Use Retirement Plans

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There are socially beneficial reasons for the creation of tax incentives surrounding qualified retirement plans. If you see a long history of tax benefits being afforded to a particular behavior or asset, this is generally because Congress believes that the behavior or asset provides some economic benefit to society as a whole. We will revisit additional tax benefits for investments later in this Lesson and in Lesson #8. In the case of retirement vehicles, the theory is that by encouraging people to fund their own retirement, the government (and the rest of us taxpayers) will not have to support them in retirement.
Two retirement tactics for Doctors to consider are:
1. Maximizing available qualified retirement plan contributions for all members of the family.
2. Maximizing investments in vehicles that are similar to qualified retirement plans for all members of the family.
As you learned in Lesson #1, Doctors must Leverage assets, capital and advisors if they want to work less and build more. By creating separate business entities to own real estate, equipment and liquid assets, Doctors are able to create employment opportunities for members of their family. By creating income opportunities for family members, you can accomplish two things:
1. Generate effective wealth transfers to junior generations.
2. Create opportunities for such family members to make tax-deductible contributions to their own retirement plans.

MA photo by Mikael Kristenson. The Use of Qualified Plans
Since tax deductible retirement plan contributions are limited for each person, having additional family members earning income within a family business or practice allows multiple tax-deductible contributions. This technique reduces the total tax liability for the family. In an earlier Lesson, you learned that qualified retirement plans were afforded the highest level of protection from creditors (+5). The use of multiple contributions also affords physician families greater level of asset protection for their total wealth, as more money will be invested into this exempt asset class. In addition to the reduced taxes and increased family savings, this strategy helps protect those savings from lawsuits (see Lessons #5 and #6). All of these benefits are integral for long term, sustainable affluence. There are many types of tax-deductible retirement vehicles. They fall into one of two cat-egories: defined contribution plans or defined benefit plans. Defined contribution plans restrict the amount you can contribute to the plans on an annual basis. These include all forms of IRAs (individual retirement accounts), profit sharing plans, money purchase plans, 401(k) plans, and others. Defined benefit plans restrict how much can be in the plan at any time. The broader category of defined benefit plans includes fully insured defined benefit plans which are also known as 412(i) plans. Typically, defined benefit plans are used to help older individuals catch up on lost contributions.
The choice and implementation of the right plan for the situation will be determined by your planning team. The benefits of that planning will vary widely depending on each family’s circumstances and the ages and salaries of the employees.

Maximize The Use Of Vehicles Similar To Qualified Plans
Another tactic Doctors should employ is to use tools and techniques that mirror many of the benefits of retirement plans. Since retirement plan contributions are limited, Doctors need to utilize alternative saving and investment methods to meet their significantly higher long-term retirement needs. A common strategy to enhance long-term retirement income and reduce taxes on investment gains is to invest in cash value life insurance. This will be discussed in detail in Lesson #8 where we discuss how certain investments offer important benefits to Doctors. If you want to maximize long term, tax-efficient retirement income, you should definitely take time to review Lesson #8.

The Diagnosis
Retirement plans are a great way to achieve a high level of asset protection, while reducing cur-rent tax liabilities. In addition, the use of vehicles like cash value life insurance policies can help Doctors avoid taxes on investment gains and enhance retirement income while protecting assets from lawsuits all at the same time. Other vehicles, like Family Limited Partnerships and Limited Liability Companies, can also offer tax benefits. These are discussed in the next chapter. More

The Value of Financial Specialists

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The best way to maximize your benefit from leveraging people is to work with experts in many financial and legal fields. As you learned in Lesson #2, you have very different needs than Average Americans do. As a result, the right specialists for most people are not likely to be the right advisors to help you.
As you become more successful, you need advisors even more. Adding employees, making additional investments, purchasing equipment and real estate, and creating new businesses add complexity to your plan. This increased Leverage exponentially increases the complexity of your comprehensive financial plan. This complexity necessitates the need for a team of advisors. Without a very strong team, you will struggle to find the time to focus on the important things that make you money, let alone enjoy any free time. To illustrate the value of advisors, refer to the equation below:

