September 26, 2019
4 min read

Retirement planning 101: Understand six retirement tools available to physicians

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Sanjeev Bhatia, MD 
Sanjeev Bhatia
David B. Mandell, MD 
David B. Mandell

by Sanjeev Bhatia, MD; and David B. Mandell, JD, MBA

Achieving a comfortable retirement is a leading financial goal for most physicians, including millennials who may continue to practice for many years. To reach this goal, physicians may use several planning tools throughout their careers.

In this article, we examine the six leading retirement planning tools most often used by physicians and outline the basic rules that govern their use.

1. Qualified retirement plans for employed physicians

Doctors who are employed and receive a W-2 can often participate in their employer’s retirement plan, which allows them to defer income by contributing to the plan.

For example, 401(k) plans are one type of qualified retirement plan (QRP) and they are the most common option offered to physician employees of for-profit entities. The 403(b) plans work the same as 401(k)s, but they are offered by government and nonprofit health care organizations.

Government-sponsored 457(b) plans are offered by state and local government health care organizations. Physicians can defer funds into the plan on a pre-tax basis in addition to the money they contribute to a 403(b) plan.

Nongovernment organization (NGO) 457(b) plans present a special risk for unwary physicians saving for retirement. Although these plans also allow for pre-tax contributions and tax-deferred growth, they only gain these tax benefits due to a “substantial risk of forfeiture” imposed by the IRS. Doctors who hold these plans can lose everything if the sponsoring employer goes bankrupt. Account balances from one NGO 457(b) plan can usually be rolled over to another NGO 457(b) plan but cannot be rolled over to an IRA or any other type of plan.

A 401(a) plan is a QRP normally offered by government agencies, educational institutions and nonprofit organizations rather than by corporations. These plans are usually custom-designed and can be offered to key employees as an added incentive to stay with the organization. The employee contribution amounts are normally set by the employer, and contributions can be pre- or post-tax. The employer has a mandate to contribute to the plan, as well.

2. QRPs for physicians in private practice

A QRP for a private practice may be in the form of a defined benefit plan, profit sharing plan, money purchase plan or 401(k). Properly structured plans offer a variety of benefits. Physicians can fully deduct contributions to a QRP, funds within the QRP grow tax-deferred, and (if non-owner employees participate) the funds within a QRP enjoy superior asset protection.


Nearly all physicians in private practice participate in QRPs. The tax deduction is a strong, hard-to-resist lure. For many physician practice owners, however, the cost of contributions for employees, potential liability for mismanagement of employee funds and the ultimate tax costs on distributions at least suggest that it would make sense to investigate another type of plan that hedges the QRP as an additional savings vehicle. For many, the next retirement tool discussed provides such a tax hedge.

3. Nonqualified plans for physicians in private practice

Many private practice physicians who want to save significantly for retirement are limited by the funding rules of QRPs. Others are interested in a plan that hedges against their QRP and can be accessed tax-free in retirement. Nonqualified plans can be the solution for many doctors. Because these plans are not subject to QRP rules, nonqualified plans do not have to be offered to any employees. Further, even among the physician-owners, there is total flexibility. For example, one doctor can contribute a maximum amount, the next partner may contribute much less, and a third physician could opt out completely.

The main drawback to nonqualified plans is that contributions are never tax deductible. However, like a Roth IRA, they can be structured for tax-free growth and tax-free access in retirement. As such, nonqualified plans can be an ideal long-term tax hedge against a QRP. Beyond these general ground rules, there is tremendous flexibility and variation with the design of nonqualified plans.

4. Benefit plans for self-employed physicians/outside businesses

Physicians who receive income reported on Form 1099 (including doctors who “moonlight,” work locum tenens or consult/speak in the health care industry) and self-employed physicians have other options to help them save for retirement.

A SEP-IRA is a Traditional IRA established under a Simplified Employee Pension Plan document (often the Form 5305-SEP). Under the 2019 limits, physicians can contribute the lesser of $56,000 or 25% of compensation. In addition, physicians with a SEP-IRA may still be able to contribute to a separate Traditional IRA or Roth IRA. Like other Traditional IRAs, account balances can grow tax-deferred and are taxed at ordinary income rates when distributed.

5. After-tax IRAs

A Traditional IRA allows holders to defer up to $6,000 per year ($7,000 per year if older than 50) into the account under the 2019 limits. Physicians who are not covered by a workplace retirement plan may deduct pre-tax contributions while those covered at work can make nondeductible or partially deductible contributions, depending on their earned income and filing status.

Many physicians implement a “backdoor Roth IRA” by first contributing to a Traditional IRA and then converting the Traditional IRA to a Roth IRA. (Note: This tactic requires careful planning to avoid unnecessary taxation. Work with an experienced advisor on this.)


6. Life insurance as a retirement plan

Earlier, it was explained that Roth IRA contributions are made after-tax, but the balances grow tax-free and can be accessed tax-free in the future. It may be surprising to learn that, if managed properly, a permanent life insurance policy can act the same way. As was discussed in another article for, “permanent” life insurance includes whole life, universal life, variable life and equity indexed life insurance policies. Regardless of the type of insurance product, the cash value of such policies grows tax-free and can be accessed tax-free during the insured’s life.

The chief financial goal of nearly all physicians is retirement on their terms. The six retirement tools discussed in this article can play significant roles in achieving this goal. If building your retirement wealth is an important goal, an experienced advisor can help you investigate retirement planning alternatives and determine the best option(s) for you, your family and your medical practice.

Disclosures: Bhatia and Mandell report no relevant financial disclosures.