Is This Tax-Cutting Tool Too Good To Be True?

Not if you are looking to cut your tax bill and save more for retirement.  Locum tenens and other independent physicians have a tremendous opportunity to significantly cut their tax bill: It's called a Defined Benefit (DB) plan. When we first start going into the details of DB plans, however, we often run into skepticism. How, they ask, can it possibly be legal to make a $100,000+ tax-deductible contribution to a retirement plan and thereby save $40,000 or more in taxes annually?

Well, it is possible and it is legal, and locum tenens physicians would be wise to familiarize themselves with the potent tax advantages that DB plans offer. In fact, locums that are not currently contributing to a DB plan are probably paying tens of thousands of dollars more in tax each year that they need to.

Many qualified candidates simply are not aware of DB plans because they are not widely discussed. Perhaps the main reason is that they are not suitable for 98% of the population. For financial writers, it is far easier to generate interest from an article on a topic such as a 401(k) or SEP-IRA, which are relevant to a broad swath of the population. Why write on a topic as esoteric and specialized (and boring sounding) as a defined benefit plan?

Defined benefit plans have been around for decades, however, and are IRS-approved. In many ways they are like an Individual 401(k) Plan on steroids. They are perhaps the most powerful financial tool for high-earning self-employed individuals looking to both save on taxes and to rapidly build a large retirement nest egg. If you are one of the lucky 2% of the population that can take advantage of a DB plan, you should give it serious consideration.

There are a couple of things about DB plans you should know at the outset. First, because each DB plan is created specifically for a certain person’s circumstances, it costs money to set up and to administer. There is simply more paperwork involved than with an Individual 401(k) or SEP-IRA. Also, DB plans are more of a commitment than 401(k)s or SEP-IRAs, both of which do not require annual contributions. The drawbacks of DB plans, however, pale in comparison to the significant tax savings they can enable.

Is a defined benefit plan right for you? We only need a few pieces of information about your situation to generate a complimentary tax-savings proposal for you. There is no cost to you for this service and no obligation whatsoever. If you do find that a DB plan works for your situation, you will have to move quickly if you want to save on your 2017 tax bill. Plans must be established by December 31 of the year for which contributions are made. However, it takes time to create the plan documents, and pension administrators are incredibly busy in the last couple of months of the year. Thus, it is best to begin the process of establishing your plan no later than December 1st.

If you are ready to get started with your proposal, use our Tax Savings Analysis Tool today.

Or to learn, more visit our Defined Benefit Plans In Detail page.


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Peter C. Thoms, CFA

About the author

Peter Thoms founded Orion Capital Management LLC in April 2002. Peter has an extensive background in crafting investment solutions for high-income clients in a wide variety of circumstances. He has a passion for helping clients to protect their hard-earned income and does do by structuring customized retirement and investment strategies to minimize clients' tax burden while accelerating their retirement savings.