Written by: Andrew Newhouse

The most common questions that I receive from my physician clients are on retirement plans. Every employer offers something a little different. Utilizing tax-advantaged retirement plans is attractive for highly compensated doctors, but it can be a little daunting learning the ins and outs of these plans.

Each employer has a different retirement plan for doctors that can be utilized. Typically, retirement plans for doctors will fall into two categories: plans available for W2 employees and plans for independent contractors or self-employed individuals. We will look at both sets of options and talk about the details of retirement plans for doctors.

Retirement Plans for Doctors Who Are Employees

Retirement plans for physicians who are employees of a hospital, or group, are going to be determined by the company. Some employers may offer more than one retirement plan to pick from, but unless you are one of the decision makers for the company, you won’t have much say what the employer offers. You will simply have the option to enroll and participate in the plan provided or not.

For-profit entities and non-profit entities have different plans available, based on the parts of the tax-code they are governed by. Ultimately the options are pretty much the same, but we will look at them all.

Retirement Plans for Doctors at Hospitals

If you are employed by a hospital, you will likely have access to a 403(b) retirement account. This is a retirement account offered by non-profit entities. This is similar to the 401(k), which is commonly offered at for-profit companies.

Believe it or not, most hospitals are non-profit businesses. How they maintain their non-profit status is a discussion for another day.

Your employer may also have a 401(a) account and possibly offer a 457(b) account too.

403(b)

A 403(b) account is a retirement account that allows you to make elective salary deferrals. This means you can elect to have a certain amount withheld from your paycheck and deposited into the account. The contribution limit for 2022 is $20,500.

Deposits can be made on a pre-tax or post-tax (Roth) basis (As we have mentioned in previous blog posts, not every employer offers the ability to contribution on a Roth basis, but it is becoming more and more popular). If you make pre-tax contributions, money is deposited before taxes are taken from your paycheck.

For example, if you earn $250,000 in a year, and deposit the maximum $20,500 into your 403(b), the IRS will only tax you on $229,500 of income. Pretty cool! Nice government we have. It’s like the government is giving you a fist-bump for saving for retirement.

Once in the 403b, any investment gains are tax-deferred, meaning you don’t pay any taxes as long as the money stays in the account. You have to wait until you are 59.5 years old before you can withdraw the money, otherwise you are penalized and pay extra taxes. In retirement, when you withdraw the funds from a pre-tax account, the amount withdrawn is treated as earned income in that year and taxed accordingly.

If you make Roth contributions, the opposite happens. Money goes into the account after taxes have been withheld. If you make $250k in a year and make a Roth contribution to the 403(b), you are still taxed on $250k of earnings for the year. There is no incentive on the front-end to save on taxes in that year you contribute. Money still grows tax-deferred, and you still must wait until you are 59.5 to touch it. Once eligible, qualified withdrawals are tax-free! How big is that! Tax-free money in retirement! Boo-yah!

Important note: there is no income limit on being eligible to make Roth contributions into employer retirement plans. The income limit is only for Roth IRA’s. Hence why the Backdoor Roth IRA is so popular amongst physicians.

Within a 403b, the employee gets to choose how to invest the money within the account. This is considered a participant-directed account. The retirement plan will have a menu of mutual funds to pick from that you can invest in.

A newer addition to employer retirement accounts are self-directed brokerage accounts. This gives the participants access to additional investment options outside of the retirement plan’s core investment options while still staying within the plan and receiving the associated tax benefits. This may not be the right fit for every investor but can be appropriate for some. There are a few pros and cons to the Self-Directed option.

Pro:

Greater investment flexibility
Access to low-cost options
Available to have professional help from an advisor

Con:

You manage your investment account
Can have additional costs
Not available with every plan sponsor

To determine if a self-directed brokerage account within your 403(b), 401(k), or 457(b) is a good fit for your situation, please reach out to us to discuss your situation, goals, and concerns. We would be happy to discuss this with you further.

403(b) accounts are also highly protected in most states and it is hard for creditors or litigators to go after money in those accounts.

401(a)

Not all employers offer a 401a, but many hospital systems do. In this account, the employer sets the contribution rules and it is mandatory. The employer could make all the deposits into this account, or they could mandate the employee deposit a percentage of their paycheck as well. Whatever the amount is, it will be fixed…. until the employer decides to make a change.

For example, the employer may have a 401(a) plan that dictates you will deposit 6% of your paycheck pre-tax into the account and the employer will also deposit the equivalent of 6% of your salary into the account.

As mentioned above, every account is different. If you have access to a 401(a), it will be important to review the rules set by your employer.

Contributions are made on a pre-tax basis (no Roth option available). Participants get to decide how to invest the money within the plan, similar to a 403(b). You also must wait until age 59.5 until you can touch the money.

457(b)

Not all non-profit employers offer 457(b) accounts. If your employer does offer a 457(b) plan, it could be worth taking advantage of if you are already maxing out the 403(b) and still have additional dollars that you want to set aside for retirement.

