Lawrence B Keller

3 Ways to Save Taxes While You Invest | Oncology Practice Management

Physicians pay more than their fair share of taxes, so when it comes to your investments, why would you pay more than you absolutely have to? While it may be too late to save taxes on investments you made last year, itís the perfect time to focus on saving money this year, so we want to share some tax tactics to keep your tax bill for 2016 in check.

1. Slip Contributions in Through the Back Door

If you are a physician who is covered by a retirement plan at work, your accountant may have told you that you do not qualify to contribute to an Individual Retirement Account (IRA). That is simply false. Physicians who have earned income can indeed contribute to an IRA, even if they cannot deduct the contribution from their taxable income.

This may leave you wondering why you should make an effort to contribute if you donít receive any immediate tax benefit. The answer is that your nondeductible contribution puts you in an ideal position to convert your traditional IRA to a Roth IRA, using a strategy known as a ìbackdoor Roth IRA. This lets the balance in your Roth IRA grow tax-deferred indefinitely, with no requirement for mandatory distributions at age 70Ω years, and no taxes due on qualified withdrawals.

To make a backdoor Roth IRA contribution, you need 2 accounts – a traditional IRA (preferably an empty account) and a Roth IRA. To do that, start by contributing the maximum allowed amount to your traditional IRA ($5500 for 2016, or $6500 if you are age 50 years or older). Next, you can instruct your financial institution to convert your traditional IRA balance to a Roth IRA account. The institution will distribute the balance from your traditional IRA and then deposit that amount to your Roth IRA, generating a Form 1099-R that is sent to you in January of the following year.

If you are taking advantage of this strategy, however, you must be careful. It is simple if the entire balance in your traditional IRA hails from nondeductible contributions, and if the account has not gained value. If that is the case, you should owe no taxes on this transaction; however, if you have any other IRA accounts (including SEP-IRAs, SIMPLE IRAs, and/or rollover IRAs) that were funded with pretax dollars, the taxable portion of any conversion made from these accounts will be prorated over all your IRA accounts.

Therefore, to truly benefit from the backdoor Roth IRA and avoid the ìpro-rata rule,î you must either convert your other IRA accounts as well, or you must transfer your IRA contributions that were funded with pretax dollars to an employer-sponsored plan that accepts IRA rollovers, so all that remains are IRA accounts funded with posttax dollars.

2. Put Taxable Income in Its Place

Although veteran investors know that a taxable bond fund generates ordinary income that is fully taxable, for some reason we continue to see physicians, even those who are under the care of financial advisors who should know better, owning taxable bond funds in taxable accounts.

For example, an oncologist earning $700,000 owns a joint account with her husband that holds $1.2 million in mutual funds, including $400,000 invested in corporate bonds. Those bonds yield dividends of approximately $13,000 this year. Since this couple is in the top marginal income tax bracket (39.6% for federal income), their tax bill for these dividends is approximately $5000, so only $8000 remains in the account after the taxes are paid.

Had this couple purchased a tax-exempt bond fund that pays dividends of $11,000, they may owe no taxes. As a result, this couple would have an additional $3000 this year, and every year thereafter.

It is easy to understand why this mistake happens. Investors routinely focus on the yield or the income from the securities they buy, while ignoring the after-tax total return that the security generates.

3. Save Your Health Savings Account

While Health Savings Accounts (HSAs) were signed into law more than a decade ago, physicians are just now beginning to take advantage of the sizable tax deduction that contributions to these accounts provide. If your family is covered by a qualifying high-deductible health insurance plan (HDHP), you can contribute $6750 to an HSA this year (or up to $3350 if you are covered individually). If you are a physician in the top marginal tax bracket of 39.6%, this contribution can provide you approximately $2700 in tax-savings income.

Having made your contribution and deducted it from your income, now you are in the right position to do the wrong thing: spend the money. Although many physicians will use their HSA balances to cover out-ofpocket healthcare expenses, a better strategy is to leave the balance in the HSA account for as long as you can. Here, the balance can be invested and allowed to grow tax-deferred until retirement. At that time it can be withdrawn tax-free to cover one of the biggest expenses we will all face in our old ageóthe cost of healthcare.

