As authors of books and articles, we regularly interact with publishers, editors, and talk show hosts. Radio and television stations, book and magazine publishers, and internet content editors are looking for material for the “average” reader. In general, they fear that providing content generated for a few high-income readers will alienate their average readers and advertisers who pay good money to reach a specific audience. Who is their average reader? Typically, they are defined in the parameters below:
1. The average American family, whose annual income tax liability is less than 12 percent.
2. The 98 percent of American families who will never owe any estate taxes.
3. 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.
Practically, what this means for dermatologists is that much of the financial advice you get from print and online media, and from large national firms, is often not appropriate.
Dermatologists who follow advice that is generated for the masses and don’t take into consideration their unique challenges should see themselves as the patient who focuses on the results of his/her 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.
Because physicians face a large set of unique challenges, it is imperative they look for advisors who spend the majority of 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 May Not Work
Above, 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 dermatologists face is the fact that the solutions we (as a group) espouse are appropriate for less than one percent of the families in the country. For that reason, doctors who insist on implementing only 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 important step to significantly improving your financial situation.
In the rest of this article, and in Part 2 of this article (which 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 Dermatology Practice.” Despite what some CPAs say, in most cases the cost and aggravation of creating and maintaining a corporation (or two corporations for most medical practices) are insignificant relative to the asset protection and tax benefits this offers physicians. With recent tax law changes and 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.
Mistake #2: Owning Assets in Your Name, Spouse’s Name, or 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 percent 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 more than 95 percent 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: Making a Bet on Qualified Retirement Plans … Without Hedging it. This is perhaps the single most important area of planning for dermatologists 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 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 a year in retirement like your employees will. You will have taxable investments, much larger retirement plan contributions, and greater Social Security income (maybe). You will be paying significant tax on 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 withdraw funds from your retirement plans at a HIGHER tax rate than 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 up to 80 percent, you may find retirement plans are not all they are cracked up to be. A growing trend among successful doctors is to implement a non-qualified plan that hedges the future tax risk of qualified plans.
Suggestion: Use Other Plans 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 or 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 59½, will not force you to take withdrawals at age 70½ if you don’t need the money, and will not be taxed at rates up to 70 or 80 percent when you pass away. For these reasons, savvy dermatologists utilize nontraditional plans more than traditional retirement plans.
Note: Non-qualified plans vary significantly in their design, scope, and applicability. Some plans work great for smaller practices. Still others may work best for 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. n
To receive a free hardcopy of Wealth Protection Planning for Dermatologists, please call 877-656-4362. Visit www.ojmbookstore.com and enter promotional code PRDERM12 for a free ebook download of Wealth Protection Planning for your Kindle or iPad.
David B. Mandell, JD, MBA, is an attorney, author of 10 books for doctors, including Wealth Protection Planning for Dermatologists, and principal of the financial planning firm OJM Group www.ojmgroup.com, where Michael Lewellen, CFP® serves as Director of Financial Planning. They can be reached at 877-656-4362 or firstname.lastname@example.org.
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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. 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.