How to take advantage of tax incentives for high earners

Traditional retirement plans are designed for taxpayers who earn less than a specific amount per year. By traditional, we mean plans that go by names like 401(k), profit sharing, 403(b), pension, thrift, or 457 plans.

Income above this specific amount (it changes annually, and with other circumstances. Consult an adviser) is disregarded for calculating retirement plan contributions you may make. If you are a high earner, would like to save more than thousands per year for your post-retirement living expenses? There are choices available.

Catch-up plan

Defined benefit pension plans and cash balance plans offer high-income taxpayers an opportunity to contribute $200,000 to $300,000 per year under certain circumstances. The idea behind this type of planning is that it allows for larger contributions for people who need to “catch up”¹ on post-retirement saving.

A defined benefit catch-up plan could work for you if:

• You are at least 45 years old; or

• You started saving for retirement very recently (or are about to start); or

• You lost some or all of your retirement plan in a divorce; or

• You had to take a withdrawal from your retirement plan for any reason; or

• You converted your old retirement plan to an IRA or Roth IRA; or

• You made some bad investments and lost money in your retirement plan; or

• You had to file bankruptcy; or

• You lost a lawsuit and judgment (including a divorce).

There are many reasons to utilize the retirement catch-up provisions.¹ For instance, the increased retirement plan contributions not only help save for retirement, but they also reduce taxable income and put your funds into a vehicle that is statutorily protected from creditors.

Numbers don’t lie

In 2014, someone under age 50 can defer $17,500 into a 401(k) plan and someone over 50 can put away $23,000². With matching and profit-sharing plan contributions, the total can be increased to $52,000 for someone under 50 and as much as $57,500 for taxpayers who are over 50.

In comparison, a doctor in her mid-50s could contribute and deduct more than $200,000 in a properly designed defined benefit or cash balance plan. This provides an opportunity for the soon-to-be-retiree to turbo-charge his or her retirement.

Defined benefit and cash balance plans have become much more popular since the Pension Protection Act of 2006. The act did several things to help make these plans more appealing. First, the act clarified the legality of cash balance plans. Secondly, the Pension Protection Act explained how a company, such as a medical practice, might be able to sponsor both a 401(k) profit sharing and a defined benefit

Plan, and take advantage of the unique characteristics of each scenario, and benefit from the combination of the two. With the help of a financial adviser, the Pension Protection Act of 2006 (PPA) can help you to cross test the benefit from both types of plans and be able to weight the contributions in a way that most significantly supports the plan beneficiaries.

Additional benefits

For families that purchase term life insurance with after-tax dollars, there is an additional savings opportunity. Many retirement plans allow the participant to buy insurance with pre-tax dollars and only pay a small tax each year. The advantage is that the death benefit from the insurance will go to the spouse income tax-free.

This is a great way to create an instant estate and to provide tax-free dollars to a surviving spouse from your retirement plan. Additional tax-efficient opportunities with retirement plans, nonqualified plans, and risk-management arrangements are more popular than ever, but those are outside the scope of this article. Find physician-focused adviser in your area at www.Daktori.com/contact-us.

To learn more ways to reduce unnecessary taxes while improving your retirement and risk management planning, please order the authors’ new book, The Physician’s Money Manual, at Amazon.com or iBookstore.com for $49. You may also receive a free copy of the book by subscribing to the authors’ newsletter at www.daktori.com/free-book/ today.

References

1. Actuarial calculations provided by Senex.

2. Limits are under IRC 415 of the code. See: www.irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401(k)-plans-in-2014 (as of 2/13/14) for more information

FREE CME offer: Dermatologists can received 7.5 hours of category I CME credits in risk management by signing up for the financial fellowship newsletter at www.daktori.com/free-book/

Michael Berry is a co-author of The Physician’s Money Manual. Along with Mr. Berry (of Connecticut), Jan Mohamed (of Texas) and four other members of the Daktori Financial Fellowship have been named “2013 Best Financial Advisers for Physicians” by Medical Economics.

Jan Mohamed is a registered investment adviser of securities and advisory services offered through Brokers International Financial Services are offered through Brokers International Financial Services, Panora, IA, Member FINRA/SIPC. Mr. Mohamed of Dallas has more than 30 years of experience working with physicians and high-income business owners.

Brokers International Financial Services, and Daktori are not affiliated companies.

For more information about speaking engagements or consulting services, contact Daktori communications director, John Henry Dreyfuss at (917) 520-4192.