Conclusion

When you understand the ins and outs of tax-advantaged investing, you can stop paying unnecessary taxes and start putting more money toward your retirement, your kidsí college, and anything else money can buy. In fact, Judge Billings Learned Hand once said, 'Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase oneís taxes.'

W. Ben Utley, CFP, is the lead advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping doctors throughout the United States to save for college, retirement or other financial goals. He can be reached at 541-463-0899 or by e-mail at ben@physicianfamily.com.

Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF, is the founder of Physician Financial Services, a New Yorkñbased firm specializing in income protection and wealth accumulation strategies for physicians. He can be reached at 516-677-6211 or by e-mail at Lkeller@physicianfinancialservices.com with comments or questions.

This article originally appeared in page 48 of the March 2016 print edition of Oncology Practice Management.

7 Steps to a More Financially Secure 2016 | Oncology Practice Management

It is a new year. That means you have another chance to start over again, to take a fresh look at your finances, and to get on track for the future. So, where should you begin? Every physician should take several steps when moving toward financial security, and we want to share a few of them with you at the beginning of 2016.

1. Delve into Your Disability Insurance Policy

When was the last time you reviewed your disability insurance for doctors policy? If it has been more than a few years, it has been too long. Things change, and your coverage should keep pace. If your earned income is higher now than when you originally purchased your policy or last updated your coverage, chances are very good that you are underinsured.

Next, sit down and read through each of your policies. Pay special attention to the definition of disability. Ideally, your policy should include a true or pure “own-occupation” definition of total disability, which specifically states that you will be considered totally disabled if you are unable to perform the material and substantial duties of your occupation.

This definition allows you to work in another occupation or medical specialty and to receive full benefits, regardless of the income you earn from another occupation or medical specialty. Some companies will even go as far as to state that if you have limited your practice to a professionally recognized specialty in medicine, that specialty will be deemed your occupation.

Look for medical exclusion riders. Were you suffering from low back pain when your policy was issued?

Were you seeing a psychologist while you were going through a divorce? If so, you may have a rider on your policy that excludes these preexisting conditions. But if that divorce is far behind you and your back is much better now, you can ask your insurance company to reconsider those exclusion riders to close the gaps in your coverage.

Last, but not least, see if your policy includes a “multilife” or association discount. Although this can provide male physicians with a savings of only 10% to 15% off of their policies, female physicians can save as much as 60% of the normal female rates, if a gender neutral or a “unisex” rate is available. Therefore, if you are still healthy, and your policy does not include any discounts, it may make sense to “shop” the marketplace to see if you can obtain a similar policy for a lower premium relative to when you first purchased your policy.

2. Lift Your Umbrella to Cover Your Assets

The past 7 years have seen a dramatic rise in stock prices and home values, so there is a good chance that your net worth has increased. That is the good news. The bad news is that you are now a bigger target for lawsuits than ever before. Although your malpractice coverage may protect you from bad outcomes in the clinic, there are plenty of dangers lurking in your everyday dealings, so you need to make sure that all those risks are covered too.

The liability coverage under your homeowners and automobile policies is your primary layer of protection. However, if you need additional protection, you should purchase an excess liability or “umbrella” policy. Personal umbrella liability protection is secondary coverage that works in conjunction with your primary policy. When the liability limit of your primary policy is exhausted, the umbrella policy will pay the balance of a liability claim against you up to the umbrella policy’s limit.

You should also avoid structuring your automobile and homeowners policies with low deductibles. Low deductibles will cause your premium rates to rise substantially. Therefore, it is best to increase your deductibles to at least $1000 and to devote the premium savings toward increasing your liability limits and/or purchasing an umbrella or excess liability policy.

