By Dr. Jim Dahle, WCI Founder
I have found tax literacy among doctors to be particularly low, so much so that many doctors get sucked into questionable investments and “tax shelters” to save minimal amounts on taxes. But there are ways for medical practitioners to find plenty of tax deductions. Today, let's take a look at effective ways for doctors to get tax exemptions so that they can reduce their overall tax bills.
#1 Tax-Deferred Retirement Plans
Tax-deferred retirement plans are the biggest tax deduction I see doctors routinely missing out on. I'd guess less than one-quarter of doctors actually max out all the retirement account options available to them. Some simply don't save enough money (a related, but separate, issue), and others simply don't realize just how much money they can squirrel away into these things with huge tax benefits.
Every dollar put into a tax-deferred retirement account isn't taxed this year. If you're in the highest tax bracket and have hefty state and local income taxes, you could have a marginal tax rate approaching 50%. That means for every $2 you put in a retirement account, you save $1 on your tax bill. That's pretty darn good.
If you're a contractor paid on 1099s, you could contribute 25% of your income to a SEP IRA, up to a maximum of $61,000 [2022]. With a solo 401(k), you can contribute $61,000 [2022], but if you're over the age of 50, you can also contribute a catch-up of $6,500 (that option is not available on the SEP IRA).
If you're an employee paid on W-2s, you may be limited to as little as $20,500 into a 401(k) [2022], but many 401(k)s will match you or at least allow you to self-match up to the $61,000 limit. If yours doesn't, I suggest you talk to your employer.
A defined benefit plan can allow you to shelter additional money from taxes, sometimes as much as another $30,000, $50,000, or even more.
#2 The Backdoor Roth IRA
This one doesn't give you a tax break, and it has recently been in the crosshairs for some lawmakers. But it does allow you to shelter retirement investments from any future taxes. The Backdoor Roth IRA is a far better option than many insurance-related tax shelters that salespeople often push on you. You can put up to $6,000 into a non-deductible IRA [2022] for you and $6,000 for your spouse (plus an extra $1,000 if 50+). Then you can instantly convert them to a Roth IRA. You'll pay the taxes this year but then it grows tax-free. There is one catch: you can't have any other SEP IRA or traditional IRA due to the pro-rata rule, but there are ways around this for most, such as rolling those IRAs into your 401(k). For a step-by-step tutorial on the Backdoor Roth IRA, read “The Backdoor Roth IRA Tutorial.”
#3 Healthcare
Health insurance is expensive, no doubt. But at least you can pay for it with pre-tax money. Your health insurance premiums could be a deductible business expense, as are the contributions to a Health Savings Account (aka a stealth IRA) that you can use for co-pays and deductibles. A high-deductible health plan combined with an HSA isn't the right move for everyone, but for the healthy, you can save a lot of money on premiums and on your taxes.
#4 Business Expenses
Many self-employed doctors miss out on all kinds of tax deductions just because they don't realize what is deductible and what isn't. If you are a sole proprietor, partner, or contractor, it would behoove you to keep careful records of your business expenses. Home office, travel, meals, accommodations, office equipment and supplies, medical equipment, CME expenses, licensing fees, communication expenses, board exam fees . . . the list goes on and on and on. The main benefit of being an owner, rather than an employee, is that you can get all these sweet deductions. That's offset by the requirement to pay the employer portion of your payroll taxes, but at least those are deductible, too.
Employees generally miss out on these great deductions. Prior to 2018, it was at least possible to deduct unreimbursed work expenses on Schedule A, but it was subject to a 2% of income floor, which for most doctors was far more than they spent. Now, you can't deduct unreimbursed work expenses at all. So, it's best to get your employer to pay for them. The employer gets to pay them pre-tax, just like you would if you were self-employed. For instance, many employees have a CME fund. You can also, of course, just become an owner. Just because 95% of your income comes from your main job, where you are an employee, that doesn't mean you can't get a moonlighting job on the side and get all the deductions a contractor would have. If the moonlighting job requires a medical license, DEA license, CME, etc., then you can deduct your business expenses from that income. Technically, you're only supposed to deduct it proportionally.
Your business doesn't even have to be medicine-related. When I originally wrote this post in 2012, the income from this blog wasn't taxed at all since I deducted office supplies, internet-related fees, and phone-related fees from it. This type of entrepreneurial path has changed the lives of many doctors allowing them to claim tax deductions and, even more importantly, helping them to reap the benefits of earning passive income. Every little bit helps.
#5 Mortgage Interest
Many doctors find themselves with hefty loans, including consumer loans, car loans, credit card loans, student loans, home equity loans, investing loans, and mortgages. While I generally advocate avoiding most of these loans and/or paying down those you take out as quickly as possible, the IRS makes carrying mortgage interest tax-friendly. If you're going to have the loans, you might as well convert them into loans that have a low rate and are tax-deductible if possible. Unfortunately, mortgage and HELOC interest is not nearly as useful as it used to be. Not only is the standard deduction higher (so fewer people deduct it at all), but these days you can't deduct interest from a mortgage or HELOC that was taken out to pay for anything besides the house and improvements on it.
#6 Charity
Doctors tend to be charitable folk. If they don't give money, they often give time. Any donations to a qualified charity are tax-deductible, just like mortgage interest (assuming you have enough total deductions to justify itemizing them), or donating large items such as an old boat. You can use Turbotax's It'sDeductible to figure the value of things you give to Goodwill. You can also count the miles used to drive to and from your charity of choice and any other expenses associated with donating your time (although you can't deduct a value for your time itself).
#7 Tax-Loss Harvesting
Investors hate losing money. But in a taxable account, Uncle Sam will share your pain. You can even get a break on your taxes without having to “sell low” by doing tax-loss harvesting. You sell a losing investment, and you buy one that is highly correlated to the one you sold. For example, you might sell the Vanguard Total Stock Market Index Fund and buy the Vanguard 500 Index Fund. These two funds generally move in lockstep, but they are different investments. You can deduct up to $3,000 a year of investment losses against your ordinary income.
What other tax deductions do you use to lower your bill? Do you think itemizing these expenses is worth your time, or would you rather just take the standard deduction?
[This updated post was originally published in 2012.]
