Are there tax advantaged retirement accounts for high income earners?

[txmom842]

My husband is in the medical profession making a good salary of $300,000 per year. Unfortunately because he works for a very small group they have no retirement options set up for the employees. At year 3 his employer has the option of funding a SEP IRA for him, but what should we do until then? Besides funding a non-deductible IRA for him and myself, are there any other options for us?

[disneysteve]

Is he self-employed to any degree? If he is, he can open his own SEP-IRA. I'm also a physician. I am an employee of my practice but earn some income independently from medical market research. I've also done some on-call work outside of the practice in the past and that counts as self-employment so I put those earnings toward my SEP-IRA.

[txmom842]

No, he is not self employed to any degree.

[creditcardfree]

This is one case where I would probably suggest deferred annuities. I'm so not a fan, but they have a place for high income earners, because you can invest tax deferred and there is not a limit. There are much higher fees than traditional investments. Annuities are offered by insurance companies.

Please do your homework before investing in annuities. Here is some basic information including criticism against annuities.

[MonkeyMama]

This may be worth considering other employment opportunities. It is common for small medical groups to offer profit sharing plans, because they are an easy way to structure tax-free compensation. Basically, the employer can contribute $49,000 per year, per Doctor, into a profit sharing retirement plan. It's easy to set up to reward the high paid staff without giving much to the low paid staff. So, this structure is very common with small medical practices. Most (all?) of my clients only have a one-year waiting period.

With the SEP - is there a profit sharing element that goes with that? If so, then maybe he is in a good place. Otherwise, if he can get the same salary + that $49k per year tax-free, it may be worth switching jobs. That will be the only way to get more substantial retirement benefits. Well, switching jobs or being self-employed.

Heck, if he has to take a $49k pay decrease to get the benefit, he still comes out ahead with the tax situation. This is why I See so few medical practices NOT doing this. It saves both the practice and the Doctors a LOT in taxes.

[DRILLINDK]

This may be worth considering other employment opportunities. It is common for small medical groups to offer profit sharing plans, because they are an easy way to structure tax-free compensation. Basically, the employer can contribute $49,000 per year, per Doctor, into a profit sharing retirement plan. It's easy to set up to reward the high paid staff without giving much to the low paid staff. So, this structure is very common with small medical practices. Most (all?) of my clients only have a one-year waiting period.

With the SEP - is there a profit sharing element that goes with that? If so, then maybe he is in a good place. Otherwise, if he can get the same salary + that $49k per year tax-free, it may be worth switching jobs. That will be the only way to get more substantial retirement benefits. Well, switching jobs or being self-employed.

Heck, if he has to take a $49k pay decrease to get the benefit, he still comes out ahead with the tax situation. This is why I See so few medical practices NOT doing this. It saves both the practice and the Doctors a LOT in taxes.

This is exactly what I do. In your husband's situation, he could set up a PC and work as an independent contractor if his employer does not want to implement the profit share.

Also, consider a HSA for the two of you. You must have a high dedubtible health care plan to be eligible. My deductible is $5400, but I'm able to put away $3050 tax free that I'm ablet to take out when I'm 65.

[txmom842]

The sep ira that they fund for him is 15% of his salary and maxes out at probably that 49k you were speaking of. I don't know if it technically considered profit sharing or not, but I am pretty sure that the practice head would do anything that would help his business taxes.

Yes, we do have a high deductible health plan--like $5000, and we are currently putting around 200 per pay--perhaps we could up that. Since we have little kids we use the hsa quite often for our medical expenses, so maybe we could just max it out. Anything to help the tax situation.

As for the variable annuity--that would probably be the last of my options, but I am open to them.

[DRILLINDK]

I'm assuming you're already contributing to a 529 college saving plan for your children too.

[MonkeyMama]

I just had to agree that in your income situation, that HSAa (max out) and 529 plans are good suggestions.

[txmom842]

Yes, we are contributing to 529's for the kids and a hsa.

[jpg7n16]

The sep ira that they fund for him is 15% of his salary and maxes out at probably that 49k you were speaking of. I don't know if it technically considered profit sharing or not, but I am pretty sure that the practice head would do anything that would help his business taxes.

