If you are a physician with a private practice, you should ideally look beyond short-term investments and consider retirement plans for not only attracting and retaining worthy medical professionals but also for tax planning that will make possible faster personal wealth accumulation. Most physicians fear the process of establishing a retirement plan for their employees under the mistaken assumption that it can be very complicated and expensive, however, this is not necessarily so. There are quite a few options of retirement plans, each with their advantages and requirements that can be explored. Once selected, retirement plans don’t have to be fixed; as the practice evolves, owners can make the desired changes. A quick glance at the top retirement planning options:
SIMPLE IRA
The SIMPLE IRA, while really being very simple to implement, actually stands for Savings Incentive Match Plan for Employees. It is quite suitable for small practices that have less than 100 people on their rolls where employees are offered salary-deferral contributions by the owner. Employees who are eligible can contribute $12,500 or more annually out of their salaries, which in turn, decreases their taxable income. Employees who are 50 years old or more may contribute 3,000 more.
Under this plan, practice owners are required to contribute 2% of each eligible employee’s contribution, irrespective of participation in the plan. Otherwise, they have the option of contributing 3% of the compensation of each participating employee every year. While contributions made by the employer are tax deductible, it is quite natural to be concerned about making continuing financial commitments in an unstable economic environment. When in doubt, you may seek professional advice from physician financial planning experts.
SEP IRA
A Simplified Employee Pension (SEP) IRA is ideal for practice owners who are not sure of the profitability of the practice. Tax-deductible annual contributions are capped at the lesser of $54,000 or 25% of the employee’s compensation. The total contribution by the employer is also restricted to 25% of the business income. The employer can change the amount of the contributions based on the performance of the practice because the rules are less restrictive.
Another reason why SIMPLE and SEP plans are so popular is that practice owners can become eligible for an income tax credit equivalent to 50% of the initial $1,000 spent by them on administrative expenses and on retirement education for the first three years after setting up the plan.
Profit-sharing Plans
If a practice owner is concerned about the cash flows, a profit-sharing plan is a good option even though the cost of administering it can be higher. With such a plan in place, the employer has flexibility in the amount of the contributions. Every year, the employer can review his practice performance and set the percentage of the compensation of each participant for contribution. While the contribution is tax deductible, these plans require the filing of IRS Form 5500 and compliance testing.
401(k) Plans
These immensely popular retirement plans permit employees to contribute amounts from their salaries thereby reducing their taxable incomes. Contributions by the employer are optional though tax-deductible. With the increase in the ceiling of contributions, these plans have become even more attractive; however, the employer has to undergo compliance testing as well as file Form 5500.
Conclusion
Practice owners may find retirement planning daunting with the existence of so many plans; however, they can make the right choice with some careful research that will benefit all concerned; employees, themselves, and their businesses. Reaching out to a financial advisor for assistance is highly recommended.
Author Bio: James Parker is a financial consultant attached to a private organization in New Jersey. He is an avid blogger who enjoys sharing his knowledge and expertise with his readers in his blog posts. He also recommends reputed companies such as Beamalife.com/ for perfect solutions.