Smart Way for Physicians to Catch Up on Retirement

14th Apr 2020

Stethoscope next to jar of coins

Because of their stable industry, physicians are in a unique situation when it comes to retirement planning. Many early-career doctors don’t have extra money to set aside for retirement when they start working. Focused on paying down school debt, these doctors often choose to pay off their loans – before saving for retirement.

There’s good news for these late planners. A tax-advantaged retirement plan can be an effective way to save for and catch up on retirement quickly. If you’re an independent physician, locum tenens doctor or own a small medical practice, looking to bolster retirement savings, you may benefit from a tax-advantaged retirement plan such as a Defined Benefit or Cash Balance plan.

These retirement plans offer the largest allowable deductible contributions – so the higher the contribution, the lower the taxable income. Plus, Defined Benefit and Cash Balance plans grow tax-free through the end of the plan.

Locum Tenens Physicians

Working locum tenens is one way physicians can earn extra income. One benefit of this profession is being able to contribute this income towards retirement savings. There are a few options available depending on the type of work a doctor wants to do. Physicians can either work part-time as secondary income, or choose full-time assignments that pay well and establish a career as a locum tenens.

Many physicians, who are on the verge of retirement, often find locum physician jobs rewarding and a great way to “wind down” their medical careers by taking jsut a few contracts a year.

Cash Balance Plan for Small Practices

Many self-employed doctors with small medical groups have opened a Cash Balance plan, which is another tax-deferred account like a 401(k), profit-sharing plan, or SEP-IRA.

If you own a small medical practice and want to make significantly larger retirement plan contributions, you may want to consider adding a Cash Balance plan to your 401(k).  This high-contribution retirement plan works by allowing participants to put additional tax-deferred money into retirement after it has been maxed out. This allows profitable owners to accelerate savings and pay significantly less in taxes.  Cash Balance plan contributions are age-dependent, so the older the participant, the higher the amount –an older participant has fewer years to save toward the $2.6 million maximum lump sum that is allowed in a Cash Balance plan.

Depending on your age, Cash Balance plan contribution limits can be as high as $250,000 each year. These contributions will reduce your taxable income, meaning that any income you put into a Cash Balance plan will not be taxed that year.

For instance, Dr. Jones is a 53-year-old independent anesthesiologist with a C-Corp who earns about $400,000 a year. He opened a Defined Benefit plan and his total annual estimated contribution is $179,400.  His tax savings will be about $66,000 and his total projected accumulation will be $2.6 million

Are you a physician who wants to catch up on retirement? See if a Defined Benefit or Cash Balance plan is right for you.



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