When it comes to retirement advice, most doctors behave like patients. They go to the experts (financial advisors), follow their advice (invest in mutual funds and the stock market), and then stew quietly when their retirement plans don't grow as expected.
When it comes to retirement advice, most doctors behave like patients. They go to the experts (financial advisors), follow their advice (invest in mutual funds and the stock market), and then stew quietly when their retirement plans don’t grow as expected. But what are you going to do about it, right? Presumably there’s not much you can do with retirement funds outside of Wall Street.
The truth is that there is another way. The brokerages and financial advisors won’t be proactive about sharing it because it can cut into their bottom line. However, there is a retirement platform that allows you to use your savings and invest them in assets you actually understand. You know medicine, and you know what it takes to run a successful medical practice. Wouldn’t it be great if you could take your savings and put them into investments that took advantage of that knowledge?
The platform that allows you to do that is called a self-directed IRA. Recent innovations in the self-directed platform have made it super easy to use and an excellent choice for diversifying beyond Wall Street. The newer versions of the self-directed IRA are particularly adept for opening a medical business. Let’s take a quick tour of the platform in general, and then we’ll look at a few of the real-world medical applications. After that, we’ll also take a look at the downsides of self direction, and find out why it may not be appropriate for everybody.
The newest iterations of the self-directed IRA establish a dedicated LLC for the IRA, which in turn opens a checking account at the bank of your choice. What this practically means for your retirement fund is that it can make investments with no more hassle than writing a check. When you see an asset that you wish to invest in, you write a check from the dedicated account, and then that asset automatically becomes part of your IRA. Additionally, the choice of assets is virtually unlimited. The only things that the IRS won’t let you invest in are collectibles (e.g. art) or life insurance contracts. Everything else is legally permitted to be put into a retirement fund. You can invest in real estate, private business, or even put some of it back in stocks and bonds.
Although virtually any asset is a permissible investment, your actual investing will still be limited by a law called Prohibited Transactions. In short this means that neither you nor a close linear relative (e.g. parents or children) can personally benefit from the investment asset. For example, if your IRA owns a house, neither you nor your children are allowed to live there. Likewise, you may not benefit by the asset by donating your physical services to it. Now, let’s see how this platform (with its few restrictions) can translate into a practical medical investment.
The most common medical application that would seem to be a prime target for investing is that of the medical office. Outside of the retirement sphere, there are plenty of physicians who profit from a group practice which they own. In this scenario the owner is responsible for the office space itself, equipment, staff, and anything else aside from the actual doctors themselves. (In some scenarios the pay structure is devised so that even the doctors’ salaries are tied into the practice.) A self-directed IRA can legally purchase all of these components. It can rent or buy a space outright, purchase the equipment, and provide any other necessary start-up costs. When profits are collected (in the form of patient or insurance payments), they are deposited into the dedicated checking account where they enjoy full retirement asset status. At that point, the profits can either be left alone as savings, or reinvested in the practice itself.
The only caveat to keep in mind is that of Prohibited Transactions. In the above example, the doctor who owns the retirement account would not be permitted to actively work in the practice. This is because the practice is owned by the IRA (via the LLC), and accepting a salary from the practice would be considered a Prohibited Transaction. That means the doctor can manage the practice to insure its profitability, but he/she would not be allowed to personally participate in it.
Now this all sounds great, but is it the answer for everybody? No. Self-directed retirement plans work best for those who have knowledge of the asset they want to invest in, as well as the time to do so properly. Some like to speculate on untested assets, and that’s definitely not a wise investment move. The freedom of self direction will only encourage such behavior. For that kind of investor, it’s better that their retirement funds be locked safely away in a traditional mutual fund. The stocks chosen by the fund manager are generally conservative in nature, and it’s unlikely that the investor will lose everything. Similarly, if a person understands the asset in question, but just doesn’t have the time to manage it properly, a third-party plan is the better choice. The profits may not be as large, but at least there’s a pair of watchful eyes on the plan.
In short, the self-directed IRA can be a valuable tool if you have a legitimate business plan, as well as the ability to put it into practice. To find out if it will work for you, the best thing to do is to get educated. There’s a lot of information on the web itself, and speaking to a specialist in the field will give you even more insight. This may just be the best option for some doctors.
Daniel Sentell is director of communications at Broad Financial. He can be reached through http://www.broadfinancial.com