Particularly in today's tough economic climate and particularly at this time of year, deferring income with an eye toward retirement is the name of the game. Lynn Edwards, a certified public accountant with Nashville-based KraftCPAs since 1976, summed it up: "There are so many things going on right now with retirement plans. Certainly, everybody's trying to cut corners where they can.

 

 … When you're paying 35 cents on the dollar, and most physicians probably are, every dollar to defer is beneficial."

 

For physicians in a group practice … and an unquestionable majority of physicians are … they face a dual challenge: how to allow the doctors to defer as much money as they can into retirement options, yet minimize the cost to contribute to the plan on behalf of the staff. There are various solutions – a profit-sharing plan, a 401(k) or a combination of the two, Edwards said.

 

A popular option is the 401(k) Safe Harbor Plan, devised a decade ago for top-heavy organizations with a significant number of highly compensated employees (HCEs). Likely candidates aremedical groups, law practices, engineering firms, financial-services companies and the like. The plan improves the ability to achieve greater contribution levels for an organization's HCEs, essentially allowing maximum contributions from them without regard to deferrals made by non-HCEs. Added to that plan could be another provision that allows "cross-testing," allocating an additional contribution for HCEs. "On the cross-testing piece that's within a plan, you segregate the doctors out into a group and segregate the staff out into another group. That allows more of the contribution to go to the physician. That's a little bit different from a traditional profit-sharing plan where everything is allocated equally," Edwards explained, warning that the ins and outs of the strategy can be complex. With that scenario in place, she said, the maximum allowable contribution is $49,000 for 2009.

 

An additional tax advantage is offered when the defined-contribution plan (the 401(k) with the cross-testing provision, for example) is coupled with a defined-benefit plan, also called a cash balance plan. This strategy "would allow the physicians to be able to contribute a whole lot more money based upon their age. It's a benefit that's actuarially calculated," Edwards said. Combine all these plans, and an older physician might be able to sock away $100,000 or more tax-deferred in a given year. "If you have a physician who potentially has not saved a lot for retirement, this is a way that he or she could put a lot of money in there to fund retirement faster," she noted.

 

The year 2009 offers a distinct advantage for older physicians, particularly those who are still practicing. At least for this year, the IRS isn't requiring participants of tax-deferred retirement plans who have reached the age of 70.5 to take the required minimum distribution. The reasoning is two-fold:

"A lot of times people don't really want to take the money, they have to take the money. This is an opportunity to not take it and not pay the tax on it," Edwards said. It's anyone's guess whether this reprieve will extend another year.

 

Edwards also stressed that 2010 offers perhaps a one-shot chance to convert conventional IRAs to Roth IRAs with no income limit. (See the story "In Tough Tax Year: Planning is Key.")

 

While most physicians Edwards comes across have already mapped out some type of retirement strategy, she said it's always surprising to meet a physician who hasn't done so. "They have been working in their practice, and all of a sudden, they're age 50 and think, 'Oh my goodness! I need to set aside money for retirement.' It's a reality check for them."