3. Establish an Emergency Fund

When you look into your bank account, what do you see? Typically, we see physicians with 2 accounts, a checking account and a savings or a money market account. Although that is acceptable, it means that your emergency fund, if you have one, is pooled with all the other monies you use to pay your expenses, go on vacation, and pay your taxes. So, how much of that money is really reserved for bona fide emergencies? There is no way to tell.

You, your spouse, and your loved ones can gain great peace of mind by simply segregating your emergency fund into its own separate account, such as a checking account, savings account, or money market account, which can be easily accessed without penalty. This is a fund to be used for unforeseen or overlooked expenses. Although the size of the fund is a personal decision, suggestions range from 3 to 6 months of your living expenses. Either way, keeping this fund separate from all your other accounts makes it easier to see, so that everyone knows that the safety net is real.

4. “Max Out” the Match

You would not walk away from free money, would you? Of course not. Nonetheless, we routinely see physicians who miss out on their employer’s matching retirement plan contribution by failing to max out their own elective deferrals.

To make the most of your retirement plan, contribute all you can. The maximum elective deferral into Section 401(k), 403(b), 457(b), and government thrift savings plans remains unchanged for 2016, at $18,000 for most physicians and $24,000 for those aged 50 years or older this year.

While you are thinking about your workplace retirement accounts, take a look at the investment options in your plan. Have they changed? Each year, your plan fiduciaries (the people who put together the list of mutual funds from which you can choose) are supposed to review the options you have to choose from so you have ample opportunity to diversify your holdings. The key word here is “opportunity,” because it is your job to actually make the final decision about how to invest.

5. Do Not Tolerate High Interest Rates

Banks and financial institutions are bending over backward to win physicians as customers. After all, you earn 6 figures in a 5-figure world, and you are the pillar of your community—both of these make you a good risk for lenders. Make them earn your business.

Review all your loans—your student loans, your mortgage, your car loans, and your credit card balances—and then ask yourself, “Is this the best they can do?” Then call up your lender(s) and at least one other bank or financial institution, and ask them the exact same question.

When you get an offer from one, compare it with the other offers you have received. Ask if you can qualify for a lower interest rate and, if you do not, ask if they can waive an origination fee or see if you can qualify for less restrictive terms. Maybe one wants your spouse to cosign, whereas another does not. Do not forget that you are the customer and deserve only the very best.

6. Raise Your Deductible to Lower Your Taxes

Health savings accounts (HSAs) have been in use since 2003, but many physicians are just now learning how they work. If you have a qualifying high-deductible health plan, you can open an HSA for yourself or your family and contribute $6750 in 2016 (for family plans) or $3350 for individual plans, plus an additional $1000 for those aged ≥55 years.

Although $6750 may not seem all that much in the grand scheme of things, your HSA contribution can deliver permanent income tax savings plus years of tax deferral. For example, a physician in the top federal tax bracket can reduce his or her tax bill by $2673 when he or she makes the maximum family contribution.

However, many physicians who are using an HSA account are using it the wrong way. They will contribute to the account, get the tax break, and then spend the account down to zero on medical bills. A better strategy is to pay those bills out of pocket and invest the account balance, so that it can grow tax deferred for retirement, when it can be used to pay for healthcare.

7. Take a Second Look at Your Life

People are living longer today than ever before, so life insurance premiums have decreased steadily over the past several years. So if it has been many years since you reviewed your coverage, now is a great time to do so.

You should use the services of an experienced insurance agent who represents several companies to help you get the best rates, especially if your health is less than perfect.

The agent will know which carriers are likely to provide you with a better underwriting classification based on your height and weight, immediate family history, and/or other medical issues to allow you to secure a lower premium rate.

For example, if you are being treated for hypertension, certain companies will allow you to qualify for their best underwriting classification, but others will not. After all, using an agent or applying for the insurance product online will not cost you any additional money.

Conclusion

This article provides 7 steps to help you reach a more financially secure 2016. The key is to take the time to evaluate which of these concepts, if any, works for you in terms of your personal financial planning. After all, most people “don’t plan to fail, they simply fail to plan.”

