Locum Tenens: The Right Retirement Plan Can Save You Thousands in Taxes

 

Because locum tenens physicians typically have high income from self-employment and few available tax deductions, they often pay a lot in tax. Thus, one of their most important financial decisions is to select the retirement plan that will provide the highest tax savings.

There are three types of plans to consider—each with its own pros and cons: the SEP-IRA, the Individual 401(k) and the defined benefit plan.

SEP-IRA

2016 Contribution Limit: $53,000

Pros:

  • Easiest and quickest retirement plan to set up
  • No cost to maintain
  • Minimal reporting and disclosure requirements
  • The SEP-IRA also has an advantage over the Individual 401(k) in that you have until your tax-filing deadline to contribute for the previous year. (With an Individual 401(k), the salary deferral part of the contribution must be made by December 31 of the relevant tax year.)
  • Making an annual contribution is 100% optional

Cons:

  • Contribution limit of $53,000 is low relative to defined benefit plan.   SEP-IRAs also lack the $6,000 over 50 catch-up provision.
  • Because of the different methodology used to calculate contribution limits for SEP-IRAs and Individual 401(k)s, at a given income level one is usually able to make a larger contribution to an Individual 401(k) than to a SEP-IRA

Bottom Line: Only use a SEP-IRA if you have missed the Individual 401(k) salary deferral contribution deadline of December 31 and you want to make a tax-deductible contribution for the previous tax year. Otherwise the Individual 401(k) is usually a better choice.


Individual 401(k) (Also known as a Solo 401(k))

2016 Contribution Limit: $53,000 (plus $6,000 catch-up contribution if you are over 50)

Pros:

  • Easy to set up
  • Usually inexpensive to maintain
  • Light record keeping required
  • May provide greater legal protection for assets
  • Making an annual contribution is 100% optional

Cons:

  • Contribution limit of $53,000 (plus $6,000 catch up if over 50) is low relative to defined benefit plan

Bottom Line: The Individual 401(k) is usually a good choice if you do not want to (or are not able to) make an annual tax-deductible contribution higher than the $53,000 (or $59,000) limit.

 


Defined Benefit Plan

2016 Contribution Limit: Defined benefit plans offer the highest contribution potential. There is no set limit. An actuarial calculation must be performed to determine your personal limit (we can do this for you). Contribution limits can be as high as $200,000 per year depending on the plan owner’s circumstances.

Pros:

  • Highest tax-deductible contributions of any plan-by far (often $100,000+) and thus largest tax-savings potential
  • May provide greater legal protection for assets

Cons:

  • Has moderate one-time set-up cost and annual administration cost
  • Moderate record keeping and disclosure required
  • Requires annual contributions to be made for at least three straight years. There is some wiggle room in the amounts from year to year, however.

Bottom Line: The defined benefit plan is by far the most powerful (but least known) plan. Locum tenens physicians who would like to make very large tax-deductible contributions should have an actuarial calculation done to determine their specific contribution limit.


Remember, because many locums . . .

  1. Are independent contractors
  2. Have high income from self-employment
  3. Have few to no employees
  4. Have few deductible expenses
  5. And pay a high rate of tax on their income. . .

. . . they are often in an excellent position to cut their taxes while accelerating their retirement savings by setting up a customized, high-contribution retirement plan.

At Locum Tenens Tax Strategy, we specialize in constructing customized retirement plan solutions designed to maximize a physician’s tax savings while rapidly building his/her retirement next egg.

 

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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.