In an ideal world, you’d start saving for retirement as soon as you can—but sometimes, that’s just not possible. For physicians who may have a late start in retirement saving, an expert offers some tips to help you get caught up.
“There’s still hope, but the sooner, the better,” said William L. Zelenik, chief executive officer at Millennium Brokerage Group. “Don’t wait to start saving until it’s too late—time can be a great friend or a great enemy.”
If you are late to start saving, your first step is to cut consumption as much as possible and save, save, save, Zelenik said. Then, consult a financial planner or adviser and figure out a plan that makes the most sense for your needs and goals.
Zelenik outlined a few options physicians in this position could take. First, determine whether a qualified or non-qualified plan is best for you.
Qualified plans, which include IRAs and Roth IRAs, offer significant tax benefits and fall under the Employee Retirement Income Security Act (ERISA). Non-qualified plans are private plans that don’t fall under ERISA. The main difference is the tax treatment of deductions, but there are other differences that an adviser can help you understand.
Defined benefit plan
This qualified plan allows you to make contributions on the basis of a defined benefit of retirement. A formula, based on earnings history and age, is used to calculate how much you can put away in the plan.
“That’s a good catch-up mechanism for physicians, and anybody can implement a defined benefit plan—you can be a sole provider, you can be a partnership,” Zelenik said. But take note: If you choose this option and your practice employs a staff, you must make this option available to your staff as well.
Section 79 plan
This plan, also qualified, is a tax plan where small business owners may take a deduction through their business to purchase an individually-owned life insurance policy. With this plan, “you kind of turn insurance on its head,” Zelenik said. “You buy as little life insurance as possible relative to the assets going into the plan. If done properly, you’re able to put a lot of money away on a tax-deferred basis, have it grow tax-free and have it come out tax-free after retirement.”
Non-qualified deferred compensation plan
This plan is non-qualified, which means it’s a bit less restrictive, Zelenik said. On a predetermined basis, you decide what percentage of your compensation you’ll set aside, which is held in a special trust and invested into a special life insurance vehicle. This is considered part of your pre-tax income, so you aren’t taxed on what you put in—but you are taxed on what you take out.
“It’s akin to a private IRA,” Zelenik said. “What you’re really doing is duplicating a pre-tax contribution, but to a private plan.”
Section 162 bonus plan
With this non-qualified plan, a physician would pay current income tax on an amount going into the plan. The money is put into a life insurance instrument, where it grows tax free and can be withdrawn tax-free, like a Roth IRA.
The bottom line, Zelenik said, is to work with an expert to determine what’s best for you and get started right away.
“You’ve got to give these strategies time to work,” he said. “If you have 15 years or longer before retirement, that’s when these options can be most effective because that really gives the tools time to perform. If you’re on a shorter time horizon, then it may not make sense to lock up assets in longer-term strategies—in that case, you may just want to save money in a well-diversified portfolio.”
Millennium Brokerage Group is an approved member of AMA Insurance’s Physicians Financial Partners program.