Reflections

How Physicians Can Reduce Liability with Retirement Plans

By Sean Condon, CFP®

As a physician in today’s world, you are under more pressure than ever to protect yourself from liability.  You work longer hours[1] as bureaucratic paperwork becomes ever more demanding.  But you have less face-to-face time with your patients,[2] possibly resulting in less trusting relationships between patient and physician.

These combined factors could increase your risk of a lawsuit.  You could be held liable for mistakes in patient records, misinforming patients of test results, or even for the actions of other physicians employed by your practice.  Some of these risks are out of your control and may occur no matter how careful you have been, so it is important to reduce liability where you can.

Many physicians may not realize it, but costly insurance is not the only way to protect yourself from liability.  A strategy to increase retirement contributions above and beyond the typical $57K annual limit allows you to protect more assets and take advantage of significant tax benefits as well.

Reduce Liability with Retirement Contributions

Most employer-sponsored retirement plan assets, such as a 401(k), are protected from creditors and civil lawsuits.[3] Money you contribute to these types of accounts cannot be seized or used to pay personal debts.  And as you probably already know, there are considerable tax benefits to contributing higher amounts of your gross income.

For these reasons, we believe that physicians miss out on opportunities to decrease their liability when they do not contribute the maximum amount to a 401(k) plan each year.  Current contribution limits stand at $19,500 annually.[4]  For high-income earners (especially older earners), this limit may be too low to fund the retirement lifestyle you want and protect your assets from a lawsuit.

Save More with A Cash Balance Plan

A better solution is to open a cash balance plan, which is a defined benefit plan.  In addition to contributing the maximum amount to a 401(k), a cash balance plan is a good option for physicians who can contribute more than $57,000 per year to their retirement.  A cash balance plan allows you to:

  • Contribute more to retirement
  • Further reduce liability
  • Benefit from greater tax advantages

A cash balance plan allows some earners to contribute well over $200,000 annually depending on age.[5] Contributing this much to your retirement not only better ensures your security during your golden years, but also better protects your assets from liability.  Taxwise, contributions to a cash balance plan bring down your taxable income dollar for dollar. What is not to love?

Work with A Professional to Understand Your Options

Although the tax benefits and other advantages of a cash balance plan are significant, they are also incredibly complex.  Working with an experienced wealth management professional can help you understand and determine your ideal contribution level each year.  Determining this level is unlike determining how much to contribute to a 401(k) plan, as it is based on how much you can take out of the plan each year when you retire.

If you are considering adding a cash balance plan to your retirement portfolio, you will need to commit time and effort to working with licensed professionals, including a tax advisor, an actuary, and a wealth manager, such as Windgate Wealth Management.  You can reach us by calling (844) 377-4963, emailing windgate@windgatewealth.com, or booking an appointment online here.

[1]https://www.ama-assn.org/practice-management/physician-health/work-hours-rise-so-does-physician-burnout#:~:text=Almost%20half%20of%20doctors%20also,a%20physician%20works%20each%20week

[2]https://www.statista.com/statistics/250219/us-physicians-opinion-about-their-compensation/#:~:text=About%2033%20percent%20of%20U.S.,impact%20on%20patient%20care%20outcomes

[3]https://www.investopedia.com/articles/personal-finance/040716/which-retirement-funds-are-protected-creditors.asp

[4]https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

[5] https://windgatewealth.com/how-to-contribute-far-more-than-18500-to-your-401k/

Perritt Capital Management, Inc. is the Registered Investment Advisor for Windgate Wealth Management accounts and does not provide tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation.

Data here is obtained from what are considered reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed.

First published June 2021.

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