The contribution limits are the same ($20,500 in 2022). Contributions are made on a salary-deferral basis – meaning the money is withheld from your paycheck if you elect to contribute to the plan. You can also choose how to invest the money from the menu of options. Some employers allow Roth contributions, in addition to pre-tax.

The main differences between the 457(b) and the 403(b) are the age restriction and the asset protection component.

With 457(b) accounts, you don’t have to wait until you are 59.5 until you can withdraw the money. Typically, the employer only requires you to be “separated from service,” meaning you don’t work for the company anymore. When looking at retirement plans for doctors, the 457(b) can be attractive for people who do a good job saving for retirement and are positioned to retire early.

The major downside to 457(b) plans is the money isn’t as highly protected as other qualified retirement accounts. For example, if the hospital declares bankruptcy, they could potentially dip into the 457(b) plan assets in order to pay back creditors. This means they could potentially take the money you saved in your account. Therefore, you probably only want to use the 457(b) account if your employer is financially stable.

Lastly, 457(b) accounts are sometimes difficult to take with you when you leave the employer. Most can only be rolled to another 457(b) as opposed to an IRA or other retirement account.

Also, some employers are quite restrictive with what you can do with the money when you leave the employer. Some require you to liquidate and distribute the entire account balance when you stop working. If you have a large balance, this could create quite the tax bill for you in that year. Before contributing to a 457(b), it will be important to review the distribution options to see what is available to you if you end up changing employers.

Retirement Plans for Doctors at Private Groups or For-Profit Companies

Instead of the 403(b), for-profit companies offer 401(k) accounts. For all intents and purposes, these accounts are identical. These accounts have the same contribution limits. Again, it will vary between employers, but often times you have the flexibility to select between pre-tax or post-tax (Roth) contributions. You also get to pick your investments from a menu of options. Like the 403(b), we are seeing more and more 401(k) plans have the ability to utilize a self-directed option.

The employer can make additional profit-sharing contributions into the employees’ accounts as well. The maximum amount that can go into a 401(k) in 2022 between employee and employer contributions is $61,000.

In special circumstances, there may be other retirement plans offered, but these are less common unless you are an executive in the company.

Retirement Plans for Doctors at Small Groups

If the group is profitable and generating good revenue, the practice will likely want to implement a 401(k) plan. This will enable the owners to deposit up to $61,000 in 2022, plus an additional $6,500 if age 50 or over.

Now, maxing out the 401(k) at $61,000 requires the business to also deposit some money into the employees’ accounts as well. Depending on the number of employees, this may create quite a cost burden for the company.

For the less profitable groups, or for practices that do not want to deposit very much into employees’ accounts, a SIMPLE IRA is a commonly used plan. SIMPLE IRA’s are, as the name implies, quite simple. Each employee, including the owners, sets up their own account and can defer up to $14,000 of salary pre-tax in 2022 (plus $3,000 if over age 50). The employer is required to match contributions, usually up to 3% of wages in most circumstances. That’s it. Super easy. Very inexpensive for the business.

Often new practices will start with a SIMPLE IRA and then migrate over to a 401(k) as the practice grows.

Retirement Plans for Doctors Who are Self-Employed

If you are self-employed, you have a several options available to you. Below is a little more detail on retirement savings accounts for self-employed individuals.

SEP IRA

If you want to keep things easy and only make pre-tax contributions, then a SEP IRA is for you. The math works out so you can make pre-tax contributions of 20% of your earnings up to $61,000/year in 2022. You can do less of course, but that is the limit. It’s like any other IRA in that you can set it up wherever you want and invest the money however you want.

Do be aware that this does have implications on your ability to do the Backdoor Roth IRA. In order to utilize the Backdoor Roth IRA strategy, you must not have any pre-tax dollars in an IRA. Since this account is a pre-tax IRA, it will eliminate your ability to do the Backdoor Roth IRA. Although this may not be a deal breaker for your situation as you can only contribute $6,000/year as of now into your Roth IRA, it is something to be aware of and confirm with your advisor or CPA before opening the SEP IRA as opposed to a Solo 401k.

As mentioned, with each of these options for self-employed individuals, be sure you are reaching out to your financial planner and CPA before making any decisions on which plan is the best fit for you moving forward.

Individual 401(k)

The Individual or Solo 401(k) is similar to a company sponsored 401(k), except when you are self-employed, you are both the employee and the employer. As an employee, you can make either pre-tax or Roth contributions up to $20,500 in 2022 (plus $6,500 if over age 50). As the employer, you can also deposit up to 20% of earnings pre-tax into the account. A maximum of $61,000 ($67.5k if age 50+) can go into the plan in 2022.

A lot of people who utilize the Solo 401k like the ability to make the Roth contributions in addition to pre-tax. This enables them to really build up an account that can be accessed tax-free in retirement. They will often do this in addition to Backdoor Roth IRA’s.

