by Midwest Legacy Group
A career in medicine can help you establish a lifetime of high-earning potential. Unfortunately, with few exceptions, most early-career physicians leave medical school with a mountain of student loans to pay off, and that’s how they start their future—in debt. This scenario is especially common for physicians of color.
Becoming a physician and inherently understanding finances don’t always go together. Decreasing debt and acquiring wealth is usually a challenge. Here are six strategies worth considering to preserve what you earn, bolster tax savings, and better plan for what’s ahead.
Defined Benefit Plans
Defined benefit plans promise a specified monthly benefit during retirement. The advantage of defined benefit plans is that part of your retirement income comes to you with no effort on your part. And, as this payment—when set up correctly—will last you through retirement, you can focus less on budgeting because you know what to expect.
In most circumstances, you will need to have worked for a company for a set amount of time to be eligible. All plans are different, so it’s important to understand the plan you choose.
Backdoor Roth Contributions
Roth IRAs have been the go-to of retirees due to their tax-free treatment of growth and distributions. The income eligibility limits Roth IRAs have, though, disqualify most physicians from taking advantage of them. That’s where the backdoor Roth IRA comes into play.
When using this method, you can make a non-deductible regular IRA contribution and the very next day convert those assets into a Roth IRA. Doing so promotes tax-sheltered growth on those assets and no tax on withdrawals.
There are several key things to keep in mind with backdoor Roth contributions:
- You must hold the Roth account for a minimum of 5 years and be at least 59.5 years old before you can tap the earnings tax-free and penalty-free.
- Unlike traditional IRAs, there are no mandatory withdrawals or required minimum distributions at age 72.
- You may owe taxes in the year you convert your IRA.
Real Estate Opportunities
The real estate game gets a lot of attention. People love to buy, own, and sell real estate, and for good reason. Here are some key ways to make money in real estate:
- Use leverage to buy real estate so you can pay a portion of the total cost upfront and pay off the remaining balance over time.
- Become the landlord of a rental property.
- Buy undervalued real estate, upgrade it, and sell it to make a profit.
- Join a real estate investment group if you prefer a more hands-off approach.
- Having a real estate investment trust (REIT) can pay dividends similar to stocks.
Independent Qualified Plans
Qualified plans reap the benefit of your tax-deferred contributions, and your employer can also deduct the amounts they contribute. Here are some things to remember when it comes to a qualified plan:
- ERISA is the governing body that sets the guidelines for these plans.
- Qualified plans qualify for certain tax benefits and receive government protection.
- Executives and other key personnel are generally the ones that get offered nonqualified plans because an ERISA-qualified plan cannot always meet their needs.
Health Savings Account
When enrolled in a high-deductible health plan, you can establish a health savings account (HSA), which permits annual tax-free contributions of $3,650 for individuals or $7,300 for families (with an additional $1,000 contribution for those 55 or older)—with no taxes incurred when withdrawn for payment of qualified medical expenses.
In addition, most HSAs will allow you to invest your HSA funds more than other accounts. As a result, HSAs possess the “holy trinity” of tax benefits: tax-free contributions, tax-free growth, and tax-free distributions if used for qualified medical expenses.
Anticipate the Unexpected
When you’re striving to make more money, protecting what you have now means you can invest more later. To establish a solid financial plan, be sure to consider the unexpected:
- Sickness and injury: Being a physician is a physically and mentally demanding job. A debilitating illness or injury can bring your earnings to a halt. Disability insurance can protect your wealth in such cases.
- Unexpected/accidental death: Accidents happen, and preventing them is often out of our control. Life insurance can help ensure your assets are preserved for those you love.
- Taxes: As a high earner, you lose a significant portion of your earnings to local, state, and federal taxes. Understanding the ins and outs of tax breaks can be crucial to maximizing your financial worth.
- Lawsuits and liability: Property and casualty insurance (auto, renter’s, homeowner’s, and umbrella insurance) is often obtained using online carriers or 1-800 call centers with just enough coverage to comply with the law. The focus is on the cost of the insurance instead of what it will do for you when you need it. It’s worth it to choose the insurance plans that will best support your financial goals, come rain or shine.
In closing, remember, Rome wasn’t built in a day, and wealth isn’t accumulated overnight. These financial strategies in saving and investing can take many decades to build you considerable wealth. And your financial worth can be undermined by the unexpected. Insurance and other risk management steps are critical to mitigating these risks and building an optimal financial future.
To learn more, reach out to Midwest Legacy Group today: P. 630.541.5958 or E. info@midwestlegacyllc.com
These concepts were derived under current laws and regulations. Changes in the law or regulations may affect the information provided.
This information is not intended to be used–and cannot be used–to avoid penalties under the Internal Revenue Code.
