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

Understanding The Average American

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Before you can understand the unique challenge facing Doctors and what the more successful ones do to achieve and maintain their wealth, you must first understand the demographics of the Average American. This is crucial because, in order to learn how to act differently in your wealth planning decision-making, you have to compare your financial circumstances to the circumstances of the “norm.” It is only through these comparisons that you can truly appreciate the different wealth challenges you have and how you can effectively deal with these challenges.
In this chapter, we will examine the Average American in terms of income level, federal income taxes paid, source of income, retirement needs, asset protection concerns and estate planning challenges.
Important Note: Throughout this book, we will refer to the term “Average Americans.” We recognize that, to some, this term may at first seem demeaning or condescending, or imply some sort of value judgment. We do not intend it that way. It is simply a demographic term to describe a particular group defined by income, tax rate and financial circumstances.

post 3Average American Source Of Income
The Average American is almost always an employee who works for someone else. He gets paid as a W-2 employee and may or may not have a modest benefits package. As a taxable employee, taxes are typically withheld from the paycheck each payday and the after tax proceeds are then distributed. Many call this the take home amount. While this eliminates the headaches of calculating and preparing complex quarterly estimated tax payments and saving for these large payments, it also means there is little opportunity for significant tax planning.
The Average American rarely owns his own business. This means that the Average American does not have to manage the complications of a growing or complicated business that may have multiple locations, many employees, and regulatory reporting requirements. This also means that the Average American’s income will be determined by someone else. The owner of the company or the management team determines when and if there will be any raises or promotions for the employees. Employees can work hard, but the financial rewards from such efforts are at the discretion of someone else. Because the cost of living increases every year, modest raises may provide relatively modest increased spending and saving potential over a lifetime.

Millions of Americans have made the decision to buy or build a small business. There are countless motivations that drive someone to leave the world of the employed and start or run a business. There are pros and cons of being a W-2 employee instead of running your own business. Let’s consider some of the pros and cons of being an employee:


  • Simplified tax reporting
  • Fixed or predictable income
  • Benefits managed by employer
  • Job stability
  • Employer Leverages your work
  • Little lawsuit risk as compared to the employer
  • No business succession risk


  • Little opportunity for tax planning
  • Little opportunity for significant increases in income
  • No control over benefits offered
  • Job stability controlled by employer
  • No direct benefit from Leverage

There is no doubt that running a business is hard work. The business owner has a lot of responsibility. Owning a business is certainly not for everyone. In fact, most small businesses fail. The point we are trying to make is that there is a trade-off for letting someone else handle all of the responsibility and headaches of running a business. The employees have little say in the planning for the business. This is neither good nor bad. It is just the nature of the situation. This is one of the ways that Average Americans who are employees differ from business owners.

Average American Retirement Planning
For almost a century, a major goal of employment for Average Americans has been to work hard and save enough money to retire. Most Americans would rather be doing something other than working and many look forward to the financial freedom of retirement.
In terms of retirement planning, most Average Americans invest in some type of retirement plan offered through their place of employment, typically a 401(k) plan. Most Average Americans also have a checking and savings account and possibly an IRA or small investment account. However, they do not have substantial or sufficient savings in such accounts. This is the result of a combination of factors, such as:

· People are living longer and have greater financial needs in retirement.
· Employers are focused on quarterly earnings and are forced to cut back on employee benefits, including retirement funding.
· Reduced fringe benefits from employers cause increased spending by the employees’ families
· Average Americans are spending more on consumer purchases than on retirement plans simply because their income doesn’t afford them the opportunity to do both.

When companies give less to their employees and employees have to spend more just to pay the bills, the employees simply do not have the discretionary funds after bills are paid to save enough for their desired level of retirement and consequently do not put enough money in these plans. Perhaps, many Americans are relying on Social Security to provide a large portion of their retirement income. You need only read a week’s worth of articles in the newspapers listed later in this chapter to get a clear understanding that relying on Social Security is not a wise planning decision. Therefore, most Average Americans do not have many retirement alternatives.

Average American Asset Protection
Next to estate tax planning, this is the area of financial planning where the needs and concerns between Average Americans and Affluent Americans (which Doctors obviously are) differ most. Asset protection—the practice of shielding wealth from potential lawsuits, creditors or other claims—is plainly not of interest to Average Americans for two reasons:
1. They do not have significant assets to protect.
2. They do not face significant liability through their work or investments.

Later in this Lesson, you will see that Doctor’s asset protection situations are polar opposites of those of Average Americans. As a More