Since most firms tailor their strategies for "average" Americans, physicians should know that financial and legal advice they get from print and online media, and from large national firms is most likely not appropriate for them.
For most doctors an “off the rack” plan from an accounting, legal, insurance or investment firm just doesn’t work. These plans have been created because they can be replicated millions and millions of times for the “average American.” According to the U.S. Census Bureau, the average American family earns less than $49,000.
With that in mind, most legal, accounting, insurance and investment strategies have been created for:
1.The average American family whose annual income tax liability is less than 12%.
2.The 98% of American families who will NEVER owe any estate taxes.
3.An employee, not an employer, who will likely never be sued and who has no control over the choice of legal entity or type of retirement vehicles the employer will utilize.
4.Someone whose income is based on productivity, NOT government regulation.
For most doctors, most, if not all, of these characteristics are not true.
The media and publishers are also geared toward the average American. In general, they fear that providing content generated for few high-income readers will alienate their average readers and the advertisers who pay good money to reach a specific audience.
Practically, what this means for physicians is that financial and legal advice you get from print and online media, and from large national firms is most likely not appropriate for physicians.
Doctors who follow advice that is generated for the masses and doesn’t take into consideration their unique challenges should see themselves as the patient who focuses on the results of his own 10-minute internet search over the specialist’s educated diagnosis based on decades of experience and the results of a personal exam and test results.
There is no profession with as large a set of unique challenges as physicians face. For this reason, it is imperative that doctors look for advisers who spend the majority of their time working with physicians.
To take it a step further, if you are a high liability or high income specialist, you will want to work with a team of advisers that is acutely aware of these additional challenges. For example, an obstetrician has a much greater need for asset protection than a pediatrician, and a surgery center owner has much greater tax challenges than a primary care doctor.
Solutions that are widely-accepted in the media and by advisers generally work for the average taxpayer. One hurdle that advisers who specialize in helping high-income doctors face is the fact that the solutions we (as a group) espouse are appropriate for less than 1% of the families in the country.
Conventional wisdom is not your friend
For that reason, doctors who insist on only implementing strategies they have heard over and over again in the media and from their colleagues will miss out on valuable opportunities. Once you embrace the fact that you are different and require “different” planning than your neighbors, you will have taken one very significant step to significantly improving your financial situation.
Here are a few examples of mistakes physicians make when listening to bad, but common, advice.
Despite what your CPA may say, in most cases the cost and aggravation of creating and maintaining a corporation (or in many cases, two corporations for most medical practices) are insignificant relative to the asset protection and tax benefits corporations offers physicians.
“You don’t need a corporation for your medical practice”
With recent tax law changes and with many new proposals we will see over the next year, the benefits will be compounded. These corporate solutions can reduce taxes by $5,000 to $50,000 per year for the doctor.
We acknowledge that owning assets in your own name or jointly with a spouse are the most common ownership structures for real estate and bank accounts. This is okay for 95% of Americans. Hopefully, by now, you realize that you are not in that common group.
Owning anything in your name, spouse’s name or jointly
You have potential lawsuit risk, probate fee liability, and estate tax risks that over 95% of the population does not have. If you don’t want to unnecessarily lose assets to lawsuits or taxes or accidentally disinherit children, you need to consider alternative ownership structures.
Something as simple as a living trust or a limited liability company can often solve these problems.
This is perhaps the single most important area of planning for doctors to address once they understand that they are different.
Wasting time and money on Qualified Retirement PlansTypical retirement plans are great for rank-and-file employees because they force employees to put away funds for retirement. Employers may match some percentage of employee contributions (which is free money for the employee). The investment grows tax-free until funds are accessed in retirement (when the employee is living on modest Social Security and these retirement plan funds).
As “the employer,” there is no “free money” for you as all the money that ends up in your plan account was yours to begin with. In fact, you are responsible for those matching contributions so the retirement plan does have some “friction” for you if you want to make any reasonable contribution on your own behalf.
On top of that, you will not be living on $25,000 to $50,000 in retirement like your employees will. You will have taxable investments, much larger retirement plan contributions and greater Social Security income (maybe).
In any case, you will be paying very significant tax on your retirement plan withdrawals. Do you think that tax rates will be lower than they are now when you retire?
With rising costs for employees and a possibility that you may actually withdraw funds from your retirement plans at a higher tax rate than the one you received for the original deduction, the real benefit of retirement plans comes into question.
When you add the potential costs and aggravation of complying with ERISA, Department of Labor and tax laws surrounding retirement plans, and the fact that any unused retirement plan balances will be taxed at rates up to 80%, you may find that retirement plans are not all they are cracked up to be.
A growing trend among successful doctors is to implement non-qualified planning alternatives instead of traditional retirement plans.
Non-traditional planning can offer higher income physicians opportunities to contribute significantly larger annual contributions. Whether you are using non-qualified plans, “hybrid” plans, fringe benefit plans or even a tool primarily designed for risk management benefits, like a captive insurance company, you could potentially enjoy tax benefits up to $100,000 to $1,000,000 or more annually.
Most of these tools allow you access to the funds before 59-and-a-half, will not force you to take withdrawals at age 70-and-a-half if you don’t need the money and will not be taxed at rates up to 70% or 80% when you pass away. For these reasons, savvy doctors utilize nontraditional plans more than traditional retirement plans.
Of course, non-qualified or “hybrid” plans vary significantly in their design, their scope and their applicability. Some plans work great for smaller practices with one or two partners. Others work best in practices with three to 20 partners. Still others may work best for the larger practices.
Edit: Part two can be found here.
This is the first of a two-part article. More tips on tax reduction and other elements of financial planning that are specific to physicians and unnecessary for Average Americans will come in the subsequent part of this continuing article
David Mandell, JD, MBA,
is a principal of the financial consulting firm OJM Group and author of
For Doctors Only: A Guide to Working Less and Building More, which is available for free (plus $5 S&H) by calling (877) 656-4362.
Disclosure: OJM Group, LLC. (“OJM”) is an SEC registered investment adviser with its principal place of business in the State of Ohio. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about OJM, including fees and services, send for our disclosure brochure as set forth on Form ADV using the contact information herein. Please read the disclosure statement carefully before you invest or send money. This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.