W. Ben Utley, CFP, is the lead advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping doctors throughout the United States to save for college, retirement, or other financial goals. He can be reached at 541-463-0899 or by e-mail at ben@physicianfamily.com.

Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF, is the founder of Physician Financial Services, a New York–based firm specializing in income protection and wealth accumulation strategies for physicians. He can be reached at 516-677-6211 or by e-mail at Lkeller@physicianfinancialservices.com with comments or questions.

This article originally appeared in page 42 of the January 2016 print edition of Oncology Practice Management.

Seven steps to finding the right financial advisor

As a physician with substantial income (or income potential), you will most likely be contacted by a number of individuals offering various types of financial products and services throughout your career. If you are in the market for an advisor, you will want to know the qualifications and experience level of each one you are considering. Unlike medicine, which has a standardized path that physicians must take to gain the education, training, and experience necessary to obtain board certification, the insurance and financial services industry does not. While advisors must pass certain tests to earn a license in securities or insurance, for the most part, anyone can call himself or herself a financial advisor. Credentials and Certifications

Finding the right financial advisor to help you build your financial future can be as challenging as choosing the right doctor to care for your health, so it is important to look for several key credentials. Following is a brief summary of some of the most recognizable designations or certifications that you might see among financial service professionals and what it takes to earn them.

Certified Public Accountant (CPA): CPAs provide you with advice on tax matters and help you prepare and submit your income tax returns to the Internal Revenue Service. To be a CPA, candidates must pass a 14-hour computer-based test with 4 sections: auditing and attestation; financial accounting and reporting; regulation; and business environment and concepts. There are also work experience requirements that must be met. Not all accountants are CPAs. CPAs must meet stringent continuing education requirements and are regulated by states as well as their profession’s code of ethics.

Personal Financial Specialist (CPA/PFS): A PFS is a CPA who has demonstrated both knowledge and significant practical experience in the area of personal financial planning. Only CPAs who are members of the American Institute of Certified Public Accountants can earn this designation.

Certified Financial Planner (CFP): The CFP certification is one of the most recognized and prestigious credentials in the financial services industry. CFPs have completed a series of courses in investments, insurance, income taxes, estate, and retirement planning. They have also passed a comprehensive 10-hour certification exam. Additionally, CFPs must have at least 3 years of planning experience and meet stringent continuing education requirements as well as have a bachelor’s degree. While an estimated 700,000 people currently call themselves financial planners, only 1 in 10 holds the CFP designation. If you need help with more than 1 issue in your financial life or if you are targeting long-term goals like retirement or college, make sure a CFP is on your list.

Chartered Financial Consultant (ChFC): ChFCs have credentials similar to CFPs. ChFCs have completed a series of courses and exams covering financial, insurance, and estate planning subjects. The ChFC program provides financial planners and others in the financial services industry with in-depth knowledge of the skills needed to perform comprehensive financial planning for their clients.

Chartered Life Underwriter (CLU): CLUs are insurance agents who have completed comprehensive educational courses and demonstrated expertise in different areas of estate and insurance planning. This designation is specifically designed to enhance the knowledge of people employed in the life insurance industry. CLUs must also have at least 3 years of professional experience.

Chartered Financial Analyst (CFA): CFAs have expertise in investing and portfolio management. They have passed 3 exams based on investment principles, applied financial analysis, and investment management. Each exam is approximately 6 hours in length. Additionally, CFAs must have at least 3 years of experience in the investment decision-making process. Generally, the CFA designation is recognized as the definitive standard for measuring competence and integrity in the fields of portfolio management and investment analysis.

The Steps

Financial planning takes the guesswork out of managing your finances and helps you understand the implications of each financial decision you make. Everyone has different goals, so it is important to have a unique plan that works for you and your financial situation, both now and in the future. The following 7 steps will help you find an advisor who understands and meets your unique goals and needs.

