401k Recovery Advice

Finding the right retirement plan opportunities

Modern Medicine |

In Brief...

Most physicians count on their retirement plans for the bulk of their financial security. The Simplified Employee Pension (SEP)-IRA allows contributions of a fixed percentage of salary (up to 25% of W2 income) to individual IRAs of most employees, including the physicians. The Savings Incentive Match Plan for Employees (SIMPLE) IRA is another plan that is relatively easy to set up and administer. It allows companies with fewer than 100 employees to open individual IRA accounts for employees. A SIMPLE IRA plan is a good choice for small businesses in which the owners are highly compensated, and few employees wish to defer salary. Note also that maximum contributions to a defined benefit plan preclude contributions for the same business to a profit-sharing plan. The employee cost of the defined benefit plan is proportionally lower for younger and lower-paid employees. However, the salary deferral side of any combination of plans must be aggregated, and may not exceed the annual limit ($16,500/$22,000) in 2010, but up to 25% of compensation for W2 income can be put into a profit-sharing plan in either business to maximize contribution. If this person also has a consulting business on the side with $250,000 of other income, roughly 20% of net income, or 25% of W2 income from that business, could be contributed to another profit-sharing plan run by the side business. Jim L, an endocrinologist in private practice, employs his wife as office manager and has 4 other employees. Jim had a "free" prototype profit-sharing plan with a well-known brokerage. He has been putting 15% of his $230,000 income into the plan each year ($35,000), and thus he must also contribute 15% of all employee compensation (employee compensation totaled $100,000) to the plan as the employee cost. Jim pays his wife $60,000 a year in order to get a $9,000 annual contribution for her, but at an additional cost of $9,000 in Social Security taxes. Jim's wife lowered her salary to $20,000, which saved more than $5,000 annually in Social Security taxes. Yet Jim and his wife were now able to contribute more than $65,000 in pre-tax money, rather than $44,000 as in prior years. Kirk L, an internist, employed his wife and 5 employees in a busy practice. Kirk and 2 of his younger employees switched to a new defined benefit plan, but also continued in the 401(k) salary deferral plan. Kirk's wife and the other employees stayed in the old plan, and his wife's salary was reduced to lower Social Security costs. With the new plan, Kirk and his wife are now putting away about $200,000 in pre-tax contributions annually at a marginally higher cost for the employees brought into the defined benefit plan.

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