Retirement planning 101: Six retirement tools available to orthopedists

A comfortable retirement is a leading financial goal for most physicians, including millennial orthopedic surgeons who may continue to practice for many years. To reach this goal, orthopedic surgeons may use several planning tools. In this article, we examine the six leading retirement planning tools most often used by orthopedists and outline the basic rules that govern use of these tools.

1. Qualified retirement plans for employed orthopedic surgeons

Physicians who are employed and receive a W-2 can often contribute to an employer’s retirement plan, which allows them to defer income.

Sanjeev Bhatia

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

Non-government organization 457(b) plans, or NGO 457 plans, present a special risk for unwary physicians saving for retirement. Although these plans 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 plan can usually be rolled over to another NGO 457 plan, but cannot be rolled over to an IRA or 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 incentive to stay with the organization.The employee contribution amounts are normally set by the employer. Contributions can be pre- or post-tax. The employer also has a mandate to contribute to the plan.

2. QRPs for orthopedic surgeons in private practice

David B. Mandell

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. Orthopedic surgeons 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.

Many physicians in private practice participate in QRPs. The tax deduction is a 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, retirement tool #3 discussed in this article provides such a tax hedge.

3. Non-qualified plans for orthopedists in private practice

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

The main drawback to non-qualified 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, non-qualified 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 non-qualified plans.

4. Benefit plans for self-employed surgeons/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 retirement saving options.

A SEP-IRA is a traditional IRA established under a Simplified Employee Pension Plan document (often 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 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 over age 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 non-deductible 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 form 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 the February 2019 Forward Thinking column in Orthopedics Today, “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 orthopedic surgeons is retirement on their own terms. The retirement tools discussed in this article can play significant roles in orthopedic surgeons retiring on their own terms. If building your retirement wealth is an important goal, an experienced advisor can help you investigate retirement planning alternatives and determine the best options for you, your family and your orthopedic practice.

Disclosures: Bhatia and Mandell report no relevant financial disclosures.

A comfortable retirement is a leading financial goal for most physicians, including millennial orthopedic surgeons who may continue to practice for many years. To reach this goal, orthopedic surgeons may use several planning tools. In this article, we examine the six leading retirement planning tools most often used by orthopedists and outline the basic rules that govern use of these tools.

1. Qualified retirement plans for employed orthopedic surgeons

Physicians who are employed and receive a W-2 can often contribute to an employer’s retirement plan, which allows them to defer income.

Sanjeev Bhatia

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

Non-government organization 457(b) plans, or NGO 457 plans, present a special risk for unwary physicians saving for retirement. Although these plans 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 plan can usually be rolled over to another NGO 457 plan, but cannot be rolled over to an IRA or 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 incentive to stay with the organization.The employee contribution amounts are normally set by the employer. Contributions can be pre- or post-tax. The employer also has a mandate to contribute to the plan.

2. QRPs for orthopedic surgeons in private practice

David B. Mandell

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. Orthopedic surgeons 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.

Many physicians in private practice participate in QRPs. The tax deduction is a 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, retirement tool #3 discussed in this article provides such a tax hedge.

3. Non-qualified plans for orthopedists in private practice

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

The main drawback to non-qualified 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, non-qualified 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 non-qualified plans.

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4. Benefit plans for self-employed surgeons/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 retirement saving options.

A SEP-IRA is a traditional IRA established under a Simplified Employee Pension Plan document (often 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 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 over age 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 non-deductible 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 form 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 the February 2019 Forward Thinking column in Orthopedics Today, “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 orthopedic surgeons is retirement on their own terms. The retirement tools discussed in this article can play significant roles in orthopedic surgeons retiring on their own terms. If building your retirement wealth is an important goal, an experienced advisor can help you investigate retirement planning alternatives and determine the best options for you, your family and your orthopedic practice.

Disclosures: Bhatia and Mandell report no relevant financial disclosures.

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