Some states, such as PA, do collect state income tax on 401-K and 403-b contributions (unlike Federal tax laws) but the state does not tax distributions from those accounts in retirement. Likewise, PA does not tax social security payments or pension payments. Hence, even with the presence of a state income tax (around 4%) it is a great state to retire to (but perhaps not such a great state to earn the income in the first place).
For those of you who have employee (W2) income and also sole-proprietor income (1099)… do you deduct 100% of the “business” expenses listed above in #4 (CME, medical license, etc) or do you only deduct a certain percentage of them given that not all of your income is 1099 income? Last year something like 75% of my income was W2 and the other 25% was 1099, so I took all of my business deductions and only deducted 25% of the total expenses. I’m thinking maybe I should have just deducted the entire amount. Interested to hear what ya’ll are doing. Thanks!
The correct answer is you only deduct it proportionally. Make $20K moonlighting and $180K at the W-2? Only supposed to get 10% of the deduction. In practice, I think most take the whole thing.
A follow up question as a spin-off to this. I similarly have most of my income from W2, but also ~5-10% from 1099 as a consultant. My W2 company gives me $1500 annually for CME. If I reimburse myself with these funds for membership dues, conferences, etc, can I also deduct them as a business expense against my 1099 income? Is this considered double dipping? Or are my W2 CME funds not part of the tax equation? Thank you!
We help 1099 income source physicians structure themselves properly and save dramatically on taxes.
Here are some ways you can lower your taxes:
1. Defined Benefit Plan
2. Hire your kids (up to $12,000 a yr.)
3. Rent your home to your business for 14 days
There are many other ways, and you need proper structuring and legal help to implement these strategies.
Thanks and best of luck to everyone out there!
Noah T. Kaufman, MD
Emergency Medicine
Remember your kids actually have to do pretty legitimate, high paying work to get anywhere near $12K a year. Renting your home is actually a fairly tricky thing to do as well for most docs. These aren’t little “check the box” kind of tax savings options like remembering to write off your CME costs.
Good points and absolutely true. Generally it’s best to have professional structuring, advice and legal representation if you want to tackle these strategies for big savings. I pay my son to do work, and I expect him to do it, and he loves the responsibility. But in order for it to be legal and tax compliant there needs to be a job description, A company resolution to hire him and an employment agreement.
Our company manages that business and creates those documents and that structure to be fully tax compliant.
One of my favorite strategies is buying a low death benefit, high cash value insurance plan inside of a defined benefit plan. You can use up to 49% of the contributions of a defined benefit plan for insurance. Your company can then pay the premiums with tax advantaged dollars and then you can purchase the plan from your company in the future when it is fully funded for a very good price. This way, you put tax advantage dollars to work, and get tax free distributions whenever you want, not necessarily at age 65 which makes this strategy very advantageous when compared to conventional/Roth 401(k), IRA‘s etc. for retirement strategies.
Physicians are typically not very savvy when it comes to taxes. I know, I am a physician who is very savvy with finances and have my series 65, but still was deficient for many years in my understanding of advanced tax planning and structuring.
This is why I partnered with a tax attorney, tax coach and team of CPAs to provide a new disruptive membership service for physicians who have 1099 income.
I am excited to help my colleagues structure themselves to reduce liability, reduce audit risk, and dramatically reduce tax burden. I really like the idea of helping people who help people at this point in my career.
Best to all,
Noah T. Kaufman, MD
Any thoughts Noah or White Coat on my previous question above?
I similarly have most of my income from W2, but also ~5-10% from 1099 as a consultant. My W2 company gives me $1500 annually for CME. If I reimburse myself with these funds for membership dues, conferences, etc, can I also deduct them as a business expense against my 1099 income? Is this considered double dipping? Or are my W2 CME funds not part of the tax equation? Thank you!
Are these funds you receive from your employer included in your taxable compensation on your W2?
They are not included in W2. I self pay for CME expenses up to $1500, submit the receipt, and they pay me back via direct deposit. Thoughts?
No you can’t double dip like that. If you didn’t pay the expense (your employer did) you can’t deduct it from your business revenue, that’s fraudulent.
Thanks for the clarification. Are you required to report these CME reimbursements? Is the $1500 taxable?
Report them to who? There’s no taxable income there. It’s a business expense to your employer (like your salary) who reports it as such on their tax record.
Gotcha, that makes sense. My misunderstanding was that CME money isn’t income for me, but an expense for the employer. Thanks again.
This is true for other deductions that you are reimbursed for as well. Never “double dip” it is illegal and fraudulent.
However, any cost above the $1,500 would be a deduction to your company, which you should preferably set up as a PC. Without a business entity behind you, the $1,500 would be your max deduction. With a business, your deductions exponentiate to save you at tax time. You can pay yourself a reasonable salary and take the rest as a K1 distribution. All business expenses are in play if you are properly structured, but hire a team of professionals to help you achieve this.
The tax code is over 67,000 pages long with over 1600 forms and heavily favors entrepreneurs and small businesses. It is best to set yourself up in this fashion and maximize tax-savings by playing their game.
Most of us hire a tax preparer (CPA, EA, etc.) and do the default and hope for the best. But we didn’t go to ordinary medical schools and aren’t living ordinary lives. Why not minimize tax-erosion of your hard earned dollar and stop doing taxes in an “ordinary” way? I have seen physicians save 6-figures on taxes by having the proper structures in place that our business, legal and other professional peers utilize.
It’s just smart.
You sell cash value life insurance INSIDE a retirement plan where the growth is already protected from taxes and the money already has (likely superior) asset protection? That takes a lot of balls to mention that on this website. Who is being paid the commission on that policy?
I know. Amazing right? This is a known strategy of the ultra wealthy and is a bit of a loophole. Any insurance broker can sell you this (we don’t). The law allows for it, and it is being utilized. Appreciate the balls comment! (not sure I understand the problem here?) This is worth looking into as it is a viable strategy and completely tax-compliant. There are some potential land-mines, so this needs to be structured with professionals, preferably a tax attorney with experience in this area, but it’s well worth it.
Happy to discuss with anyone that’s interested and put you in touch with such a professional.
Best luck to all,
Noah
I should also clarify: The original insurance product would have a commission to a licensed broker. The policy is being purchased for cash from the plan. It is the same policy, not a new policy, so there is no commission or cost to do this. The reason it makes sense is, that if you left the life insurance in the DB plan, any future distributions would be fully taxable, whereas, if you get the policy out of the DB plan, then the cash surrender value is available tax-free.
