When Medicine is the Family Business
Proper tax planning reduced a physician family’s tax bill by almost 50%
As financial advisors, one of our main goals is to help ALL clients, especially physicians, make sure they are saving enough for retirement. For physicians who are employed (the vast majority of them) we help to make sure that they are contributing the maximum allowable amount to an Employer-Sponsored Retirement Account, typically a 401(k).
In 2022, most physicians are currently full-time employees of large hospital systems, but there are a growing number of doctors and other “medical families” who are getting tired of “working for the man. ”they are venturing back into traditional private or group practices, starting their own Direct Primary or Specialty Care practices, and some are becoming entrepreneurs and pursuing “side-hustles. When physicians own their own businesses, saving for retirement can becomes a little more complicated, but our role as advisors is to help break things down so they are simpler, compliant with tax code and which allows families to achieve true financial health.
ALL IN THE FAMILY
we have had the opportunity to work with physician clients who employ their family members within their practice and for marketing purposes, billing and for other practice-related job duties. Not only have they all been able to pitch in to make the practice successful, but with our help they were able to take advantage of some pretty significant advantageous tax benefits.
When the second-round of stimulus checks were being distributed in 2022 there were some medical residents and fellows (but few Attending Physicians) who were eligible to receive them.
Using a family of four as an example of a household who was eligible to receive a stimulus check of $5,600 for those with an Annual Gross Income (AGI) founder $150,000 (after maxing out 401ks, HSAs, etc.) we use the example of the fictional Jones family. Dr. Jones is a Family Practitioner, and her husband is the office manager.
Family Medicine LLC distributes $225,000 to the Jones Family annually. Mr. Jones handles the operations of the business. Dr. Jones provides all medical care, and their two children provide marketing support.
** This scenario is based on a real example where a physician client’s children are paid models and their photos are used in the marketing materials of the clinic. **
A Financial Planner from Fortress Physicians manages the Family Medicine LLC 401(k) Plan for the business and the four participants referenced above. Since they are all eligible based on the plan’s governing documents and are all receiving reasonable compensation for their duties, they all were able to contribute to the 401K plan. Setting up financial plans can take significant attention to detail and research to ensure compliance with state and federal tax regulations (not to imply that it is brain surgery!). As with ANY tax strategy, we urge clients to consult with their tax preparers/accountants as well as their attorneys to ensure that all the “T’s” are crossed, and “I’s” are dotted.
Each of the four members of the Jones family was able to contribute their individual allowable$19,500 maximum 2021 employee contribution, which totaled $78,000. They also jointly contributed the allowable maximum of $7,000 into a family Health Savings Account. Here is where the benefits of holistic financial planning really started to compound.
As you will recall from this scenario, Family Medicine LLC has been distributing$225,000 to the family in the form of income. This is noticeably over the $150,000 AGI limit that made a family eligible for the second round of stimulus checks.
With the planning that Fortress assisted them with, they were able to “max out” their contributions into their 401(k)sand HSA accounts, which resulted in an $85,000 decrease their income from $225,000 to $140,000. This, in turn, made them eligible to receive that stimulus check...that was an additional $5,600 in the family’s pockets thanks to effective planning.
The Jones family recently added a new member to their family when they adopted a one-year-old. This baby is ALSO following in his older siblings' footsteps and is modeling and has proven to be quite effective in marketing the practice to families with younger infants and toddlers. Family Medicine LLC is planning on using the $5600 stimulus check and an additional $400 to,, pay the baby a $6000 annual salary.
By paying this new member of the family an annual $6000 bonus for marketing expenses for the next 18 years and investing the money into their Roth IRA (which is also allowed) they will be contributing $108,000 over that child’s lifetime. Assuming an 8% annualized rate of return, this baby would have over $5,000,000 in this tax-free retirement account by the time they retire (age 60) from these contributions alone!.
This is just an example and values are estimated to help express the point that proper tax planning is a crucial part of any financial plan. As with any tax strategy, we urge you to contact your tax preparer/accountant as well as your attorney for any legal advice.