By Salvadore R. Salvo
After serving patients for years in the medical field, the idea of retirement should be associated with feelings of excitement and freedom to live your ideal lifestyle. However, more often than not, many physicians will be filled with a sense of dread and uncertainty at the thought of having not saved enough. The last thing anyone wants is to be 5 years into retirement and running out of money, especially if the plan is to retire early. Alternatively, if you have accumulated a significant retirement nest egg through discipline and careful planning, you could still feel uncertainty due to tax rates. If you are a physician who is worried about future tax rates or seeking a flexible lifestyle in retirement, then you should consider attaining “tax-advantaged income in retirement.”
One of the most popular plans for retirement is a Roth IRA. A married couple filing jointly cannot put any money away in a Roth if their taxable income is over $194,000. Under that taxable income amount, the maximum contribution is $5,500 as of 2016, or if you are age 50 or over you can put $6,500. Moreover, the annual contribution of $5,500 begins to phase out at incomes starting at $184,001 for married filers until the contribution finally reaches $0 for incomes above $194,000. For single taxpayers, the thresholds are even lower. In the long term, the amounts are simply not enough to significantly benefit high-income physician families who want to maintain their lifestyle and live comfortably in retirement.
So, what would be another way of accomplishing a more practical result? Many corporations have been using whole life insurance policies to put money away after taxes. After enjoying stable and consistent tax-deferred cash value growth, they can take it out in a tax-efficient way like a Roth IRA but without the IRS limits. In other words, your policy builds guaranteed cash value over time, which increases each year and will never decline in value due to changes in market conditions. The only caveat is: the money has to stay in the life insurance policy as specified by the IRS. Some prominent mutual life insurance companies have paid dividends consistently since the 1860s, including estimated 2015 dividend payouts of $1.7 billion. In today’s environment, this would be considered a very favorable outcome.
PROS
• An income tax-free death benefit paid directly to the policy beneficiaries in cash;
• Policy holders get tax-advantaged dividends;
• Again, prominent mutual companies have paid consistent dividends since the late 1860s;
• Estate planning and wealth transfer flexibility;
• Plan is personal to you; your employees do not need to be included; and
• If a policy has accumulated paid-up additions, they may be surrendered for their cash value as needed – functioning as a source of cash or credit to fund major expenses such as college tuition.
CONS
• Requires free cash flow;
• Not designed as a short-term strategy; and
• Premiums must be paid.
The bottom line: Whole life insurance should not be dismissed as a cost burden. If optimized correctly, physicians can use it to enjoy the comfort and flexibility of “tax-advantaged income in retirement.”
Salvadore R. Salvo is a co-founder of The Institute for Family Wealth Counseling, and offers Securities and Investment Advisory services through Summit Equities Inc, Member FINRA/SIPC, and financial planning services through Summit Equities Inc’s affiliate Summit Financial Resources Inc.
Disclaimer: Summit Financial Resources and the Institute for Family Wealth Counseling do not give tax, accounting or legal advice to their clients. The effectiveness of any strategy described will depend on your individual situation. This information is for discussion purposes only and is not intended to constitute legal or tax advice. Clients should consult with legal and/or tax counsel of their choice prior to taking any action since the members of Summit’s financial planning design team do not serve in a representative capacity to Summit’s clients. 20160712-0611