Hope that makes sense,
Noah
Noah-
In general, cash value insurance is a crummy long term investment designed to be sold, not bought. So no, I don’t think putting it in a cash balance plan is likely to be a clever solution unless there is something I’m missing here.
As a general rule, money taken out of a cash balance plan is fully taxable. Any gains on a surrendered cash value insurance policy are also fully taxable. Yet you seem to think a magic wand can be waved and one can take an insurance policy out of a cash balance plan and pay taxes neither when the policy is taken out nor when it is surrendered. Both seem highly unlikely to me. So I’ll read up on it a bit.
I stumbled over to here: https://www.emparion.com/life-insurance-in-a-cash-balance-plan/ where I read this:
As we see here, if you die prior to retirement, you’ve now got a taxable death benefit to your heirs, at least an amount equal to the cash value. That’s not good.
If you hold on until retirement, you can buy the policy off the plan with after-tax money (that doesn’t sound like pulling it out tax-free to me) or you can surrender the plan and roll the money to an IRA. When you pull the money out of the IRA, it’s fully taxable. Again, no fancy tax trick here. You just owned a crummy investment in your CB plan instead of something better. So you likely ended up with a smaller CB plan than you otherwise would have.
Nothing fancy. Just typical whole life salesmen tricks to try to sell you a policy “for the great tax benefits” that don’t actually exist.
Jim,
I’m not making this stuff up, and I encourage you to look a bit deeper. I didn’t mean to evoke ad hominem responses from you, and my vision is aligned with yours to help our colleagues become better educated about their options in shark infested waters. I assure you, as an ER doc of 12 years still grinding out shifts, I am not one of those sharks. To your points: In general, no one chooses to buy insurance, whether it be health insurance, dental insurance, disability insurance, liability insurance, property insurance, and yes … sometimes life insurance. We buy insurance to reduce risk. Few realize that there are tax advantaged strategies to purchase insurance as an investment. HNW individuals do this. You can save a lot of money on taxes by doing this accomplishing multiple objectives at once. It is a commonly known fact that insurance is based on the law of large numbers, i.e., having enough people pay into a pool a small amount so that when, and if, one of the people in the pool suffers a loss, then the pool has enough reserves to pay for the risk. Insurance premiums charged by insurance companies, assuming a competitive marketplace, typically are just enough to cover the potential loss incurred by the insured, costs of operations and marketing, plus/minus the return on investments owned, and dividends/net profits to the shareholders/policy owners.
You are correct in stating that insurance is designed to be sold. Most, if not all, businesses incur marketing expenses in order to sell their product or services. The insurance industry uses a chassis of compensating third party agents to promote their products. Its how the insurance industry was built.
Based upon our research, the life insurance industry has come a long way over last few decades due largely to the uncertainty in the capital markets. It has evolved from being a pure risk mitigation business to offering a more stable savings and tax-efficient wealth accumulation vehicle. With that said, life insurance should mostly be acquired only if it is needed, again to reduce risk. Because of the nature of the premiums being utilized to cover the claims of insured, the death coverage portion of the premiums can never be seen as an investment, short-term or long-term. On the other hand, if some of the premiums are used as a savings account or tax efficient wealth building vehicle, it should compare and be competitive with other investments, and may, in some cases, be a part of a diversified portfolio that can be seen as a long-term investment. Not all life insurance cash values are the same, just like no stock, bond or real estate portfolio is the same. Both require due diligence and analysis.
So, as it relates to owning permanent life insurance inside a cash balance defined benefit plan, if it is structured properly in compliance to the tax laws, and if it makes sense from a retirement planning perspective, it is possible to buy the policy from the plan at some point in the future. That’s not a life insurance sale that results in any commissions paid to an agent. It’s the same policy. This strategy makes sense if the physician-participant otherwise needs life insurance and would prefer to pay for the life insurance with pre-tax dollars rather than after-tax dollars. If, at some point in the future, it makes sense for the physician-participant to move the cash value of the policy out of the plan in exchange for cash, it is possible to do that without incurring an income tax on the exchanged value. The result is that the cash now in the plan continues to be invested, and when it is later distributed to the physician-participant during retirement, it is subject to income taxes. The cash surrender value of the insurance policy, now owned by the physician-participant, continues to grow and becomes available, potentially on a tax-free basis, to the physician-participant. It is also possible that the physician-participant keeps the life insurance policy intake inside the defined benefit plan for life. Buying insurance inside or outside a retirement plan should be a carefully thought out decision involving the physician-participant’s tax, legal and investment professionals. Again, life insurance, if it is needed, may be a necessary evil to protect against the untimely death of insured. I am only presenting a strategy that is being used by our HNW peers in a very tax advantaged way. There are many other strategies that are available when you have a 67,000 page tax code and structure yourself to utilize that code to your highest (and ethical) legal advantage. It’s insanity, and as physicians, we can either pay the least amount of tax that the law demands, or we can just do the default and hand it all over to a tax preparer who can save us a little bit to make us feel better about the massive erosion that taxes cause us. I would rather keep more of what I earn and help other docs do the same. That’s why I got my series 65, partnered with tax attorneys, tax coach’s and CPAs to create [my business]. I am happy to introduce you or any of your readers to these professionals that I trust and whose knowledge and opinion I respect. Wishing everyone the very best in achieving their financial goals.
I agree that insurance should only be acquired if needed.
I disagree that it makes a good long-term investment, even in a diversified portfolio.
I think you’re being very misleading describing buying it in a defined benefit plan as “getting to buy it with pre-tax dollars.” Yes, the plan is pre-tax. Yes, you buy it in the plan. But you’re not buying the same thing as you would buy outside the plan. You’re getting less since some of the death benefit is now taxable income to your heirs. Then, at the end, you either surrender the policy (and this is probably at a loss or minimal gain given that most cash balance plans only run 5-10 years and most cash value insurance takes at least that long to break even) and then pay taxes on it all as you pull it out, or you use AFTER TAX MONEY to then buy the policy from the plan for the cash value. That’s not pre-tax money. That’s now after-tax money. So you really don’t get to buy it pre-tax.
I would argue that most are going to be far better off with traditional stock and bond investments in their defined benefit/cash balance plan. Needed insurance can be purchased separately at a dramatically lower cost.
