Doctors who work in a private practice, own a small practice or are independent contractors servicing other medical establishments must take charge of their own retirement plans. Many different options exist, all of which can help a doctor decrease current tax liability and help retirement savings gather momentum because earnings grow on a tax-deferred basis. Understanding the types of plans available is a first step in determining which are best suited for achieving retirement goals.
A Simple IRA is a retirement savings plan well-suited for doctors who are self-employed or are partners in a practice. Employee contributions to a Simple IRA account are pre-tax and all earnings are tax-deferred. According to the IRS, for 2013 and 2014, the maximum contribution to a Simple IRA is $12,000 for those age 49 and under and $14,500 for those age 50 and above. Employers may select between matching employee contributions at a rate of up to 3 percent, or contributing 2 percent of each employee's annual compensation to their accounts. Distributions of funds from a Simple IRA are allowed at any time, but withdrawals during your first two years' participation in a Simple IRA, as well as those made before age 59 1/2, incur special tax penalties. Otherwise, withdrawals are treated as ordinary income for the year withdrawn.
A Simplified Employee Plan, also called a SEP-IRA, is an employee retirement plan geared towards smaller businesses such as small medical practices. A doctor can participate in the plan even if he is the primary partner or owner of the practice that funds the plan. This retirement plan can be used in conjunction with other retirement vehicles provided all IRS maximum contribution rules are followed. SEP-IRAs follow the same distribution rules as Simple IRAs but contribution limits are higher. The maximum annual contribution to a SEP-IRA is $49,000.
An individual 401(k) plan can be a powerful retirement tool on its own or in combination with another type of retirement plan, especially if the doctor's employee matches a portion or all of his contributions. Income tax on contributions is deferred until they're withdrawn, and earnings are likewise tax-deferred. The annual contribution limit in 2013 and 2014 is $17,500 for persons age 49 and under, or $23,000 for those age 50 and over. Withdrawals of vested amounts can be taken at any time and are treated as ordinary income for income tax, except that there's a penalty for withdrawals made before age 59 1/2.
Doctors should consult with their financial planners and tax professionals because their income tends to be well above average and each financial situation is unique. Understanding retirement objectives and current financial status is the first step in creating a manageable retirement strategy.
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