Financial Advisor to high net worth individuals including physicians and those at or nearing retirement.

Julianne F. Andrews, MBA, CFP, AIF

Despite recent pressures on physician profit margins, a physician’s income remains relatively high compared with that of the general public, propelling many into the onerous top tax brackets both before and during retirement. Without the proper tax planning strategies in place, a physician could face some costly and unwanted surprises.

So, what do physicians need to know about mitigating taxes and preparing for retirement?

Understanding How Much of Your Income Will Be Taxed and When

In 2020, a physician filing a joint tax return with taxable income exceeding $414,701 is taxed at the 35% federal tax bracket, which goes to 37% if taxable income exceeds $622,051. The physician would also be subject to Social Security, Medicare and state income taxes, as well.

For most working physicians, the majority of their income will come from their paycheck or practice revenue. In retirement, though, physicians will likely rely on multiple different sources to generate income including investment income, IRAs, social security, and possibly even pension plans. Each type of income incurs different tax liabilities and will affect your “take-home” amount in different ways.

Managing a Practice: Advice from your peers

For example, contributions made to traditional retirement plans with pre-tax dollars during your working years will be taxed upon withdrawal in retirement as ordinary income, but Roth IRA contributions made with post-tax dollars will not be taxed when withdrawn. A portion of your social security benefit is taxed based on your overall income (from 0-85% of the benefit), which means physicians’ benefits will likely be heavily taxed.

Understanding how your retirement income will be generated will give you an overall plan for how to withdraw the funds with the least amount of tax liability chipping away at your resources. It will also allow you and your financial advisor to plan ahead—working to avoid becoming “tax deferred” rich and owing a huge chunk of change each year in retirement when you have less control over your income. Does it make sense to contribute to a Roth retirement account rather than a traditional deductible retirement account while you are working? Does a Roth conversion make sense either while you are working or in retirement? These are questions your financial advisor can help you with in the years moving up to and through retirement.

When selling a security, the tax rate on the gain in a taxable account is determined by the length of time you have owned the security. Since selling securities may be part of your draw-down plan for generating retirement income, you’ll need to know at which rate your securities will be taxed. Long-term capital gains are taxed up to 15-20% depending on income, and short-term capital gains are taxed as ordinary income, which could be as high as 37% depending on your marginal tax bracket. A security qualifies for long-term gains when it has been held for over a year.

In some circumstances, it may be advisable to take tax losses to offset capital gains elsewhere. This is known as “tax loss harvesting” and involves the selling of certain investments that show a loss in order to offset the high capital gains rates on other securities being sold or taxed that year. Be aware of the “wash sale rule,” though, which prohibits individuals from claiming a loss if the same or substantially similar security is purchased within 30 days of the sale.

Maximizing Retirement Contributions Before and During Retirement

Other tax-minimizing strategies are related to the practice retirement plan, and thanks to provisions of the 2019 SECURE Act, can now be implemented both in the accumulation and decumulation phases so long as the physician is earning wages from non-investment income.

Physicians should maximize their annual contributions to their retirement plans in order to:

variegate their retirement income between tax-free, tax-deferred, and tax-advantaged accounts;

and lower their taxable income during their working years.

In 2020, physicians under 50 can contribute $19,500 each year to their 401k accounts while physicians over 50 can put aside that same amount plus an additional $6,500 each year, which makes them able to contribute a total of $26,000 to a 401k annually. Pairing a 401k with a profit-sharing plan can further increase the annual contribution to $57,000 for those under 50 and $63,500 for those over 50.

Any amount that is contributed to a 401k is made with pre-tax dollars, meaning the contributed funds will not be taxed until retirement, lowering a physician’s annual income in the year the contribution is made.

In previous years, physicians could only continue contributing to their IRAs until age 70 ½ when they were forced to begin taking Required Minimum Contributions (RMDs). However, the 2019 SECURE Act both extended the RMD age to 72 and eliminated the curtail on making contributions…with one caveat—the physician can only continue to make contributions past this date if he or she shows earned income not generated from investment accounts. This change will especially benefit those individuals who continue to work past age 72 in some fashion and allow a tax deduction for contributed funds.

. She specializes in working with physicians and executives in the healthcare industry. Her passion for working with physicians comes from being a pediatrician’s spouse for more than three decades. Julie has been featured on Forbes’ list of America’s Top Women Wealth Advisors since 2017 as well as Forbes’

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Without the proper tax planning strategies in place, a physician could face some costly and unwanted surprises.

Why tax planning matters for your retirement

There is no doubt about it, becoming a physician is not easy. You spend years training to be able to make life-altering decisions, sometimes at a moment’s notice. Chances are you feel comfortable making these types of calls, but less confident when it comes to making major decisions that, for example, affect your finances.

And who can blame you? Decades of demanding medical education may have prepared you to become a great physician, but offers little in the way of financial guidance. Discomfort or trepidations aside, you’ll have some tough decisions nonetheless.