Stop taking advantage of physicians’ fear of taxes to sell them a high-commission, unneeded insurance product that functions poorly as an investment.
Again, I don’t sell insurance, Jim, and I don’t take advantage of anyone. That’s slanderous and you need to settle the hell down.
And, I am actively using this strategy personally. I agree with everything you are saying because you are not taking into consideration the proactive tax-planning considerations and how these premiums are being paid and the deductions that are happening that the law allows for thus reducing taxable income and ultimately tax burden.
I have multiple companies set up in my personal structuring, and I use the high cash value low death benefit insurance strategy in my DB plan as a tax advantaged savings vehicle. My management company pays the premiums, takes a deduction, and I will buy the insurance from my management company down the road for pennies on the dollar when the plan is fully funded. Then I will have access to tax-free distributions when I choose to. Not at 65 or when mandated by the government. I am not getting this insurance for my heirs, it is for my wife and I to have tax-free cash flow during early retirement.
I also have whole life, and term products in my portfolio. AGAIN, I DO NOT SELL THESE PRODUCTS NOR MAKE MONEY BY REFERRALS ETC. It’s unfair for you to be so assumptive and judgmental with very little knowledge about me or my vision to create value for other physicians.
I was merely giving one example of another way to create retirement options that can give you a huge tax savings up front.
You can also put that money to work in other ways as your excellent website/resource has expounded upon many times over.
I am an ER doc, just like you, grinding through and trying to make sure I am as savvy as can be when it comes to my finances. I am also an entrepreneur and have created numerous companies that are in various stages of their life-cycle.
I take offense to your vitriol, and you should be more welcoming when one of your own takes it upon themselves to create something of value as an entrepreneur to bring to our industrious community.
There is nothing more important than integrity, and I assure you, I will grow Physician Tax Solutions and help thousands of doctors structure themselves properly and reduce their tax burdens dramatically so that they can achieve financial freedom sooner.
I won’t debate you or post more comments on this topic again, and I would rather restart our relationship without being so assumptive about each other or our motives.
Kind regards,
Noah T. Kaufman, MD
I guess you won’t be back and so won’t see this. But you fail to explain how you get to buy the policy for pennies on the dollar. My understanding of your strategy is that if you want to buy the plan from your defined benefit plan, you will need to pay an amount equal to the cash value of the plan in after-tax dollars. If that is not correct, I’m certainly willing to listen to more about this plan of yours. If it is, I fail to see how this is even a remotely good idea.
You are not “just an ER doc grinding out shifts.” You are a licensed financial advisor here advertising your firm. Every comment you have posted includes a “call me, here’s a link to my website.” It’s pretty hard for anyone to believe you’re just here as a run of the mill doc when you do that. To make matter worse, you’re advocating a strategy that is a bad idea. By doing so you’ve moved yourself from a camp of people I spend a great deal of time trying to help into a camp of people who are not the target audience of this blog, but its subject.
You may be offended by me all you like. I’m offended by what you’re doing to your fellow doctors and by your thinking you could show up here, pretend to be an expert while advocating an idiotic technique that has been thoroughly debunked here and elsewhere, and attempt to advertise your firm without even bothering to inquire whether that was okay and how much it would cost.
I’m all for helping docs do better with their taxes. But when the main technique appears to be selling unnecessary and ill-advised whole life insurance, and that inside a retirement plan, don’t expect me to stand by and pretend it’s okay. It’s not.
No, Jim, I am not scared off or anything and happy to continue the dialogue so you can get a better understanding.
For the record:
1. I have my series 65 but I am not an investment advisor, nor do I receive any money whatsoever from anyone to manage their money or give advice.
2. I am not offended by you. I feel for you, and if you are truly this closed minded, it will limit you.
3. Neither myself nor my new company sells insurance nor benefits from the sale of insurance. We do taxes and do them very very well for physicians. We don’t give financial advice, but offer up strategies to reduce taxes drastically. Clients can discuss our strategies with Financial Advisers, other CPAs/Tax Attorneys, etc.
4. You do not understand the strategy, but are quick to naysay and judge. This is not helpful to your reader nor you.
I am happy to make an introduction to my partner, a very experienced tax attorney, so you can have a free consultation with him to do your own due diligence before rattling off all the reasons why we are fleecing people etc.
I have no idea why you would make the assumptions that you do and verbally belittle and assault another ER doc who has slaved away in the ER just as you have. I am a man of honor and integrity, Jim, and I aim to create value in the world. My business puts its clients first and we turn clients away if we don’t feel our services can benefit them. We are not profiteering.
I am trying to spread the word, grow my business and gain clients. I apologize if I went about it the wrong way on your site. I will advertise on your site (if allowed?!) and make sure that I am not “freeloading” and that you get paid.
As for the strategy: please allow me to introduce the actual tax expert (I am NOT he). I would love for you to have a call with him, understand the strategy, and if you STILL think it is somehow taking advantage of our colleagues (and me), I will own up and stand corrected and apologize. If the opposite is true, I have no expectations of you, but an apology might be appropriate for your vitriolic attacks.
Either way, and whether you believe me or not, I am here to help people and create value for them. What business in this world succeeds by trying to take advantage of people? Do you actually think I am this stupid evil physician scam artist?? I gave the same oath as you to do no harm. I guess I just rubbed you the wrong way, and now you have some preconception that has no basis in reality.
Anyway, feel free to call me and perhaps we can start over. It’s funny since we have mutual acquaintances. Why don’t you call one of them and inquire about my character and integrity as a human being and professional?
Best to you either way and thanks for your well-intentioned site.
Noah
So you don’t understand the strategy well enough to explain it in the over 2000 words you’ve typed into comments on this post since I called you out on what you’re doing? “Just talk to my pal, and he’ll explain it.”
This is the problem. Doctors are believing you that this is a good strategy. They say “Noah works in the ED and he got a series 65 and he used to be a licensed advisor, he wouldn’t screw me over. In fact, he says he has one of these policies in his DB/CB Plan himself. I’m sure he wouldn’t advocate that if it wasn’t a good idea. He’s a doc!” But you don’t even understand it yourself. That’s the problem. Once you (or anyone else) dives into it, they go “Oh yea, that isn’t a good reason to buy whole life insurance. It’s just another way to sell it. Yes, you could put it in a DBP, but you shouldn’t.”