  • Wealth can only be achieved through Leverage
  • Leverage can only be managed with a team of Advisors
  • Wealth can only be achieved with a team of advisors managing the Leverage

In this section, we will discuss the reason why Doctors need a team of knowledgeable advisors with diverse areas of expertise. Then we will discuss how to maximize the value of your advisors and suggest tips for working with your team.

post 6Managing Complexity: The Need For Advisors
Most people realize that wealth creates complexity. What Doctors need to realize is that the management of complexity and Leverage is not the job of a traffic cop. As wealth grows, the number of complicated, technical risks that the Doctor faces also grows exponentially.

As an example, the transition from running a sole proprietorship to having a single em¬ployee may not seem to be major, but that couldn’t be further from the truth. The addition of just one employee creates a need for:
· Payroll creation, funding, and payments
· Regular payroll tax payments (or you can go to jail)
· Withholding tax filings and payments
· Workers compensation insurance or fund payments
· Occupation Safety Hazard Association (OSHA) compliance
· Separate retirement plan (ERISA) regulations and contribution requirements
· A host of other state and federal reporting requirements.

In addition to all of the aforementioned specific issues, the Leverage of assets also increases the need for more general categories of planning, like asset protection, banking (private and commercial), business planning, financial planning, healthcare law, HIPAA, Medicare, income tax management, investing, life insurance analysis, disability insurance analysis, property and casualty insurance analysis, long-term care insurance analysis, educational funding, retirement planning, family law, gift and estate tax planning, charitable planning, Medicaid planning, and a host of other areas.
Each category of planning has its own technical areas that can be competently handled by an advisor who has expertise in that area. Although it is common to find an advisor who has expertise in several areas, there are categories in which the input of two advisors may be necessary. For example, tax issues are typically handled by a both a tax attorney and a CPA. As a result, there is no way that a small team of two or three advisors could possibly handle the needs of a Doctor. This means that a Doctor may need to Leverage the services of six or more advisors over their career.
While the concept of such a large team may seem overwhelming, consider your profession of medicine. Adult patients do not continue to see the obstetrician who delivered them or the pediatrician who treated them in childhood. Patients need to see a number of specialists as they mature and as their needs change, often consulting with a number of Doctors at once.
If you are like your patients, you may want to be able to keep the same financial “primary care” advisors for as long as possible. Having someone you know and trust as your primary contact is very comforting. This “primary advisor” can help explain situations to you, find the right specialists if a need for one arises, and help communicate with you as complicated procedures take place. Keep this in mind. In Lesson #10, there will be discussion of your team of advisors. One of your advisors on this team is going to be the primary contact to help you through it all.

Working With Your Team
Having the right team of advisors is another step in the right direction, but there is still more to do. Having a team that is run poorly is like having an alarm installed in your house but never turning it on. You have to “work” with the team for the team to provide any value. In our discussion with the partners of The Founders Group in San Diego, we learned some valuable lessons about successful business owners (and Doctors need to consider themselves business owners). The Founders Group only deals with families with businesses or net worth above $25,000,000. They have found that the most successful clients and families arranged annual or semi-annual all-day or multi-day meetings with all of their advisors, business partners, and key family members. Sometimes, the costs of flying in advisors to perform these meetings and paying them their hourly wages can cost thousands of dollars per year.
According to Joe Strazzeri of The Founders Group:
“Professionals and business owners who make the effort to spend time with the experts on their team generally see these meetings as the most productive use of time and money.”

Tips For Working Within A Team
As with any collaborative endeavor, the collection of people into a coordinated team is not enough to ensure success. Every conference call and meeting must have an agenda and someone to manage the meeting to make sure that all-important items are handled within the allotted time. It is common to put one of the advisors in charge of organizing and facilitating information between the other advisors. This is usually a financial planner and not an accountant or attorney—though the “quarterback” could be any one of the advisors More