Physicians and medical professionals often struggle to adequately save for retirement. They start their careers later in life than most professionals and with a lot more student loan debt.
Those who also own and operate their medical practices have even more of a challenge when saving for retirement. After all, they don’t have access to an employer-sponsored retirement plan they can contribute part of their paycheck to.
But there are several options for self-employed medical professionals to save for retirement.
Simplified Employee Pension (SEP)
SEPs are a pre-tax retirement plan, which enables you to deduct the money you contribute from your taxable income.
A SEP is one of the most flexible self-employed retirement plans and easiest to establish. It is similar to setting up an IRA for you and your employees.
As an employer, you can contribute to a SEP for you employees up to the lesser of:
25 percent of the employee’s compensation, or
$54,000 for the 2017 tax year
If you have employees, the IRS dictates that make the same percentage contribution to their retirement accounts as your own contribution. So if you max up your contribution to 25 percent of your income, then you must also contribute 25 percent of your employee’s salary to their accounts.
Another key limitation of this plan is that only you the employer can contribute. Employees cannot contribute to their accounts under a SEP. Only you the employer can contribute to the plan. Employees cannot contribute to their own retirement plan.
One of the key benefits of SEPs is that there are no minimum contributions dictated by the IRS. You can fund more into the plan when business is good and less when times are tight, so long as everybody receives the same percentage of their salary.
The Savings Incentive Match Plan for Employees (SIMPLE) is another way to save for retirement while also provided a way for employees to do the same.
SIMPLE plans have a contribution limit of $12,500 in 2017 with an additional $3,000 allowed for individuals who are 50 and older.
SIMPLE IRAs have an advantage over SEPs in that employees can contribute. The downside is that you the employer are required to contribute to your employees’ accounts; either a percentage match up to 3 percent of each employee’s salary or a flat 2 percent across the board.
Another limitation is you cannot have another retirement plan in addition to a SIMPLE IRA.
Cash-balance plans are a fast-growing segment in retirement planning. They are similar to a traditional pension plan in that they are insured by the Pension Benefit Guaranty Corporation (PBGC). If a cash-balance plan is terminated with insufficient funds to pay all promised benefits, the PBGC has authority to assume trusteeship of the plan and pay benefits.
How cash-balance plans differ from pensions is that instead of a benefit based on your years of service to a company, a cash-balance plan creates a hypothetical account that grows in value based on annual compensation and a set annual interest rate.
These accounts are considered hypothetical because they do not reflect actual contributions to an account or actual gains and losses allocable to the account.
Cash-balance plans have much higher contribution limits than other retirement plan options. The limits increase with age and can reach up to $200,000 a year at older ages.
The Solo 401(k), also known as an Individual 401(k), is probably not a viable option for most self-employed physicians. That’s because its biggest limitation is that it can only be used by business owners who have no employees. If you work alone or if your spouse is the only other person working in your practice, you could implement this type of retirement plan.
One of the benefits of a solo 401(k) is the contribution limits. In this plan, the IRS considers you both an employer and employee. That means:
You can make an employer contribution up to the lesser of 25 percent of your practice’s net earnings or $54,000 to the plan in 2017 (similar to the limits in a SEP); AND
You can make employee contributions up to the current 401(k) maximum of $18,000; $24,000 if you are 50 or older.
Another retirement option for self-employed physicians is an annuity.
Annuities are sold by insurance companies. You pay them a premium, usually a large amount such as $25,000 to $100,000. Annuities are designed to then pay you a stream of income or a lump sum based on the premium you paid, the interest earned on the annuity and how long you held onto the annuity before taking income.
Once you decide to take income from the annuity, you can opt for lifetime income or an amount for a set period. You pay tax on the income above what is considered a return of your premium.
There are no IRS contribution limits to an annuity, so you can save as much as the insurance company will allow. You won’t, however, receive a tax deduction for that contribution.