Tax-Advantaged Strategies to Help Optimize Physicians’ Savings

Physicians often want to learn about the various tax-advantaged savings vehicles available to them. Whether you’re employed by a hospital, own a medical practice or are self-employed, it’s wise to consider the tax implications of saving for retirement. Following are three questions to consider as you evaluate your retirement savings options.

Question #1 – Does your 401(k) plan allow for after-tax contributions?

If the answer is “yes,” you may be able to contribute more to your plan than you thought, while also diversifying the tax character of your retirement savings. Because no one can predict what the tax rates will be years from now, it’s wise to build a tax-diversified retirement portfolio. Saving with after-tax dollars within your retirement plan allows higher-wage earners to accumulate Roth dollars. The flexibility to draw from various tax buckets (i.e., taxable, pre-tax and after-tax/Roth) will allow you to optimize your portfolio withdrawal strategy in retirement.

The years between retirement and when you reach age 70-72 are often ideal years to optimize your tax withdrawal strategy if you have not yet received Social Security payments or required minimum distributions from your retirement accounts. Because your income is likely lower without these payments, it may be wise to take advantage of Roth conversions during these years.

Question #2 – Are you eligible to contribute to a 457 plan?

If you work for a state or local government or a non-profit employer, you may be eligible to contribute the maximum amount to a 401(k)/403(b) and a 457 plan.

Question #3 – Are there other defined benefit and cash balance plans available to you?

If you’re not using all plans available, you may be missing out on opportunities to save for retirement while reducing your current tax liability. If you’ve reached a point where excess income isn’t necessary to fund your desired standard of living, and reducing taxes is a more important goal, funding a defined benefit (possibly in conjunction with a defined contribution plan) can help optimize your retirement and tax planning.

It’s common for doctors to seek financial advice from other doctors; however, when making changes to your savings plans, keep in mind that what works for others may not be the best solution for your particular financial situation. For example, depending on your current situation, it may make sense to save excess dollars in a taxable account in order to fund a specific short-term goal such as finalizing education expenses for a child or a down payment on a second home. Or, if you’re close to retirement and nearly all of your wealth is in tax-deferred accounts, now may be a good time to consider Roth conversions or a taxable account to diversify the tax character of your investments.

Physician Financial Freedom is a specialty practice of Creative Planning. Each of our dedicated teams specializes in working with doctors and includes an attorney, a CPA and a CERTIFIED FINANCIAL PLANNER™ practitioner. These professionals are also supported by Creative Planning’s dedicated insurance professionals. Regardless of your specific situation, we are available to help evaluate your insurance options and identify policies that meet your specific needs. If you’d like help with your insurance planning, or for any other financial matter, please schedule a call.

Sam is a Certified Financial Planner™ who specializes in comprehensive wealth management with a financial planning led approach. Sam graduated from the University of Wisconsin-Whitewater with a bachelor’s degree in Finance and received his Master of Business Administration degree from the University of Wisconsin-Milwaukee. He has over 15 years of experience in the financial service industry in both compliance and wealth management. He has adjunct taught at the University of Wisconsin-Milwaukee and Wisconsin Lutheran College and was the treasurer for a free health clinic in Milwaukee.