1 Make a Well-Founded List of Prospective Advisors

Begin your research by conducting an Internet search using the terms “physician financial advisor” or “physician financial planner.” Look for signs of expertise such as published articles, a book, or maybe even a blog. A search outside of your community means you increase the odds of finding the best-qualified advice for the price you may pay. A search inside of your state means that the advisors you find are more likely to understand your financial environment, including your state’s tax laws, economy, job market, unique investment opportunities, and other factors that may impact the success of your financial plan. If you are concerned about the advisor’s location, keep in mind that today many financial advisors work with clients by telephone, e-mail, and video conference on a regular basis.

Next, it is important to search a few specific organizations. CFP Board (www.cfp.net) is a nonprofit organization acting in the public interest by fostering professional standards in personal financial planning through its setting and enforcement of the education, examination, experience, ethics, and other requirements for CFP certification. The National Association of Personal Financial Advisors (www.napfa.org) is the country’s leading professional association of fee-only financial advisors. Finally, the Financial Planning Association (www.plannersearch.org) is the largest membership organization for CFP professionals in the United States and also includes members who support the financial planning process.

To round out your list of prospective advisors, ask your colleagues, your accountant, and your attorney who they recommend. Ask them why they believe this advisor is the best one for you. If their reason sounds valid, add the advisor to your list.

2. Select for Quality

Every prospective financial advisor on your list should have at least 1 real credential. Beware of generic pseudocredentials like financial advisor, financial consultant, and wealth manager. These titles merely signify that an advisor is in the business and may hold a license. Whereas most licenses require an advisor to pay a fee and pass an exam, these may be easily acquired with a minimal commitment of time and effort.

In contrast, certifications usually require a higher level of commitment and dedication. Formal training, rigorous examination, continuing education, years of experience, and oversight by a board or governing body are part of attaining and keeping a certificate, so certification is an outward indicator of the quality of advice you may receive. Narrow your list by crossing advisors off your list if they do not have at least 1 of the previously listed credentials.

3. Do Your Homework

Learn more about the advisors who remain on your list. Visit their websites, and search for answers to questions such as the following:

  • How long have you been in business?
  • What type of clients do you work with?
  • What services do you provide?
  • What is your specialty?
  • What is your approach to financial planning?

4. Conduct an Interview

Every advisor on your newly trimmed list warrants a preliminary phone call. This is an interview, and you are the interviewer, not the interviewee, so make sure that you get the answers you need.

First and foremost, ask the candidate how he or she is paid. Planners can be paid in several ways: through fees, commissions, or a combination of both. Your financial planner should clearly state how he or she will be paid for the services to be provided. Although there is no single method of paying for financial services that is inherently better than another, you will nevertheless want to consider, and discuss with your planner, how the method of compensation could affect the advice you receive or the way you work with the advisor. You and your financial planner should discuss these issues, including any conflicts of interest that may be created by the method of compensation.

Then ask whether the advisor has ever been publicly disciplined for any unlawful or unethical actions in his or her professional career. Several government and professional regulatory organizations, such as the Financial Industry Regulatory Authority, your state insurance and securities departments, and the CFP Board keep records on the disciplinary history of financial planners and advisors. If a CFP professional violates any of the CFP Board’s standards, he is subject to disciplinary action up to permanent revocation of certification. Ask which organizations the planner is regulated by and contact these groups to conduct a background check. You can also visit http://brokercheck.finra.org.

Make appointments to visit advisors who remain on your list after this screening round.

5. Speak with at Least 3 Prospective Advisors

Now you are ready to make the biggest mistake that most people make when selecting an advisor: engaging the very first advisor you meet. While this may solve your immediate problem, it may lead to less-than-stellar results over the long haul. Why? Almost all advisors hold up well during the first interview. They have been interviewed hundreds of times and are ready to sign you up today. Resist the temptation to sign up for services at the first meeting. Instead, collect information and get a feel for how you and the advisor might work together over the longer haul.

