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Chad Carlson

If you're a physician in private practice, odds are that you have a retirement plan in place for you and your employees. But if you're closing in on retirement and need to give your retirement nest-egg a boost, a traditional 401(k) and profit sharing plan may leave you short of your goal.

New tax law changes now make it possible to dramatically cut your taxes and potentially put away as much as $100,000 a year or more in a defined benefit plan. For many physicians, this makes defined benefits plans an attractive compliment or alternative to their existing 401(k), Profit Sharing Plan, or SEP IRA.



Who Should Consider a Defined

Benefit Plan?

To determine whether or not a DB plan is right for you, consider the following questions:

· Are you 45 years of age or older?

· Do you have a practice with five or fewer employees, including yourself?

· Do you want to contribute more than $44,000 annually to your retirement?

· Do you expect to be able to make that contribution for at least three years?

If you answered "yes" to all of these questions, a DB plan may be worth considering.



How Does a Defined Benefit Plan Work?

In defined benefit plans, you set a target amount that you want to receive as income each year during your retirement. Then, your annual contributions are calculated (by an actuary) to provide that benefit. You decide what percentage of your income you would like to live on when you retire and what percent of your income you can comfortably afford to contribute.



Flexibility

Each year, the exact amount you need to contribute to your defined benefit plan is calculated. Your annual contributions are based upon your current age, your compensation, your planned retirement age and the assets you have accumulated in your plan. Naturally, a higher benefit will result in higher annual contributions. Contributions will also increase or decrease as the criteria mentioned above fluctuate.

You have the ability to increase or decrease your plan's benefit formula. Generally, increasing your benefit will increase your contribution amount while decreasing your benefit will decrease your contribution amount. Your contribution amount may increase or decrease if investment earnings exceed or fall short of expectations. Your plan's retirement date is one of the plan provisions used to establish the amount of money to be funded each year.



Larger Contributions Mean Larger

Tax Savings

As a self-employed physician, your contributions may be tax-deductible as a business expense to your practice. Additionally, larger defined benefit contributions reduce your adjusted gross income. This helps your itemized deductions to make a more significant impact in reducing your taxable income and therefore the amount of income tax you pay.

As a general rule, the tax law provides that the annual benefit with respect to a participant may not exceed the lesser of $165,000 or 100 percent of the participant's average annual compensation for his or her high three years.



Tax Deferral

Similar to a 401(k) or profit sharing plan, a DB plan allows interest, dividends and capital gains to accumulate tax deferred. This means that money that would have been paid in taxes is allowed to remain in the plan and compound over time. Due to this fact, tax-deferred investments help your money accumulate faster than taxable investments earning the same rate of return. Distributions from a defined benefit plan are subject to ordinary income tax, and if made prior to age 59 ½, may also be subject to a 10 percent federal income tax penalty.



Distributions During Retirement

Annual Benefit: Once you retire, you can start receiving a lifetime annual income from your defined benefit plan. This benefit reflects the predetermined percentage you chose based on your compensation, up to a certain benefit limit.

Lump Sum: You may also choose to take a lump sum distribution. However, the distributions are subject to ordinary income tax and if made prior to age 59½ may also be subject to a 10 percent federal income tax penalty.

IRA Rollover: You may also choose to directly roll it over to an IRA. This option allows your retirement assets to continue to accumulate tax-deferred. It may also offer you additional flexibility.

As a reminder, it's important to consult with your investment, tax, and legal advisors about what type of retirement plan may be appropriate for your specific situation. As your physician's practice matures along with your baby boomer patient base, the defined benefit plan is certainly worth considering.



Chad Carlson is a financial advisor with Delta Trust Investments, Inc. in Little Rock.

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