You’re advocating this technique or at least promoting the work of other financial professionals who are advocating this technique. It’s a bad technique. So that leaves the reader to determine whether you are doing so out of ignorance or for your own personal profit. But either way, it’s not a good look for you. You’re now telling me you don’t profit from it, so I can only assume it is ignorance, which you are essentially admitting by sending me to talk to your CPA because he can actually explain “why it is a good idea.” I would suggest YOU go talk to your CPA until YOU understand how this works. Then sit back dispassionately and take a look at it. I suspect if you do so you will arrive at the same conclusion I have–that whole life insurance inside a cash balance plan doesn’t make any sense.
In fact, whole life insurance is a lousy tax reduction technique despite the fact that it reduces taxes because the goal isn’t to pay the least in taxes, but to have the most left after any taxes due are paid. The low returns of whole life make it a lousy long term investment despite the very limited tax benefits it provides.
As long as you are advocating the purchase of whole life insurance for large numbers of doctors, you won’t be advertising on this site. If you stop doing that, I’ve got lots of docs interested in help with optimizing their taxes. But I’m sick of seeing doctors get sold cash value life insurance policies inappropriately so I get fired up when I see it happening. Take a look:
https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/
I won’t apologize for that. I’m a conference right now and met another half dozen docs who were sold whole life inappropriately. It is one of the most common mistakes doctors make with their finances.
Speaking of apologies, you’ve got a lot of gall showing up here, trying to advertise for free, advocating a crummy technique to doctors that is likely to leave them poorer, making ad hominem attacks and then asking ME to apologize. I think you owe an apology to the doctors you’ve recommended this strategy to. 75% of the doctors sold a whole life policy regret the purchase. There’s a reason for that.
Ok haha, I think I am starting to understand you. This is how you communicate. Let’s dance.
I understand the strategy well and I will explain it to you. I only offered you to speak to one of the Tax Coaches we work with because their are nuances specific to each of our situations. Again, I was offering this as an example and not something everyone should be doing. I don’t disagree with you that straight WL is crap. What you aren’t seeing is the legal structuring and nuance that makes these strategies shine for high income professionals whom are structured properly and have a good team behind them.
Here we go:
1. My company, Kaufman medical group, Inc (S-corp) pays premiums on a universal life high cash value low death benefit insurance plan inside my defined benefit plan up to 49% of the contribution (I put in $100k to the DB each year and that is a deduction for the company, lowering my taxable income dramatically).
2. I do this for seven years or whatever to fully fund of the insurance plan. The money is invested by the insurance company and is capped at 0% downside and 6% of the upside depending on market conditions. This is pretty standard. The return will avg 4-5%.
3. After seven years or so, I purchase this plan personally from the company by paying the company for it. Basically I transfer money between bank accounts. Here’s what I need: a company resolution to do this and legal supporting documents. There are land mines, so this needs to be done by tax attorneys (I have several different that I use). …The company could buy (or sell) me a car, a boat, a house, an insurance policy, whatever, and at whatever price is negotiated (there are some legal limitations here, hence the lawyers).
4. The moment I buy the plan, I transfer it out of the defined-benefit plan and there is no tax event. This is how it is designed. I then let it grow, and when I want, I can access that growth and take it out tax-free as income in retirement. So I can wait 20 years while it grows, and then start taking what I need out of it during retirement but at any age. Kind of like a Roth.
Again, this is not for everyone, and it requires deft hands managing it, but this is being done by hundreds of physicians right now.
Jim, it’s just another bucket. This whole thread started with my response to another poster asking about expensing CME. There are numerous other more important tax-reduction strategies that just about everyone who makes 1099/OBI can utilize such as renting your business renting your home for up to 14 days for non-reportable di minimis income and a nice deduction. Again, the devil is in the details and your company needs a rental agreement, a company resolution to do this and for what purpose, etc.
Here is some more info on the DBs and common myths:
MYTH 1: With qualified plans, I’m locked into a contribution structure and I don’t know where my business will be in 5 years.
When necessary, you may amend your plan and change the level of contributions should business conditions change. You cannot take away any benefits from employees that have been earned in the plan up to the date of change; however, you can change the future benefits that the pension will provide.
MYTH 2: With qualified plans I have to pay way too much toward employees.
A pension plan must consider all full-time employees who meet certain age and service requirements. However, available design options may allow a company to carve-out selected employees from the plan. In most instances the cost for funding benefits for employees is money that would have been lost to income taxes anyway if there were no plan.
MYTH 3: With qualified plans, if something changes, I have no flexibility.
The Pension Protection Act of 2006 has created much more year-to-year flexibility of funding contributions as every plan is now designed with a minimum and maximum funding range. We design each plan so that the first year contributions are near the maximum levels. When funding at the maximum level, this results in a continuous reduction in the required minimum contribution levels in future years.
MYTH 4: Life insurance in a qualified plan doesn’t make sense.
The addition of an insured, pre-retirement death benefit increases the permitted tax deductible contributions, which results in larger income tax savings and provides a self- c ompletion feature of the plan in the event of an untimely death. Net proceeds from life insurance are income tax free* to the beneficiary. This ability to get a “tax break” on both ends of the transaction is unique to life insurance in a qualified plan.
MYTH 5: I already have a Profit Sharing Plan. It sounds like a hassle to install a Defined Benefit (DB) Plan as well.
Companies that already maximize contributions into a 401(k)/Profit Sharing Plan can install a DB Plan and deduct the contributions to both plans. The DB Plan will provide maximum benefits to the principal(s) of the company and very minimal contributions for the rank & file employees.
MYTH 6: Pension Plans are only good for people in their 50’s.
Pension Plans can be designed to benefit both younger and older business owners and key employees.
MYTH 7: I fully fund my Profit Sharing Plan. That should be enough, shouldn’t it?
If you are 55 and contribute $55,000/year for 10 years and earn 8% on your investments, you’ll have $796,761 at the end of 10 years. That will provide you with a $200,000 salary for about 5 years! That’s why you need a pension plan to save more money.
MYTH 8: I can live on 70% of my working income in retirement.
The things that retirees spend a lot of their money on, medical and nursing care, are inflating faster than the economy in general. Those things could double in cost in 10 years or less.
MYTH 9: I can earn 8% on my money over a long period of time.