6.  Consider What You Have Learned

Think about your interview with each advisor. Ask yourself these last few questions before making your final decision:

  • How well did each financial advisor listen to me? The hallmark of a good relationship with your financial advisor will be your ability to communicate your needs. This means that he or she must do an excellent job of listening to you in order to understand how he or she can help.
  • How clearly did each financial advisor express himself or herself? Even if you receive the very best financial advice from your new advisor, you might not follow the advice unless you fully understand it. Consider whether the advisor “speaks your language.”
  • What promises did each financial advisor make? Consider how each advisor attempted to win you as a client. The best advisors attempt to set clear, realistic expectations about your work with them during the very first meeting. They know the foundation for a great, long-term advisor–client relationship is their ability to make promises and deliver on them.

7. Select a Financial Advisor Who Suits You

When you finally decide which advisor to hire, you may realize something that good financial advisors already know: the financial advisor you choose may be a lot like you. People have a natural tendency to trust others who are much like themselves, so the advisor you choose will likely share your interests, your outlook, and even some of the same financial goals you hold.

Summary

No matter which financial advisor you choose, make sure the one thing that you have in common is an uncompromised interest in your financial health. Start your search for a competent financial advisor today and begin enjoying better financial health tomorrow.


W. Ben Utley, CFP, is the lead advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping doctors throughout the United States to save for college and invest for retirement. He can be reached at 541-463-0899 or by e-mail to ben@physicianfamily.com.

Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF, is the founder of Physician Financial Services, a New York–based firm specializing in income protection and wealth accumulation strategies for physicians. He can be reached at 516-677-6211 or by e-mail to Lkeller@physicianfinancialservices.com with comments or questions.

 

 

Umbrella Insurance - Malpractice insurance for every day living | W. Ben Utley CFP® writes for Orthopreneur

As a physician, you have a bright red target painted on your back with a big dollar sign in the bull’s eye. Everybody wants a piece of you. While there’s nothing you can do to keep them from suing you, you have plenty of options when it comes to protecting yourself.

At work, you have malpractice insurance but what can you do about liability you might incur throughout the course of your life outside your profession?

If you crash your car into someone, your auto insurance will cover you. If someone trips and falls on your property, your homeowner’s insurance covers that. But what if something really bad happens? What if the defense—and the damages—are substantially more than the limits on your policies?

You can pay the costs out of pocket if you have the resources but if you don’t, the person who sues you may attach your future earnings to satisfy the liability.

Open Your Umbrella

To protect yourself, what you really need is something like malpractice insurance for everyday living. In fact, there is a special form of property and casualty insurance that’s layered on top of your homeowner’s and automobile insurance policies. Since it covers liability “above and beyond” that afforded by your base layers, it’s known as “umbrella” insurance.

This “excess liability insurance policy” sits on top of your other coverage and picks up the liability where the base layers leave off. It can pay for your legal defense and cover the damages up to the limits of the policy.

For example, let’s say you are implicated in a motor vehicle accident and found liable for a bodily injury claim totaling $1,500,000. If your auto policy’s liability limit is $500,000 and you did not have an umbrella policy, you would be expected to meet the remainder of that claim ($1 million) yourself. However, if you had a $1,000,000 umbrella policy layered on top of your auto coverage, you would be adequately protected since your base policy would pay the first $500,000 and the umbrella policy would cover the rest of the claim.

Umbrella insurance may also protect you from losses not covered by basic liability insurance.  It often covers damages for unusual occurrences  including personal injury losses due to libel, slander, wrongful eviction, false arrest, and invasion of privacy.  Your umbrella liability policy might also pay for damages incurred in situations where coverage from auto and homeowner’s insurance might not apply, as may be the case when you are traveling.

In addition, an umbrella policy might pay a proportionate share of a claim even if your basic liability insurance policy cannot pay its portion, either because you failed to comply with the conditions of the base policy or because the base layer insurer has become insolvent.

Be aware that umbrella policies usually do not protect you against damages you cause intentionally, liability that you accept contractually, liability related to planes, boats and other “toys” (which should be covered under other policies) or damages arising out of business or professional pursuits (which is usually covered by your malpractice insurance).

