FINANCE
Other than Retirement
Wes Flores
Scenario # 1 : Leaving practice early or making a change due to desire or circumstance .
Between government mandates , the rise of electronic medical records and declining reimbursements , it ’ s no wonder that nearly 75 percent of physicians may be contemplating a career or practice change 1 . Even if you ’ re not thinking about quitting cardiology to become a candle maker in a village in the foothills of the Italian Alps , you still need to be prepared should an illness or disability limit your ability to practice .
That ’ s why all physicians should diversify not only their assets , but also their tax structure between tax-deferred , taxable and tax-free structures .
Diversifying Taxes on Investments
Dumping money into a 401 ( k ) or traditional IRA is certainly worthwhile and will lower your tax bill today . But it ’ s only tax-deferred , meaning that you will have to pay income taxes on it when you access the account after 59½ . Under the current tax regimen , for instance , that means if you withdraw $ 1 million at age 60 , you will be paying close to $ 400,000 in taxes on it .
There are two big advantages to keeping a significant portion of your retirement savings in a taxable general investment account , despite not getting the tax deduction today .
If your circumstances change or you need or want proceeds from investments early / immediately , there is no penalty to access it . If you ’ ve done well saving and investing , this can ease the process of retiring earlier or transitioning your practice or career .
Only the long-term capital gains are taxed when you access the investment – typically , a much lower rate than income tax . Since you ’ ve been paying taxes on realized gains and dividends over the life of the investment , a $ 1 million will be much closer to $ 1 million . For example , if you ’ ve invested $ 350,000 after tax dollars over a period of 20 years and already paid annual taxes on $ 250,000 of cumulative dividends , interest and realized gains and the account is now worth $ 1 million , your tax burden is much less . In fact at today ’ s rates , if you were to withdraw $ 1 million , you would only pay 20 percent on the $ 400,000 of capital gains growth – or $ 80,000 .
A Word on Asset Protection
One reason physicians are often advised to put as much money as possible into retirement accounts and cash-value life insurance policies , besides the tax benefits , is because these accounts are typically protected from creditors . However , physicians can also protect general investment accounts from creditors using various legal frameworks such as limited family partnerships or LLCs ( laws governing these tools vary state-by-state , so check with a CPA or attorney ).
Accessing Retirement Accounts Early and Without Penalties
Should you need or want to access a qualified retirement plan ( 401 ( k ), IRA , etc …) before 59½ without the accompanying hefty penalty , you can do it under the IRS ’ s 72T rules .
Under 72T rules , individuals can access a certain percentage of qualified retirement accounts each year . The catch is two-fold :
The exact percentage individuals are allowed to access is determined by the IRS based on current age and life expectancy .
Individuals who access retirement accounts early must withdraw the same amount for five consecutive years or until age 59½ - whichever is later .
However , you can still continue to work while using your retirement as a supplement .
1 .
" 3 in 4 Physicians Could be Contemplating a Career Change ." 2016 . HealthLeaders Media . http :// www . healthleadersmedia . com / physician-leaders / 3-4-physicians-could-be-contemplating-career-change
49 TODAY ’ S PRACTICE : CHANGING THE BUSINESS OF MEDICINE