By David B. Mandell JD, MBA of OJM GROUP.
Most legal, accounting, insurance and investment strategies have been created for:
- The average American family whose annual income tax liability is less than 12%.
- The 98% of American families who will NEVER owe any estate taxes.
- An employee, not an employer, who will likely never be sued and who has no control over the choice of legal entity or type of retirement vehicles the employer will utilize.
- Someone whose income is based on productivity, NOT government regulation.
As authors of books and articles, we regularly interact with publishers, editors and talk show hosts. Radio and television stations, book & magazine publishers, and internet content editors are looking for content for their "average" reader. In general, they fear that providing content generated for few high-income readers will "alienate" their average readers and the advertisers who pay good money to reach a specific audience. Practically, what this means for physicians is:
Financial and legal advice you get from print and online media and from large national firms is most likely not appropriate for physicians!Doctors who follow advice that is generated for the masses and doesn't take into consideration their unique challenges should see themselves as the patient who focuses on the results of his own 10-minute internet search over the specialist's educated diagnosis based on decades of experience and the results of a personal exam and test results.
There is no profession with as large a set of unique challenges as physicians face. For this reason, it is imperative that doctors look for advisors who spend the majority of their time working with physicians. To take it a step further, if you are a high liability or high income specialist, you will want to work with a team of advisors who are acutely aware of these additional challenges. For example, an obstetrician has a much greater need for asset protection than a pediatrician and a surgery center owner has much greater tax challenges than a primary care doctor.
Conventional Wisdom is Not Your Friend. In the beginning of the article, we pointed out what characteristics are common for US taxpayers. Solutions that are widely-accepted in the media and by advisors are generally tools that work for these people. One hurdle that advisors who specialize in helping high-income doctors face is the fact that the solutions we (as a group) espouse are appropriate for less than 1% of the families in the country. For that reason, doctors who insist on only implementing strategies they have heard over and over again in the media and from their colleagues will miss out on valuable opportunities. Once you embrace the fact that you are different and require "different" planning than your neighbors, you will have taken one very significant step to significantly improving your financial situation.
In the rest of this article, and in Part 2 of this article (which will be published next month or can be requested via email at Mandell@ojmgroup.com), we will share a few examples of common mistakes physicians make when listening to bad, but common, advice. These include:
Mistake #1 You Don't Need a Corporation for Your Medical Practice.
Despite what your CPA may say, in most cases the cost and aggravation of creating and maintaining a corporation (or in many cases, two corporations for most medical practices) are insignificant relative to the asset protection and tax benefits corporations offers physicians. With recent tax law changes and with many new proposals we will see over the next year, the benefits will be compounded. Though these corporate solutions can reduce taxes by $5,000 to $50,000 per year for the doctor, these particular strategies are outside the scope of this two-part article. To help you continue your education with these strategies, we offer readers a free copy of our book, For Doctors Only: A Guide to Working Less and Building More ($75 value). You can order the book by calling (877) 656-4362 or emailing Diana@ojmgroup.com. We ask that you pay only the $5 shipping costs.
Mistake #2 Owning Assets Your Name, Spouse's Name of Jointly with Your Spouse!
We acknowledge that owning assets in your own name or jointly with a spouse are the most common ownership structures for real estate and bank accounts. This is okay for 95% of Americans. Hopefully, by now, you realize that you are NOT in that common group. You have potential lawsuit risk, probate fee liability, and estate tax risks that over 95% of the population do not have. That's why, in most states, owning assets jointly can be a mistake. Something as simple as a living trust or a limited liability company can often solve these problems.
Mistake #3 Wasting Time and Money on Qualified Retirement Plans.
This is perhaps the single most important area of planning for doctors to address once they understand that they are different. Typical retirement plans are great for rank-and-file employees because they force employees to put away funds for retirement. Employers may match some percentage of employee contributions (which is free money for the employee). The investment grows tax-free until funds are accessed in retirement (when the employee is living on modest Social Security and these retirement plan funds.
As "the employer," there is no "free money" for you as all the money that ends up in your plan account was yours to begin with. In fact, you are responsible for those matching contributions so the retirement plan does have some "friction" for you if you want to make any reasonable contribution on your own behalf. On top of that, you will not be living on $25,000 to $50,000 in retirement like your employees will. You will have taxable investments, much larger retirement plan contributions and greater Social Security income (maybe). In any case, you will be paying very significant tax on your retirement plan withdrawals. Do you think that tax rates will be lower than they are now when you retire?
With rising costs for employees and a possibility that you may actually withdraw funds from your retirement plans at a HIGHER tax rate then the one you received for the original deduction, the real benefit of retirement plans comes into question. When you add the potential costs and aggravation of complying with ERISA, Department of Labor and tax laws surrounding retirement plans, AND the fact that any unused retirement plan balances will be taxed at rates up to 80% (see chapter on IRD in For Doctors Only book), you may find that retirement plans are not all they are cracked up to be. A growing trend among successful doctors is to implement non-qualified planning alternatives instead of traditional retirement plans.
Suggestion: Use a Better Retirement Plan to Support Your Retirement.
Non-traditional planning can offer higher income physicians opportunities to contribute significantly larger annual contributions. Whether you are using non-qualified plans, "hybrid" plans, fringe benefit plans or even a tool primarily designed for risk management benefits, like a captive insurance company, you could potentially enjoy tax benefits up to $100,000 to $1,000,000 or more annually. Most of these tools allow you access to the funds before 59 1/2, will not force you to take withdrawals at age 70 1/2 if you don't need the money, and will not be taxed at rates up to 70% or 80% when you pass away. For these reasons, savvy doctors utilize nontraditional plans more than traditional retirement plans.
Note: Non-qualified or "hybrid" plans vary significantly in their design, their scope, and their applicability. Some plans work great for smaller practices with one or two partners. Others work best in practices with 3 to 20 partners. Still others may work best for the larger practices. To determine which one is right for you, contact the authors for a free no-cost consultation offered to readers.
Don't Miss Part 2 of this Article
This is the first of a two part article; more tips on tax reduction and other elements of financial planning that are specific to physicians and unnecessary for Average Americans will come in the subsequent part of this continuing article. The author welcomes your questions. You can contact them at (877) 656-4362 or through their website www.ojmgroup.com.
SPECIAL OFFER: For a free (plus $10 S&H) copy of For Doctors Only: A Guide to Working Less and Building More, please call (877) 656-4362.
David Mandell, JD, MBA is an attorney, lecturer, and author of five books for physicians. R. Paul Wilson, CRPC® is a consultant with 10+ years working with physicians. They are a part of the team at the financial consulting firm OJM Group and can be reached at 877-656-4362.