While that is probably true, retirement planning is not about averages. The sequence of returns is a critical factor. If there is a significant downturn in the market just before your retirement (like 2008-2009 or 2000-2003) it is likely to have a significant impact. More conservative assumptions put less dependence on investment returns to get you to a comfortable, secure retirement.
MYTH 10: Only large corporations can sponsor a Defined Benefit Plan.
Any type of entity can sponsor a Defined Benefit Plan. This includes Sole Proprietors, S-Corp.’s, Partnerships, LLC’s, etc.
*For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2) (i.e. the transfer-for- value rule); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).
Anyway, hope this helps and at least gives you a starting place to do some more research. It’s all about the structure that allows you to implement these strategies. These are fully tax complaint techniques that the ultra-wealthy are using to reduce their tax burden.
Lastly, I do sincerely apologize for “advertising for free”. I am in your house and that was wrong. I will be more respectful and focus on commentary that only adds value and education. I will also try to steer clear of the WL debate altogether!
Noah
I’m still not convinced this is a good idea and I don’t think anyone looking at it objectively will be either. I know it’s hard to accept you probably made a mistake buying this thing, but such is life. I’ve also bought a cash value insurance policy that was a bad idea.
Let’s start with looking at the illustration of your policy. You seem to think you’ll be getting a 4-5% return on it by year 7. I would submit that is EXTREMELY unlikely. You’ll be doing well to break even by year 7. So if you had simply bought a more typical mix of stock and bond index funds in the DBP, you would have more money inside the DBP when you ended it at year 7. If for some crazy reason you actually wanted a universal life policy (which is probably a terrible idea to start with) you could just buy it outside the DBP. It’s going to cost you the same amount of money either way. Starting with it in the DBP and then moving it out isn’t saving you anything.
You’re clearly a fan of buying cash value life insurance. Look, if you think it’s awesome and think the benefits outweigh the downsides, buy as much as you like. But in my experience, the doctors who really understand how these work want nothing to do with them. I’ve debunked all these myths used to sell it inappropriately to doctors elsewhere on the site and between going SCUBA diving on trying to get my next book out, don’t feel like going over them all again. They can be found here:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
Congratulations. You’ll be in part 7, coming out later this year.
As far as your “myths”:
1. Garbage. Easily adjusted if the business changes.
2. True, but that’s because the tax benefits are way better than buying life insurance.
3. False. There is tons of flexibility in a qualified plan. For example, if I don’t want to put anything into my 401(k) or Roth IRA this year, I don’t have to. Not so with life insurance. If you don’t make the premium payment, it’ll be paid from cash value, if there is any.
4. No it doesn’t. The contribution to a DBP is the same whether you buy mutual funds or life insurance in it. That one is so bad even you had to put an asterisk in it.
5. Not fighting you on the value of a DBP. Just on putting life insurance in it.
6. Same.
7. Uh…I agree if you want more money you should save more money. Not really any myth there.
8. Most docs will find they can maintain their standard of living after retirement with a nest egg that provides 25-50% of their peak income. Look at all the expenses that go away in retirement- retirement savings, college savings, payroll taxes, most of your income taxes, child related expenses, work expenses, many of your transportation expenses etc.
9. Okay. Sequence of returns matters. That’s why most investors have a little less aggressive portfolio for the last 5 years of accumulation and the first 5 of decumulation. They might even buy a SPIA to put a floor under their retirement savings. Not a reason to buy life insurance.
10. I don’t know who believes that myth. Certainly not anyone who has read this site for long as they are frequently discussed here, both for partnerships and for individual docs.
What do you think about Restricted Property Trusts, Jim?
If you need to learn more about them you could try this link: https://restrictedproperty.com/
or this one:
https://talkmarkets.com/content/what-is-a-restricted-property-trust?post=142986
or this one:
https://www.whitecoatinvestor.com/forums/topic/restricted-property-trust/
But in general, it looks like yet another way to try to sell whole life insurance to doctors which is worrisome. Whether it’s a reasonable thing or not to do, I’d have to spend more time researching before weighing in.
Noah, you note 4 steps to this insurance-DBP strategy.
1. The $100k yearly deduction for the contribution to the DBP really has nothing to do with the insurance product, the deduction would be the same if it were invested traditionally.
2. The returns in the DBP seem to be the same as what is typically written into plans as well. Most have a built in rate of around 4%.
3. Here is where I don’t follow. You seem to suggest that you personally are purchasing the plan from the company (which you own and manage) for some reduced “negotiated” rate, the same way the company may sell you “a car, a boat, or a house” for whatever price is negotiated. I would challenge that your S Corp cannot buy “a car, a boat, or a house” for some amount, claim that as a business deduction, and later sell the same to you, the sole shareholder of the S Corp, for some arbitrary (presumably reduced below fair market value) “negotiated” rate.
4. The fact that you say the transfer out of the DBP is not a taxable event requires further explanation.
The argument that you have invoked multiple times of “rich people are doing this” and “lots of doctors are doing this” is meaningless, because both you and I know that lots of rich people and lots of doctors do really stupid stuff with their money.
Regarding your more general comments about DBPs, I would invite you to explore this site some more. We talk about DBPs and their benefit and applicability to folks like you and me all the time. Those myths aren’t subscribed to around here. Except myth 4. Because most of the time when someone’s talking to doctors about insurance products, they’re selling something.
Look, I don’t disagree with most of what you are saying. I think enough has been said about the strategy that people can go to their own tax attorneys and do research from this point forward.
Also, I love this website, and think it’s one of the best things that have happened for physicians in terms of finances ever. I’ve been reading and lurking for years.
The thing about financing and taxes is that there are a lot of ways to skin the cat. With a 67,000 page tax code, there is a lot of amazing opportunity for strategic tax planning. I am an advocate of physicians getting educated about this stuff, and I am happy to be a foil for you guys to present another perspective on insurance, retirement, etc. being part of the 25% of physicians who don’t regret my WL products or strategies.
Since I do not sell these products nor benefit from any sale of them, there is no COI. My goal is to create the most value possible for our clients and to help them get structured and educated and dramatically reduce their tax burdens.
It’s that simple.
