When planning your retirement, you are likely familiar with IRAs, 401(k), and retirement plans as a traditional route to retirement savings. But for many Doctors, Physicians, Dentists and practice owners, these options can be unsuitable.
Luckily, there is another lesser-known eligible savings option available to you: retirement plans with a cash balance. Cash Balance Plans are a class of IRS-approved pension plans that allow for maximum contributions to be made to the pension plan.
Doctors to save more with a cash balance pension plan. This plan is considered a defined benefit plan, but with some elements of a defined contribution plan with 401(k)/profit sharing maximum.
Cash balance pension plans are more popular as a way to provide doctors with an opportunity to increase their annual retirement savings by as much as 4X while reducing their taxable income. Working with your financial, tax, and retirement consultant, you can determine if these plans are the right fit for you.
Doctors that can benefit from a cash balance plan
- Doctors with a small practice that has a few employees
- Doctors who are solo practitioners without any employees
- Doctors who are employed with a major hospital but also have a side income as an independent practitioner
- Doctors who serve as locum tenens
Which type of business entity can sponsor a cash balance plan for doctors?
Business entities that can sponsor a cash balance plan are:
- Sole-proprietorships
- S-Corporations
- C-Corporations
- Partnerships
In short, any type of business entity can sponsor a cash balance plan. The only thing that would differ is how the tax deduction is claimed on the tax returns.
If the doctor receives 1099 income from a hospital, they would normally declare that income as a sole-proprietor and file a Schedule C. The Schedule C income can be used to fund the cash balance plan as well as be considered as compensation for the cash balance plan. However, the tax deduction for the contribution to the cash balance plan would normally be taken on Form 1040.
If the doctor has registered the business as an S-Corp, the compensation for the cash balance plan would be gross compensation (typically Box 5 of the W-2) and the deduction would be taken on the Form the 1120S filed for the S-Corp
Examples of cash balance plans for doctors:
Cash Balance Plan for a doctor who is self-employed and does not have any employees
Let’s assume the doctor is 45 years old and has not incorporated the practice and files their taxes as a sole proprietor.
Let’s also assume that the Schedule C for the past three years has been at least $200,000 and no contributions were made to any type of pension plan.
Use our cash balance calculator to find out how much you can contribute based on your age and income.
Cash Balance Plan for Doctor who has a small practice and a few employees
Let’s assume our doctor in this case is 50 years old and has incorporated the business as an S-Corp. The W-2 income from the business is $280,000 and three other full-time employees assist the doctor in the practice.
A participant with the above-mentioned parameters can accumulate $2,621,923.68 till s/he reaches the assumed retirement age of 62. In the first year, a maximum contribution of $166,267.00 can be made to the plan.
Cash Balance Plan for Doctors with a growing practice wherein ownership will be offered to new doctors over time
This is a typical situation for a practice that is started by one doctor who hires another doctor who will slowly buy into the practice while growing it. This team could further keep expanding and the cash balance plan could act as a great incentive to hire entrepreneurial doctors while offering significant remuneration in a tax-deferred way.
In such a situation, the cash balance plan could have different classes with different levels of cash balance contributions:
- Class 1: Owner Doctor
- Class 2 Non owner doctor
- Class 3: Doctors who are highly compensated employees (as per the definition of the IRS)
Doctors with small practice but employee retention is essential
Employees are crucial to a small practice as a good employee can take a significant administrative burden off the doctor. The cost and effort of training and retraining new employees are significantly higher and it might make more sense to add additional retirement benefits to the employee package. Employees also directly interact with patients and delivering care with empathy can be crucial to the long-term success of the practice.
In such a situation, the doctor can include key employees in the cash balance plan wherein the benefits increase with years of service. The plan can also implement a vesting schedule making the employees earn vesting through years of service.
Retired Doctor but still earning significant income through other sources
Many doctors serve as expert witnesses or provide consulting services to other hospitals/doctors/drug companies. Such doctors may be above the age of 70 and may not be qualified to contribute to other types of retirement plans. However, a cash balance plan can be set up if there is significant income and used to further increase retirement savings.
Benefits of Cash Balance Plan for Doctors
- Lower taxes: Doctors are almost always in the highest tax brackets no matter their age. In this situation, tax planning is an imperative goal for long-term financial well-being. Defined benefit plans offer significant tax deductions and help in lowering your taxable income.
- Liability Protection: Money held in a cash balance plan is protected from lawsuits which are always a big threat to medical professionals.
- Saving for Retirement: Based on current IRS maximums, a cash balance plan allows a doctor to save as much as $2.8 million in the plan in a tax-deferred manner. The spouse can also be employed in the practice and that can increase the total lump sum that can be accumulated in the plan.
- Employee Retention Strategy: As described earlier, this plan can be used to promote employee retention which has many non-quantifiable benefits.
We specialize in the set-up of pension plans for doctors. Feel free to send us an email at info@pensiondeductions.com or schedule a call If you’d like to discuss whether this may be the right option for your business.
