Securing a comfortable retirement is a leading financial goal for most physicians, including retina specialists. To reach this goal, many physicians use a variety of different planning tools throughout their careers. In this article, we examine the five most common retirement planning tools used by physicians.

1. QUALIFIED RETIREMENT PLAN (QRP)

Retina specialists who receive a W-2 can often participate in their employer’s retirement plan, which allows them to defer income by contributing to the plan.

A classic example of a QRP is a 401(k), which is the most common retirement plan option offered to physician employees of for-profit entities. Government and nonprofit health care organizations offer 403(b) plans, which work the same as 401(k)s.

For retina practice owners, a QRP can also be an attractive option, although they need to be aware of the financial ramifications (ie, what it will cost them to fund the plan for employees). Working with an experienced advisor can help practice owners determine which type of plan(s) make the most sense (eg, 401(k), defined-benefit plan, profit-sharing plan, money-purchase plan); they can also run various funding formulas so that owners get the lion’s share of the benefits while also meeting the requirements for employee contributions.

Properly structured plans offer a variety of benefits: plan participants can fully deduct contributions to a QRP, funds within the QRP grow tax-deferred, and (if non-owner employees participate) the funds within a QRP enjoy superior asset protection.

In our experience, we find that nearly all physicians in private practice participate in QRPs. The tax deduction is hard to resist. However, for physician practice owners, QRPs come with a few downsides, such as the cost of contributions for employees, potential liability for mismanagement of employee funds, and the ultimate tax costs on distributions. Because of these, it often makes sense for owners to investigate another type of plan (that hedges the QRP) as an additional savings vehicle. For many, the next tool provides that tax hedge.

2. NON-QUALIFIED PLAN

Many private practice physicians want to save significantly for retirement but are limited by the QRP funding rules. In addition, practice owners are interested in a plan that hedges against their QRP and can be accessed tax-free in retirement. Non-qualified plans can be the solution for many. Because these plans are not subject to QRP rules, non-qualified plans do not have to be offered to employees. Further, even among the physician owners, there is absolute flexibility. For example, one physician can contribute a maximum amount, the next partner could contribute much less, and a third physician could opt out completely.

The main drawback to non-qualified plans is that contributions are never tax deductible. However, like a Roth IRA, they can be structured for tax-free growth and tax-free access in retirement. As such, non-qualified plans can be an ideal long-term tax hedge against a QRP. Beyond these general ground rules, there is tremendous flexibility and variation with non-qualified plan designs.

3. BENEFIT PLAN FOR SELF-EMPLOYED AND OUTSIDE BUSINESSES

Self-employed physicians and physicians who receive income reported on Form 1099 (including those who “moonlight,” work locum tenens, or consult in the health care industry) have other options to help save for retirement.

A SEP-IRA is a traditional IRA established under a Self-Employed Pension (SEP) Plan document (often the Form 5305-SEP). Under the 2024 limits, physicians can contribute the lesser of $69,000 or 25% of their compensation. In addition, physicians with a SEP may still be able to contribute to a separate traditional IRA or Roth IRA. Like other traditional IRAs, SEP-IRA account balances grow tax-deferred and are taxed at the ordinary income rates when distributed.

4. AFTER-TAX (ROTH) IRA

Under 2024 limits, an individual’s total contributions to traditional and Roth IRAs cannot exceed $7,000 per year ($8,000 per year if older than 50 years of age). Physicians who are not covered by a workplace retirement plan may deduct pretax contributions while those covered at work can make non-deductible or partially deductible contributions, depending on their earned income and filing status.

Many physicians implement a “backdoor Roth IRA” by first contributing to a traditional IRA and then converting the traditional IRA to a Roth IRA. (Note: This tactic requires careful planning to avoid unnecessary taxation. Work with an experienced advisor on this.)

5. PERMANENT (CASH VALUE) LIFE INSURANCE

If managed properly, a permanent life insurance policy can provide the same benefits as a Roth IRA (ie, contributions are made after-tax and balances grow tax-free and can be accessed tax-free). The category of permanent or “cash value” life insurance includes whole, universal, variable, and equity-indexed life insurance policies. While the differences among these policies are significant, a deep dive into these distinctions is beyond the scope of this article (to learn more, see Further Reading). Regardless of the type of insurance, the cash value of permanent policies grows tax-free and can be accessed tax-free during the insured’s life.

SECURING THE FUTURE

The top financial goal of nearly all physicians is retirement on their terms, and the five retirement tools discussed here can play significant roles in achieving this goal. If building your retirement wealth is an important goal for you, an experienced advisor can help you investigate retirement planning alternatives and determine the best option(s) for you, your family, and your practice.

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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice, or as a recommendation of any particular security or strategy. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.