defined benefit plan, but instead of requiring complex calculations that provide vague projections of retirement benefits, cash balance plans are more predictable and easier to understand.
These plans can be used by smaller practices, including sole proprietors, as long as the cash flow needed to cover the funding requirements remains fairly consistent each year. Combined with more commonly used 401(k) plans, the two together can allow for generous pre-tax contributions of $150,000-$250,000, resulting in significant tax savings. Executing these combined plan design will require third-party administration by a licensed actuary.

2/ Backdoor Roth Contributions
Since they were created in 1997, Roth IRAs have been the darling of retirement savers due to their tax-free treatment of both growth and distributions. Roth IRAs’ income eligibility limits, however, disqualify most physicians from taking advantage of them. However, a backdoor Roth IRA provides a workaround.
Using this method, you can make a non-deductible regular IRA contribution (non-deductible because of income limits)-and the following day convert those assets to a Roth IRA. This will allow tax-sheltered growth on those assets, plus no tax on withdrawals. 
With these benefits come several requirements. Among them: You must hold the Roth account for at least five years and be at least 59.5 before you can tap the earnings tax-free and penalty-free. The good news is that, unlike traditional IRAs, there are no mandatory withdrawals or required minimum distributions at age 70.5.

3/ Trusts and Family Limited Partnerships
The value of complete peace of mind can’t be understated. Trusts provide the ability to shelter assets from creditors above and beyond tort reform’s protections.
Family limited partnerships are an alternative to trusts that are favored by many physicians. Along with protecting assets, these partnerships are useful in estate planning, as they provide a discounted valuation of the assets contributed. These discounted valuations can be particularly beneficial for gifting strategies, effectively allowing you to contribute approximately $20,000 per beneficiary, rather than $15,000-without having to file a gift tax return.

4/ 529 Savings Plans 
For those of you with children, college savings plans are a great vehicle for saving money for their education. With the new tax law, they can also be used to pay for K-12 private school tuition (up to $10,000 per year). These accounts are funded with after-tax contributions, with no additional taxation on the growth of the assets if used for qualified educational expenses. 

The annual maximum contribution that can be made to a 529 without filing a gift tax return is the annual gift exclusion amount ($15,000 in 2018). But you can contribute five years’ worth of gifts at one time ($15,000 x 5= $75,000). Unused funds can also be transferred to your other children’s 529 accounts. Finally, although the assets you deposit into a 529 account aren’t included in your estate, they don’t leave your control for estate-planning purposes.

5/ HSAs
Those enrolled in a high-deductible health plan can establish a health savings account (HSA), which permits annual tax-free contributions of $3,450 for individuals or $6,900 for families (with an additional $1,000 contribution for those age 55 or older)-with no taxes incurred when withdrawn for payment of qualified medical expenses. Most HSA custodians will allow account holders to invest their HSA funds in excess of certain account minimums. These accounts possess the “holy trinity” of tax benefits: tax-free contributions, tax-free growth, and tax-free distributions if used for qualified medical expenses. While working, you can pay medical expenses out of pocket, watch the assets grow, and use them to pay for this spending post-retirement.

Craig W. Eissler, MBA, CFP, is a wealth adviser with Halbert Hargrove based in Houston.

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