The SEP IRA is a qualified plan. If it's already funded fully at $49k, then you're already able to do more than the majority of the US. His business can't do any more for him. $49k is the max allowable under the plan they have.

You can always contribute to a non-deductible IRA. You can't take the tax write-off today, but it will allow for tax deferred growth. He can do $5k for him, and another $5k for you. (Spousal IRA, no deduction due to income limit)

Another option would be a variable annuity for tax deferred growth, but I generally don't like annuities. In your husband's case, your options for any tax advantage are running slim. Again, no tax deduction, but would allow for some tax deferral.

HSAs and 529s are covered above.

---------------------------------------------------------------

Now if you could convince the business to have a 401k, the company could still contribute the max $49k, but your husband could also defer his contribution of $16,500. (plus still have the other options listed above of IRAs and annuities)

Not sure if that's a possibility, but it might be an option.

https://www.fidelity.com/retirement/small-business/compare-plans-chart

---------------------------------------------------------------

In your case, given the options you currently have available, I would hold any bonds or income stock funds inside the retirement accounts. But if you have money left over that cannot fit into any retirement account, use growth stock funds and any muni bond funds outside of the account. Why use those out? Long term cap gains are taxed at a max of 15% (growth stock funds go for cap gains). Muni bonds have tax free interest payments. Corporate bond interest is taxed at your regular bracket. <- so defer this one if you can

Since you can only fit in so much money into the IRA, you should try and get as much of your investments that regularly pay off income put into the IRA, to defer taxation on the interest. (otherwise you'd be taxed at your marginal rate every year)

So as part of your overall portfolio, you should have some bond percentage - I'd keep that bond percentage in the retirement accounts (unless muni bonds, then keep those out or you waste the tax advantage).

[jteezie]

Seems like you will be putting a whole lot in almost all the available tax benefit vehicles (49k employer contribution max, HSA, 529). I assume you also fund 5k into the IRA. The only thing you're missing out on is 15.5k employee contribution side to employer sponsored retirement account. Something to keep in mind, 529 funds can be transfered to others fairly easily so don't think it's locked in for specific children only. For example, you could use transfer it to their children later so they may be encouraged to have more grandchildren for you .

Regarding the more immediate question for the interim period. Do some sort of side business where he can be his own employer and fund the 49k into his own employer sponsored retirement account. All he needs is $1 of profit to be a real business (well and some paperwork and maybe a lawyer )

Anyways, short of other options, I recommend municipal bond funds because they are tax exempt and at your income level with retirement savings, you don't exactly need to invest in risky assets like stock. Less risky than muni's are TIPS, treasury inflation protected securities. They are government bonds that guarantee +2% returns over real inflation.

[DRILLINDK]

Regarding the more immediate question for the interim period. Do some sort of side business where he can be his own employer and fund the 49k into his own employer sponsored retirement account. All he needs is $1 of profit to be a real business (well and some paperwork and maybe a lawyer )

Just to clarify, if I'm already maxing out my 49k contribution via my PC. I can establish another business and contribute another 49k???

I'm about ready to hit the speek dial button to get my CFP working!

[jpg7n16]

All he needs is $1 of profit to be a real business (well and some paperwork and maybe a lawyer )

And then if that were even possible to do 2 plans (which it technically is), he would still be restricted to a total of $49,000.

The OP's business has already done as much as is allowed under law, unless the plan changed to a Profit Sharing 401(k). (which would allow the same 49k, plus an employee contribution of $16,500)

From: Publication 560 (2010), Retirement Plans for Small Business

There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. You can have more than one qualified plan, but your contributions to all the plans must not total more than the overall limits discussed under Contributions and Employer Deduction, later.


From: Publication 560 (2010), Retirement Plans for Small Business

Defined contribution plan. For 2010, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of the following amounts.

1. 100% of the participant's compensation.
   
2. $49,000 (same for 2011).

Catch-up contributions (discussed later under Limit on Elective Deferrals) are not subject to the above limit.

[jpg7n16]

Just to clarify, if I'm already maxing out my 49k contribution via my PC. I can establish another business and contribute another 49k???

I'm about ready to hit the speek dial button to get my CFP working!

Hopefully, my above post saves you a call to your CFP.

But I would love to know how to get a 'speek' dial button haha