Locum Tenens: This is Your Most Powerful Account

By far the most impactful step many locum tenens physicians can take toward rapidly building a large retirement nest egg is to set up a defined benefit plan into which they can make $100,000+ in tax deferred contributions each year and thus save tens of thousands of dollars on their taxes annually.

Photo credit: 401(K) 2013 via Foter.com / CC BY-SA

Photo credit: 401(K) 2013 via Foter.com / CC BY-SA

However, there are also many smaller things they can do to further grow their portfolios and strengthen their financial foundation. One thing is to invest in a Health Savings Account (HSA).

Pound for pound, the Health Savings Account is actually a more powerful account from a tax perspective. Many locums doctors, because they are self-employed, are enrolled in high-deductible healthcare plans. HSAs are used in conjunction with high-deductible healthcare plans to help individuals pay out-of-pocket healthcare expenses.

Thus, the question becomes how to maximize the financial benefit of an HSA…

Most people who have HSAs use the money in them for current-year medical expenses. However, in my view people with HSAs should make the maximum contribution each year—then cover their medical expenses with other funds. The HSA assets should be invested for the distant future. Here’s why:

Health Savings Accounts are potentially your most powerful account because they pack a triple-whammy tax-savings punch. First, contributions to HSAs are tax deductible. Second, your HSA assets grow tax-free. And third, distributions that are used for qualified medical expenses are also tax-free. There is no other type of account that offers more powerful tax characteristics.

Thus, by contributing to your HSA each year you will lower your tax bill and build, tax-free, an account that you can tap tax-free for medical expenses during retirement. (Contribution limits for 2016 are $3,350 for an individual and $6,650 for a family.) These tax attributes of HSA accounts put them at the top of the heap of retirement savings vehicles, ahead of Roth IRAs (where funds are taxed before they are contributed) and IRAs, 401(k)s and defined benefit plans (where funds are taxed on the way out).

However, there are a few restrictive attributes of HSAs that people need to know. First, withdrawals are only tax-free is used for medical expenses. Second, many HSA custodians levy fees on transactions, so costs can add up. Third, the penalty for withdrawals not used for healthcare expenses prior to age 65 is 20%--versus a 10% penalty on IRA withdrawals prior to retirement.

As always, when it comes to making financial moves, what’s right for one person’s situation may not be right for another’s. However, using an HSA as an investment vehicle, given its trio of tax advantages, is certainly worth considering.

Disclosure: This article is for informational purposes only and is not tax advice. For tax advice individuals should consult their CPA.


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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.