For anyone unstructured to buy a UL/WL product is exactly as you say; a bad idea generally. But these products exist for a reason and have value in the right circumstances. Typically, these vehicles make more sense when you are looking for another bucket and have the means to take adavtange of how the tax laws deal with these products. I would never say that this is a “must do” or better than any of the very useful, and typically unsophisticated straightforward ways to amplify one’s wealth. It’s just another bucket.
I love this stuff. I love finances, and I love helping people. I would like to be an additive part of this community, and there has to be room for new ideas and debate.
Just let me know how you’d like me to proceed, and I stand behind the strategy I have presented and encourage anyone interested to discuss with their tax attorney.
Noah,
1. I don’t have a tax attorney. Can you explain steps 3 and 4 that I’m not following.
2. What did I say that you don’t agree with?
So if it isn’t better than the unsophisticated, straightforward ways to amplify one’s wealthy, why would someone do it again?
I guess for the same reason that people eat carrots. It’s not like it’s better than any other healthy vegetable, but it’s just one more vegetable that’s healthy to eat.
I hardly see whole life insurance as “another vegetable.” When the best argument for it is “well, it’s just another option” you know you’re getting low on arguments. If it isn’t as good as something else that can be done, I (and most other people) would do the something else. That’s the case for most uses of it for most people.
So her is why I like whole life:
1. If it’s in a DB plan you can make it Tax advantaged if you pay premiums with your company. Ie. premium is a business deduction.
2. I have plenty of exposure to the equity markets and real estate etc. so this is a stable, consistent diversification for us.
3. Yes, there is a big fee/commission up front. This pay-to-play is a get-in-the-club cost that I was willing to pay. My family gets millions of dollars (my death benefit) when I die, no matter my age. I could be 95. (I also have cheap 20 yr term to round this out and protect my “productive” money making years).
4. Like a mortgage, when I’m paid up (ie. done paying premiums after 20 yrs) my cash value keeps growing, and if structured correctly, I can take income out tax free whenever I choose. (Again, by buying the WL from my company and getting it out of the DB (law requires 7 yrs of premiums paid)).
5. Losses are capped at 0% if the market tanks. I can’t say that about my stock/ETF positions in my other retirement vehicles. Gains are capped at 6% also, that’s how these plans are devised.
I understand the argument about saving the big commission and investing on my own and beating the return etc etc. for me, my WL plan is a great hedge against economic uncertainty and potential toppiness in the equity markets. I mean, I also have exposure to real estate, RPT’s, metals, crypto, collectibles, etc. and believe strongly in diversification.
I could stop working in medicine at 43 if I chose to right now based on my financial decisions through the years. I am not saying I’m right and anyone else is wrong. Everyone is in a different position and has different needs. I happen to see value for my family in a WL product, and I don’t sell insurance nor profit off of it.
I think that more important than any Investments is tax structuring, which should be done by professionals and preceed any major strategic financial considerations.
I will save an incredible amount this year on taxes—as much as I used to earn as income—because of my structuring, and I encourage all physicians to look into optimizing their financial position with adroit legal structuring and proactive tax planning.
Glad you like your policy. But you haven’t mentioned anything about “saving an incredible amount in taxes” that has anything to do with whole life insurance. You could have all that DBP savings without buying a whole life insurance policy.
With those other DBP investment options you won’t owe tax on those contributions until you begin receiving distributions from the plan.
With the High cash value, low death benefit insurance, you can get the benefits tax free.
That’s better than a Roth. Deduction on the way in, tax-free on the way out. It all depends on how you structure it, and how you get the plan out of the DBP after 7 years (the minimum funding period required by law).
It’s not a commonly known strategy, but it is a good one after you reach about $400-500k income (mostly 1099 or >50% at least).
I don’t need a response. It’s a cool strategy and anyone can look a bit deeper into it and ask their tax attorney about it.
Best of luck to all and thanks for the great article.
Ahhh….the old “life insurance is better than a Roth IRA” argument.
https://www.kevinmd.com/blog/2019/01/a-financial-checklist-for-the-pregnant-woman-physician.html
And as I explained before, for it to come out tax-free (although not interest free) it has to come out of the DBP, at which it is no longer bought with pre-tax dollars. I’m not sure why you’re having trouble getting that.
I disagree that it is a “cool strategy.” I think it’s a dumb strategy. You get a crummy investment in your DBP and when you take it out you’re stuck with cash value life insurance you don’t need or probably even want.
I’ve been blocked from the website. I am sorry if I caused problems for anyone.
Best of luck to all,
Noah
You haven’t been blocked from making comments. That’s why this one posted. Did you break some forum rules and get kicked off there by the moderators?
I don’t think so. I wasn’t soliciting, I just was suddenly blocked and all my comments were removed. I would love to add value, and I apologize if I did something egregious. I didn’t get a reason obviously, I just saw that I was suddenly blocked.
I do see that I can still post comments here, but suddenly feel very unwelcome and perhaps it’s best if I go back to lurking. I would love some feedback about what I did wrong and happy to take that offline
I generally stand by the moderators’ decisions there, mostly because I don’t want to do all the moderating myself. I’ve been told I’m more tolerant in the comments section than they are there, but I’ve had to edit most of your comments here too, so maybe not. I’m not sure if you haven’t spent much time on internet forums, but they’ve all got their own code of conduct. When you see someone violating it on day one it really makes you wonder whether it’s worth the trouble you’re likely to have with them over the following months or years.
Some of the things you can’t do there which you’ve already done on this site include:
1) Posts that are written primarily to advertise your firm (beats me what you think soliciting means if you don’t think you’ve been doing it)
2) Using profanity
I think they also didn’t like the fact that you’ve chosen to partner with someone that has been disbarred from practicing law.
Jim,
1. I wasn’t soliciting on the forum at all. I did do that here in the comments, and I apologize for that and that is on me.
2. I didn’t use any profanity besides the word “hell”. I was feeling attacked by you, and I was being defensive.
Yes, one of our team had some non-criminal professional trouble that he regrets and worked past. He’s a good guy and a family man and was always looking out for his client’s best interest. He’s only part of a team of great people helping clients. He has been practicing law for 30 years and is extremely knowledgeable. I am his client, and so are many other physicians who have vetted him and know about this and vouch for him and his professionalism.
In any event, I appreciate the education about all of this and will respectfully bow out of your realm.
Noah
Hi,
My W2 income combined with my wife is $530,000.
I recently started a working for a separate group as a 1099 contractor and make about 30,000$ additional per year.