Big Risks, Little Premiums

If all this talk about millions of dollars makes you think, “this insurance must be expensive…” guess again. The perils covered by umbrella insurance are as rare as they are catastrophic, and the premium reflects this fact. The average $1 million umbrella policy comes with an annual premium ranging from $300 to $500, while a $5 million policy might cost you $600 to $700 per year, or about two dollers a day. If you have a weak credit history, a bad driving record, or teenage drivers in your household, you may pay a little more.

While paying the premium is easy, knowing how much coverage to get is the hard part since it’s not an exact science. The best practice here is to get somewhere between $1 million in umbrella coverage (obeying the “something is better than nothing” principle) and as much as your insurer will allow (which conforms to the principle of least regret).

Getting enough insurance to cover all your assets plus another $500,000 for legal defense seems like the happy medium. For example, a physician with a net worth of $2 million might opt for $2.5 million in coverage. As you make your decision, you might also consider factors such as how often you have guests in your home, how many miles you drive and whether your kids are likely to cause you to incur liability.

The best place to start shopping for coverage is with the insurance companies who currently cover your autos and your home since these policies are prerequisites for coverage.

When you set up your coverage, make sure there’s no gap between the top limit of your base layer coverage and the bottom limit of your umbrella policy. For example, if you have a $300,000 liability limit on your home, you might find yourself out of pocket for $200,000 when you incur a $1.5 million liability and also have $1 million in coverage from your umbrella policy. The first $300,000 would be paid by your base layer, then you would pay the next $200,000 and your umbrella would pay the remainder of the claim. A little diligence in the process can save you a bundle.

As a physician, you already know people think you’ve got deep pockets. By putting a cheap but vital second layer of coverage on top of your base layers, you can show them the money if your legal team can’t show them to the exits first.

About the Authors

Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF is the founder of Physician Financial Services. Based in New York, he offers income protection and wealth accumulation strategies for physicians nationwide. Contact him at (800) 481-6447 or LKeller@physicianfinancialservices.com.

W. Ben Utley, CFP®, is an attending advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping physicians throughout the U.S. to make a plan and get on track with saving for college and invest for retirement.

This article originally appeared in Orthopreneur with the title "Umbrella Insurance: Malpractice Coverage for Every Day".

Three ways to make the best of a bad (401k) situation | W. Ben Utley CFP® writes for Orthopreneur

We see the changes that physicians make to improve their financial security, but one item is usually beyond their control: their 401(k) plans. Unless you are self-employed, there is practically nothing you can do about your 401(k)’s underwhelming investment options, ridiculously low contribution limits or perverse tax consequences. If your 401(k) is your main (or maybe your only) investment vehicle for retirement, we have good news for you. It is possible to work around your 401(k) plan’s limitations, so that you can get back on track toward retirement.

Low Limits Many physicians operate under the mistaken belief that if they max out their 401(k) plan contributions, they will be set for retirement. But did you know that the maximum amount of money you can elect to defer into your 401(k) this year is only $17,500 ($23,000 if you will be age 50 or older by December 31)? That’s roughly $1,400 deducted from your paycheck each month ($1,900 per month if you are age 50 or older).

Have you ever met a physician who could live well on $1,400 a month? We haven’t. In fact, the physicians whom we serve are planning to spend more like $10,000 per month in retirement, and that’s after tax. It would take a miraculously high rate of return to turn $1,400 per month pre-tax into $10,000 per month after-tax. As you can see, many physicians are well on their way to a retirement disaster.