The catch with the 401(k) is there are additional tax-reporting requirements that go along with it. You are required to file an IRS form 5500-EZ for accounts with balances over $250,000. Not many accountants will do this, so you will likely need to do it on your own or set up the account with a company that will do this for you (for an additional cost, of course).

With the Solo 401k, as compared to the SEP IRA in most cases, you will be able to contribute more to your retirement plans. Everyone who opens a Solo 401k can contribute the $20,500 for employee contributions along with 20% of income for employer contributions. For the SEP IRA, you are maxed at 25% of your earnings regardless.

Be sure to speak with a professional to help you understand the pros and cons for each of these accounts in order to make an informed decision.

Cash Balance Pension

For the overachievers who are maxing out the Solo 401(k) at $61,000/year and are looking to invest additional monies on a tax-advantaged basis for retirement, then the cash balance pension plan is for you.

Some employers do provide these for their employees, so you may have one if you are an employee at a company.

The cash balance pension plan is a defined benefit plan, as opposed to a defined contribution plan like all these other accounts we have been reviewing. The maximum contribution limit varies by age. More money can be added the older you are. Older participants can contribute upwards of $300,000/year pre-tax! If self-employed, or the owner of a small practice, the goal is to contribute as much as cash flow allows to help reduce your taxable income.

Contributions are made pre-tax. Technically, the employer (ie, you if self-employed) provides a guaranteed interest rate on the account. The money can be invested, but if you invest too aggressively and the account goes down in value significantly, the plan may be considered underfunded, and you will be required to deposit extra money into it the following year.

Conversely, if the account outperforms the target return objectives, you may be limited in how much you can add in future years, restricting the tax-deductible contributions you can make.

Long-story short, if you are maxing out the 401(k) and wanting to save a lot of extra money for retirement, it could be worth looking at a cash balance plan.

Comparison Between Self-Employed Plans

Solo 401(k) vs SEP IRA vs Simple IRA: Solo 401(k), SEP IRAs, and Simple IRAs all are designed for business owners to save for retirement, but all vary slightly.

Solo 401(k):

As it sounds, Solo 401(k)s, also known as individual 401(k), are only available to the owner of the business.
This allows for both employee and employer (as the business owner, you are both the employee ($20,500) and the employer (up to $40,500) contributions (Limit $61,000)
- For those who are 50 or older, you can make a catch up contribution and contribute an extra $6,500.
You have the option for both pre-tax and post-tax (Roth) contributions
With Solo 401(k)’s you must establish this before the end of the calendar year.

SEP IRA:

This retirement plan is available for the employer and company employees to save for retirement
The maximum contribution is the lesser of 25% of an employee’s compensation or $61,000. One downside if there are employees, is that the owner will have to contribute the same percentage to their employees SEP IRA as their own.
This plan only allows for pre-tax contributions
A SEP IRA has the ability to be set up any time before filing your tax return. A CPA would be able to provide a little more insight.

Simple IRA:

This retirement plan is for small businesses that have 100 or less employees. This can be attractive to business owners because it is easier to set up than a 401(k) but has lower contribution limits (up to $14,000). It is also a more cost-effective way to increase retirement savings for the owner and employees.
- For those who are 50 or older, you can make a catch-up contribution and contribute an extra $3,000.
There is also a mandatory employer matching contribution that is required.

If you are curious what might be the most beneficial plan for you and your business, please reach out to connect with us. We would be happy to review your current situation and walk through what might be best for you.

Competing Financial Goals

Along side retirement planning, I get a lot of questions, especially from young physicians, whether to pay off student loan debt faster or save more for retirement. The answer to this isn’t always that simple. It really depends on a few different factors. The main factor is the interest rate associated with your student loan.

If you went through a student loan refinance, it may not be in your best interest to pay this off aggressively if the interest rate is competitive. To meet with a financial advisor to come up with a plan for your student loans, visit our website.

Summary

There are many retirement plans for doctors out there. What is available to you will mostly depend on your employer. If you are disappointed in the retirement plan offerings at your employer, get on the retirement plan committee and lobby for a change.

If you own your own practice or are a locum doctor, you have some choices available to you. What you go with will depend on the size of the practice, how profitable it is, and how much you want to save for yourself and your employees.

As a self-employed individual, you can stuff a lot of money away in tax-advantaged retirement plans if you really want to. Because you are your own boss, you have a lot of flexibility with what you do.

When it comes to physician retirement planning, there is not a gameplan that is best for all individuals. To learn more about financial planning for doctors, and to take into account your own financial situation, please visit our website.

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Reach out to us for a complimentary review of your retirement plan!

Disclosures:

Any investment involves risk of loss, including total loss of principal. Consult with a financial professional for guidance on which retirement plan in right for you. This is not to be construed as tax-advice. Consult with a tax-professional for tax-advice and implications for your particular circumstances.

Retirement Plans for Doctors