My employeer contributes the max to the 401k plus profit sharing to a maximum contribution of 50,000$ per year.
Doesn’t seem like I qualify for deductions using the 199A deduction.
I also thought about doing a SEP IRA or solo 401k however I think I meet the maximum deductions allowed of 50k.
I max out the backdoor Roth, HSA, and business expenses yearly.
Is a defined benefit plan the next reasonable step or else there something else that I am missing?
Ben
Does a medical practice get to write off on their taxes the self pay discount given to patients without insurance?
You can’t write off something you didn’t spend. Sorry. I’d love to see a tax break associated with donated or EMTALA-mandated care, but doubt it’ll ever happen.
Hi, I’m new to all this. I just set up a professional association as an s corp for my medical practice work. I had a few questions:
Can I deduct my health insurance or have it set up where my PA pays for it pre taxes? Would it be taxable to my PA or would it simply be an expense?
What about my disability and life insurance? Can my PA pay for it? Would it be counted as an expense? Would my PA be taxed?
With this PA I was trying to learn about the deducts I could make and how all this works. I don’t know a lot so far in this regarding so any additional information would be extremely helpful. Thanks so much!
Health insurance is an expense to a business. As are any other reasonable and necessary business expenses.
Hello,
I need advise for what are “reasonable “ deductions for 2019. A little background – I am paid mostly on a w2 (I work at the VA) , I moved mid year from Washington to Colorado ) and we sold our house at a large profit from when we bought it 5 years ago (after my husband who is a contractor remodeled it pretty much from the studs). (Profit being approx $850k. I don’t have receipts for $350k because my husband did most of the work himself, and some of his friends did work at cost. However I do have materials receipts over the last 5 years.
When we moved we donated a ton of stuff to various charities, and every year I have made monitory and good donations to thrift stores and various charities- however in 2019 the amount of goods donated to thrift stores like goodwill was so much more that I could probably come up with 10k donated.
My basic question is this- I don’t want to get audited so I am worried that if I have a dramatic increase in my goods donated to goodwill (even if it is all legit) + I have $150k or so in materials for the house that we remodeled (also legit with receipts) that the irs will still look at this and audit me. What is a reasonable amount to claim in charitable donations and what is reasonable in receipts? What should I do?
I am filing my taxes late this year due to a very active year, and this conundrum swirling over my head.
There is no longer a moving deduction which is greatly unfortunate for our situation.
Thank you!
If I had legitimate deductions I could defend in an audit, I would claim them, even if it meant an audit.
Bear in mind that you must have an appraisal above a certain amount of charitable donations, so look at that rule carefully. Essentially your materials just increase the basis of your house. Combined with the free $500K in capital gains, it should reduce your tax bill on an $850K gain substantially. Sounds like you’ll still owe something like $50K in capital gains taxes though.
If you have a taxable investing account you might want to see if you have any capital losses you can harvest. I harvested a bunch back in March, but the market has gone up quite a bit since then. If the market dips later this year, you might have another opportunity.
Donations of Professional Services is Virginia‘s tax credit law for doctors, dentists, and lawyers who help indigent people at designated sites, but not in private offices. It is available online.
Why not allow such treatment in private offices, and why not extend this law to
cover federal taxation? Write your senators, congressman, and your state legislature if you concur. Please email me if you have a better idea.
Henry E. Butler III M.D., F.A.C.S.
Commander U.S.N.R., Fleet Reserve
[email protected]
Cell phone 757 377 7775
Can you clarify ,
Under section
#1 Tax-Deferred Retirement Plans
but many 401(k)s will match you or at least allow you to self-match up to the $61,000 limit
Does this mean I as employee of the hospital can self match up to 61k,and if yes how it can be done?
Thanks
The employer’s plan has to allow it. If your employer does nto allow it, you can try to get them to change the rules, but steep uphill climb for most big companies.
If your plan allows it, yes. Your plan probably doesn’t allow it as a hospital employee. But might as well go in and ask HR. This is much more common in a physician owned business such as a group practice/partnership. Mine allows it for instance.
My employer is a big hospital system which does come close to allowing employees to self match up to $61K. Is there anything holding them back from raising their limit (other than some paperwork?)
In other words, would it cost my hospital money to increase the self-match limit?
Thanks for a great post!
Probably. They might have to pay penalties to all the non highly compensated employees.
Catch up contribution is $6500 for 2022
You’re right. We missed that when updating this for republication.
There is a $1000 catch up contribution for the IRA in item #2
You’re right. We missed that when updating this for republication.
You updated to: “plus an extra $7,000 if 50+”
I think you meant to say: “plus an extra $1,000 each if 50+”
Not trying to be pedantic….but a lot of people out there rely on your info, so I want to make sure it’s correct.
Thanks.
I’m a full time W2 employee. I max out my 401K. I also have a side gig where I get paid 1099. Is it possible to contribute to SEP IRA as well?
Yes, but a solo 401(k) is probably a better idea for you.
https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/
https://www.whitecoatinvestor.com/multiple-401k-rules/
You mention refinancing your mortgage to pay off student loans in order to lower the interest rate on the student loans and make the loans tax deductible.
I think the TCJA eliminated the ability to deduct the interest on the portion of a home equity or mortgage loan that is not used for the home or home improvements. So it may not be possible to employ this strategy since 2018. Is that correct? Thanks for what you do!
You are correct. That should have been fixed when we updated this post originally published in 2012. I’ve now updated that paragraph.
Under #7 could you sell vtsax and buy VTI to tax loss harvest since they have different CUSIP numbers?
I didn’t realize they had different CUSIP numbers; I guess I better quit saying “So long as they have different CUSIP numbers you’re likely okay.” In this case, I don’t think that’s okay. These are two different share classes of the exact same fund that owns the exact same thing. These are pretty clearly substantially identical. Not acceptable tax loss harvesting partners.
I am an emergency medicine physician employed by my hospital (W-2). As such I know I can not claim business expenses such as conferences, professional memberships, etc.
However I also have a single-member LLC that I use for developing apps. These apps all have an emergency medicine focus, and my expertise in EM is instrumental to development of these apps. Can I therefore claim EM conferences (where I also do some advertising) and professional memberships as an expense through my LLC?
Yes. Technically you have to pro-rate it though, either by time at each job or by how much money you make at each job.