To improve your odds of reaching your retirement goal, you can save outside of your 401(k) plan. Even if you cannot deduct the contributions you make to a Traditional IRA, you can still contribute $5,500 this year ($6,500 if you will be age 50 or older by December 31), and if you max out your own IRA, your spouse can also contribute up to $5,500 to his or her IRA ($6,500 if he or she will be age 50 or older by December 31), even if they are not earning an income. Depending upon your tax situation, it might also make sense to convert these contributions to a Roth IRA, doing what is known as a backdoor Roth IRA contribution. Once the money is in a Roth IRA, it can grow tax-free for the rest of your life. Of course, this still might not be enough to allow you to retire comfortably, so you should consider investments outside of your 401(k) plan and IRAs.

Underwhelming Options You probably haven’t read the fine print behind your 401(k) plan, but you are betting that your practice manager has carefully vetted both your 401(k) plan provider and the investments offered inside your plan. Don’t believe it! We have found that busy managers either fail to read the fine print or lack the experience to understand what they have read. Despite new laws requiring plain English disclosures of investment-related fees, many employers continue to keep physicians locked into expensive plans with unpalatable investment options.

If your plan charges more than 50 basis points (0.50 percent) on top of mutual fund operating expenses, your plan’s costs are draining an unfair share of your retirement savings. To get this under control, you need to raise your voice, but carefully. We regularly see very expensive plans that persist simply because of office politics.

It’s more common to see an investment lineup consisting mostly, if not entirely, of actively managed mutual funds. This is a sign of ignorance on the part of your plan fiduciaries. At a time when most prudent investors recognize that passively managed index funds have been shown to have delivered better results at a lower cost than the average actively-managed fund, there’s no good reason that your plan should continue to limit you to subpar investment options.

To work around these issues, look at your retirement investments holistically. Think about your 401(k) plan, your Traditional IRAs and your after-tax accounts (mutual funds and brokerage accounts) as if they were all one retirement portfolio. Then use the least-bad investment options from your 401(k) and pair them with the best options available within other accounts that make up the balance of your portfolio.

Tax Time Bomb You already know that physicians pay more than their fair share of taxes. But did you know that you are probably setting yourself up to pay more taxes on your 401(k) than you really should? That’s right. There’s a perverse little wrinkle in the tax code that can turn your 401(k) plan into a tax time bomb.

To understand this trap, you need to know a little bit about how investments are taxed. Withdrawals from your 401(k) plan will be taxed at your marginal income tax rate, which may be as high as 39.6 percent for Federal income tax. At the same time, capital gains and qualified dividends from mutual funds held in taxable accounts outside your 401(k) plan are taxed at a maximum Federal rate of 23.8 percent (which is 20 percent plus the new 3.8 percent Medicare surtax).

This means that your 401(k) nearly doubles the tax rate you pay on capital gains and qualified income by effectively converting these tax-favored returns into tax-trapped ordinary income. Consider holding equity mutual funds in a taxable account, or better yet, own them in your Roth IRA or the Roth subaccount of your 401(k) if you have one.

If your 401(k) is a lousy place to stash your stock funds, what should you hold there instead? Consider low growth, income-producing investments, including bond funds and stable value funds. If you have an appetite for more aggressive fare, consider high yield (junk) bond funds or emerging market bond funds. Outside of your 401(k) plan, these investments may be taxed at your highest marginal rate, so it’s a good idea to protect your income by keeping it inside of the tax shelter of your 401(k) plan.

Again, the best workaround for this tax trap is to view your entire retirement portfolio, including your 401(k) plan, your IRAs and your other accounts that are earmarked for retirement, as one portfolio. Choose to own the best investments in the accounts that make the most sense from the standpoint of expense, risk, return and taxation.

Summary Even if you are stuck with a stinky 401(k) plan, you can still make the best of a bad situation. All you have to do is take a look at the big picture, think outside the box and make smart moves to put yourself on track for a solid retirement.

 

W. Ben Utley, CFP®, is an attending advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping physicians throughout the U.S. to save for college and invest for retirement.

Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF, is the founder of Physician Financial Services. Based in New York. He offers income protection and wealth accumulation strategies for physicians nationwide.

This article originally appeared in Orthopreneur with the title "Overcome 401 (k) LImitations: Three Ways to Make the Best of a Bad Situation".