 One of the first major decisions nearly all physicians encounter is whether or not to join a private practice with the intent to become a partner, or join a corporate practice and take advantage of being a W-2 employee. The major difference here is whether your career path will entail your embracing business ownership or being employed by a larger company. The following considerations may help you weigh your options.

Within the industry as a whole, larger corporations are buying out and acquiring smaller hospitals and practices at an alarming rate. Many physicians even wonder if opening a private practice is sustainable when a handful of mega-corporations continue to expand, grow, and monopolize the scene. As such, many physicians are trading the autonomy and earning potential of business ownership with the security and longevity of a corporate position.

Of course, there is no right answer, only personal preference and fiscal reality, but balancing the two will be the key to keeping your finances on track.

 Technology innovations have left no portion of the healthcare industry untouched. Today, patient records are stored and secured electronically, and machines are becoming more capable of performing procedures that once were done by humans. Tough diagnoses are uncovered in minutes by technologies that didn’t even exist even five or ten years ago. Not only will physicians need additional training to learn how to integrate these technologies into their practice, but may have to rethink how they perform their role as a care provider. The training and the tools will prove costly, especially for those who choose to take the business-owner route. Of course, one option that is growing in popularity, is partnering with an outpatient facility so that you don’t have to purchase, maintain, and insure costly equipment on your own.

How Will I Account for Shrinking Margins?

 The trend continues toward shrinking margins between declining physician reimbursement from insurance providers and increasing medical-related expenses such as staff, equipment, and real estate. Unfortunately, the trend shows no signs of reversing with CPI inflation rates on healthcare related expenses surpassing nearly all other sectors year over year. And as some physicians and large corporations move to value-based compensation models, the discrepancy between income and expenses could potentially increase, putting significant pressure on a physician’s ability to earn a higher income. How will you maintain your desired standard of living when expenses wax and compensation wanes? This may sound like an impossible task, but with the proper planning and guidance, one that can be managed to optimize your financial picture.

 Asset Protection and Physician Family Businesses

Of course, none of the answers to the above questions will come easily and should always be considered in the context of your overall financial plan.

Discomfort or trepidations aside, you’ll have to answer these tough, but inevitable, questions.

3 financial questions early career physicians must answer

These days, physicians face increased risk from lawsuits, judgements, creditors, and malpractice claims, yet one of the most common mistakes they make is relying solely on their insurance policies to protect them in these high-stakes situations. Not only do they overestimate just how far their personal and professional coverage will go but they also generally have no backup plan to pick up where their policies leave off.

So, how do you protect your income and estate from legal claims? By integrating a number of diversified asset protection strategies into your overall financial plan.

 Collection Law Firms vs. Collection Agencies

, we talk about re-locating funds in such a way that they are removed them from the property of the physician or the physician’s estate. After all, that is where the risk lies. Generally, any asset in the physician’s control, or the property of the estate, is vulnerable to legal judgement.

While there are a variety of strategies that can be implemented to shield your estate from costly judgements, the 529 Savings Plan might just be the holy grail and one you probably have not considered.

Here are the basic tenets of the 529 Savings Plans:

A 529 is a tax-advantaged savings plan that is exempt from federal taxes and was designed as a way for families to save for college expenses on behalf of a beneficiary.

Any US citizen or resident alien over 18 years of age can open a 529 for the benefit of themselves, children, grandchildren, or any other relative or friend.

Monies must be used for qualified education expenses in order to be withdrawn tax-free.

Only one person can own each plan and there can only be one named beneficiary per plan.

There are no income restrictions associated with contributions, so they are a viable option for high-income earners like physicians.

Contributions can be made up to the annual gifting limit (currently $15,000) but five years of gifts can actually be made at one time into a 529 plan (currently $75,000). If the five-year strategy is used, additional gifts cannot be made into the plan for the ensuing five-year period without gift tax consequences.

Because the law sees funds contributed to a 529 as gifts made on behalf of the beneficiary, funds kept in these accounts are not considered part of the physician’s estate and are safeguarded from lawsuits and creditors… for the most part.

Since 529s are not federally regulated, but state regulated, each state can set its own legal mandates for their state-sponsored plan. Some states have built in protections from creditors, while others only offer these protections if the accounts are in the child’s name (not the parent’s). For example, the state of New York will protect all assets in a 529 if the account is owned by the child, but only $10,000 if it is owned by someone else, say a parent or grandparent.

Nineteen states have given their savings plans protection from outside suits and creditors no matter who is named as the accountholder. As a physician looking to use the 529 as a sheltering tool, you’ll want to choose a plan that offers these full protections or consider putting the account in a spouse’s name to ensure the funds are seen as independent of your estate.

Provide tax-free income and growth for educational expenses

Shelter a significant amount of funds from potential outside threat by removing it from the physician’s estate

Not only do these plans benefit the accountholder from the tax planning, estate planning, and asset protection standpoints, but will benefit the beneficiary down the road when the assets are needed, as well.

