401k's bigger but not enough for certain doctors

The IRS usually makes your life more difficult, but this time, they got it right. Limits on retirement plan contributions have been increased for 2012.

What does the increase mean to you?

  • Self-Employed Doctors: If you're one of the remaining few practitioners who hasn't yet been forced to join the local hospital and you still own your practice, you probably have a cross-tested safe harbor defined contribution plan, like a 401(k) combined with a profit sharing plan. In your case, limits for total contributions will increase by $1,000 for 2012, to $50,000 per year.
  • Doctors Who Are Employees: If you work for a non-profit hospital or clinic, you probably have a 403(b) plan or other tax-deferred arrangement, and doctors employed by for-profit healthcare providers may have a traditional 401(k). In either case, the IRS has upped the limit on elective deferralsthe amount you choose to have withheld from your paycheckby $500 to $17,000 for 2012.

What do you need to do?

To benefit from these changes, you need to increase the amount you have withheld from your pay. Depending on the way your retirement plan works, your contributions might not be adjusted automatically and they cannot be increased retroactively, so it's important that you take action. Call your human resources or benefits person and ask them, "Am I signed up to max out my retirement plan this year?"

The max is not enough.

Even with increased limits, fully funding your retirement plan does not mean you'll have enough money on the day you decide to hang up your practice. When I help physician families do their retirement fund planning, I see that stuffing your 401k to the max often means you'll have only half as much money as you might need when you retire, so you'll probably need to save outside your plan too, using Individual Retirement Accounts (IRA's) and after-tax accounts. (Beware people trying to sell you tax-deferred annuities for this purpose.)

If it's been a while since you updated your Retirement Fund Plan or you don't have a Retirement Fund Plan, contact me so I can help you get on track.