When saving for retirement, it's important to consider all available retirement savings plans and how each aligns with your job, lifestyle and vision for retirement. For physicians, that may mean looking beyond the standard 401(k) to another type of qualified retirement plan that offers more uniquely suited benefits., such as a cash balance plan.
When saving for retirement, it’s important to consider all available retirement savings plans and how each aligns with your job, lifestyle and vision for retirement. For physicians, that may mean looking beyond the standard 401(k) to another type of qualified retirement plan that offers more uniquely suited benefits., such as a cash balance plan.
Since physicians tend to spend more years in school than the average professional and graduate with more debt, there is consequently less time to save for retirement.
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By looking beyond the traditional 401(k), there is greater opportunity to take advantage of the deferred tax benefit. Cash balance plans allow physicians to boost their retirement savings with larger contributions, while still maintaining the tax efficiencies of a qualified retirement plan.
While 401(k)s have an annual employee contribution limit of $18,000, cash balance plans have a significantly higher contribution limit, potentially allowing a physician’s total contribution to be in excess of $200,000. Since physicians tend to max out at the $18,000 limit and seek alternative methods of saving, cash balance plans can serve to supplement 401(k) savings.
There are several other factors that make cash balance plans a unique fit for physicians. For one, money saved within a cash balance plan may be more protected from creditors or lawsuits than savings outside of a retirement plan. According to a recent study, 61 percent of doctors over 55 reported being sued at least once in their career, making the added protection of cash balance plans particularly beneficial for physicians looking to secure their assets as a precaution.
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Additionally, since cash balance plans require long-term vision-the value is realized over many years and requires relative stability within a company-they are well-suited for private practices, which tend to have high retention rates and consistent revenue. Cash balance plans are also the most profitable in organizations where there is a high owner-to-staff ratio.
Practices with physicians receiving large contributions under a cash balance plan are required to provide enhanced contributions, often around 10%of pay, to non-physician employees. Though some employers feel that staff prefer compensation in their paycheck over compensation deposited into their retirement account, research shows that a majority of employees understand the need to save for retirement and are looking for help. A recent study found that 90% of employees make voluntary 401(k) contributions to auto-enrollment plans.
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Having an employee education program in place that fully outlines plan provisions and communicates the value of retirement contributions can further increase non-physician employees’ appreciation of enhanced contributions as a form of compensation.
While a 401(k) is a valuable place to start when determining your practice’s retirement plan structure, it’s critical to explore other options. Your savings strategy will have a significant impact on your future and how you spend your retirement. Supplementary plans such as the cash balance plan offer an efficient way to save more and grow your retirement fund.
One of the main advantages of investing in a qualified retirement plan is the deferred tax benefit. While this advantage is well known, the true dollar value can be difficult to fully understand. You may argue, “Yes, I save taxes on the front end, but still have to pay taxes on this money plus interest in retirement. Isn’t it just a wash?”
Consider this scenario, in which the income tax rate is 40 percent and the investment tax is 20 percent:
Dr. Smith invests $100,000, pre-tax. Over 30 years, his investment grows to $1,000,000. At the time of distribution, he pays 40 percent in income tax and walks away with $600,000. At the same time, Dr. Joseph receives a pre-tax income of $121,950 and opts to invest outside of a qualified retirement plan. He pays 40 percent income tax up front and invests the remaining $73,170. Over 30 years, Dr. Joseph’s investment has the same return as Dr. Smith’s and the $73,170 principal grows to $731,700. Upon distribution, Dr. Joseph pays 20 percent investment tax, $131,700, and is left with $600,000. In the end, Dr. Smith and Dr. Joseph both walk away with $600,000, but Dr. Joseph had to start with $21,950 more than Dr. Smith to achieve the same outcome - not exactly a wash.
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By investing on a pre-tax basis, you can create efficiencies and avoid paying taxes twice.
Trevor S. Bare, FSA
Trevor is a consulting actuary at Conrad Siegel, and specializes in retirement plan consulting and administrative services for defined contribution and defined benefit plans.