Of course, asset protection measures on their own are no replacement for insurance, and vice versa, which is why a strategic integration of both will likely be a physician’s best bet when it comes to shielding their estate from potential lawsuits.

The basics of a diversified asset protection plan. 

Could the 529 be the holy grail of asset protection?

As a physician, you more than pay for your ability to earn a high income with decades of studying, sweat, sleep deprivation, personal discipline, and of course, money. But simply having the ability to earn a high income doesn’t grant you immunity from financial challenges-especially when your career is just getting started.

What exactly do you need to look out for when it comes to your finances? What challenges can you expect to encounter?

To a degree, some uncertainty in life is inevitable. None of us can predict the future or how it will affect our well-laid plans. The best we can do is evolve and adapt to thrive in our changing environment. 

HHS Stimulus: Practices may not be eligible to retain funds

Unique to physicians, though, are concerns about the changing face of healthcare. How will the evolving industry affect your livelihood? How about the way you conduct business and support your family? 

With the political division over Medicare for all, physician compensation trends in value-based care, broad-based consolidations, and transparency and convenience dominating consumer preferences, the traditional model of providing care is becoming outmoded. And what’s more is that no one is certain when or where the dice will fall on many of these issues. 

We have already seen staffing shortages, an increase in the use of outpatient facilities and urgent care clinics, a rise in popularity of “telehealth” options, and accelerated mergers and acquisitions of smaller firms into larger ones. But 

How are you supposed to plan a stable future amidst these shifting conditions?

The good news is that all of these new options in the healthcare realm mean any physician can choose a career path that best fits his or her changing needs. Perhaps you will choose to travel and accumulate a healthy savings before putting down roots with a family. If a family isn’t yet in the cards, you may choose to work in a higher-risk environment or less desirable geographic location for a period of time and reap the monetary reward for doing so. 

As a young doctor, you can use the changing landscape to your advantage, but will need to mind your future plans, as well, in order to gain the financial footing necessary to carry you there. 

 Every career path comes with its own balance of risks and rewards, challenges, and payoffs. Young doctors, though, must pay hefty education and residency dues upfront long before entering the workforce and beginning to earn an income.

When the time finally comes to put their education to work and start seeing a positive cash flow, many of their peers have already begun building their lives, starting families, and stashing money away in retirement accounts. In reaction to this reality, we have seen many young doctors go one of two routes: (1) they either forego savings to “catch up” to those around them, buying homes and cars in lieu of saving (2) or they begin saving but fail to recognize that they have fewer years to accumulate the appropriate income to live a comparable lifestyle in retirement. 

The unfortunate result is that many physicians today are too financially strapped to retire with their peers. Physicians earn above average incomes for the majority of their careers, but they also face heavier income tax burdens, contend with student loan debt, are forced to pay high premiums for a host of different personal and professional insurance policies, and lose out on many precious years when compound interest could have been working its magic on invested principal. 

As you read this article, scores of baby boomer physicians are currently working into their seventies and unsure when they will be secure enough to finally start phasing out of their careers. Not only are they struggling with workplace burnout, but are contending with the very real possibility that they may be forced to live a diminished lifestyle in what was supposed to be their “golden years.”

In order to avoid this commonplace reality, you will have to do some serious strategizing. You will be need to balance paying off student loan debt and financing the life you desire with making heftier retirement plan contributions. Keep in mind, you’ll want to begin making these larger contributions as early as possible in order to make up for the precious compounding years that were lost while you were in school. 

While some physicians are lucky enough to receive scholarships, grants, or familial support to help offset the costs of their education, most physicians enter the workforce carrying a significant amount of debt on their shoulders.  According to the Association of American Medical Colleges, the average medical student debt balance for graduating students in 2018 was $196, 520 

 With total undergraduate debt, this number could easily tally anywhere in the $200-400K dollar range. 

Physicians are faced with a two-fold problem: they don’t start earning an income until later in their lives (likely into their thirties), and once they finally begin seeing a cash flow, they are already in a deficit due to student loans. Depending on a new doctor’s plans and goals for the future, he or she will need to map out short and long term priorities in order to decide where and in what proportions to allocate income to satisfy building a life (and/or practice), paying off debt, and saving for the future.

As a physician, you must pay close attention to your finances right out of the gate. Your late start, student debt, and changing industry demand it. 

. She specializes in working with physicians and executives in the healthcare industry. Her passion for working with physicians comes from being a pediatrician’s spouse for more than three decades. Julie has been featured on Forbes’ list of America’s Top Women Wealth Advisors since 2017 as well as Forbes’ 

High incomes don’t grant immunity from financial challenges.

Author | Julianne F. Andrews, MBA, CFP, AIF

Financial Advisor to high net worth individuals including physicians and those at or nearing retirement.

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