Taxes

  • Increased Retirement Account Contribution Limits for 2024

    The IRS announced new contribution limits to employer retirement accounts (401(k)s, 403(b)s, most 457(b) plans, and the Thrift Savings Plan) and individual retirement accounts (IRAs, Roth IRAs). Along with increased contribution limits, the income limits to be able to contribute to a Roth IRA and to deduct contributions to a traditional IRA are receiving a bump for 2024 as well.

    Key Points

    • 401(k)/403(b) employee contribution limits increased to $23,000 for 2024.
    • IRA and Roth IRA contribution limits also increased and are up to $7,000.
    • The income limit to be able to directly contribute to a Roth IRA ranges from $146k – $161k for single filers and  $230,000 – $240,000 for married filing jointly.
    • The total contribution limit for employer retirement accounts also grew to $69,000. This is the limit for all employee, employer, and after-tax contributions.

    2024 Employer Retirement Account Contribution Limits

    The employee contribution limit for employer retirement accounts, think 401(k)s, 403(b)s, the Thrift Savings Plan and most 457(b) plans is increasing to $23,000. A $500 bump from 2023. The total limit which includes employee and employer contributions rises to $69,000, a $3,000 boost from last year.

    The catch-up contributions available to employees who are 50 or older remains unchanged for the new year at $7,500.

    After-tax 401(k) Contribution Limits

    Once you hit the limit to what you can contribute as an employee, $23,000 for 2024, you may be able to save more in your 401(k) through after-tax contributions. That’s where the combined limit of $69,000 comes into play. If your 401(k) plan allows you can make additional after-tax contributions up to the $69,000 limit.

    Consider an example where your employer makes a flat $5,000 401(k) match and your 401(k) plan allows after-tax contributions. Once you’ve made your $23,000 contribution you can contribute an additional $41,000 of after-tax contributions.

    $23k employee contribution + $5k employer match + $41k after-tax contribution = $69k

    Your after-tax contributions will continue to grow tax-free and you will owe taxes on their withdrawal in retirement similar to traditional 401(k) contributions.

    After-tax 401(k) -> Mega Backdoor Roth

    An even better option if your 401(k) plan allows it is to do an immediate Roth conversion on your after-tax contributions. Since the contribution is made with after-tax dollars there will be no tax owed on the Roth conversion, and your converted funds will grow tax-free and can be withdrawn tax-free in retirement. You can learn more about the Mega Backdoor Roth at this link.

    2024 IRA (Individual Retirement Account) Contribution Limits

    The contribution limit on IRAs is getting a $500 increase for 2024 as well. Individuals can contribute up to $7,000 to Roth and Traditional IRAs, up from $6,500 last year. The 50 and over catch-up contribution will remain at $1,000.

    The income limits to contribute to a Roth IRA or to make a tax-deductible traditional IRA contribution are increasing as well. These limits can be a little confusing because the amount you can contribute or deduct decreases once you earn above a certain amount, and if you are married the limits also vary based on whether you or your spouse have access to an employer retirement plan like a 401(k).

    2024 Roth IRA Income Limits

    The income limits for a Roth IRA are relatively straightforward compared to the rules around the traditional IRA. For a Roth IRA in 2024 single taxpayers can make the full contribution if your income is $146,000 or less. Above $146k as you make more income the amount you can contribute is reduced until you make $161,000 at which point you can no longer directly contribute to a Roth IRA.

    Although, if your income is too high to contribute to a Roth IRA directly you can still make a backdoor Roth IRA contribution.

    The phaseout limits for married couples filing jointly contributing to a Roth IRA go from $230,000 to $240,000. Both of these limits increased $12,000 from last year, so more folks should be eligible to contribute to a Roth IRA directly in 2024.

    2024 Traditional IRA Income Limits

    Income limits to deduct contributions to a traditional IRA follow a similar pattern. There’s a range of income where your ability to deduct contributions is phased out and the actual limit depends on your tax filing status and on whether you or your spouse have access to a workplace retirement plan.

    If you are a single filer and you don’t have a workplace retirement plan, or if you are married filing jointly and neither you nor your spouse have a workplace retirement plan then there aren’t any income limits and your traditional IRA contribution will be deductible.

    Single filers with a workplace retirement plan have an income limit phaseout range from $77,000 to $87,000.

    For married filers where the spouse making the contribution has a workplace retirement plan the income limit phaseout range is $123,000 to $143,000.

    For married filers where the spouse making the contribution does not have a workplace retirement plan, but the other spouse does, the income limit phaseout range is $230,000 to $240,000.

    These limits are also increases from last year.

    Qualified Charitable Contributions

    Along with increases to retirement contributions, the amount that you can contribute from your retirement account to charity also increased. A QCD (Qualified Charitable Distribution) allows you to roll funds directly from your IRA to a qualified charity. QCDs satisfy RMD rules and you can exclude the amount donated from your taxable income. The QCD increases by $5,000 for 2024 up to $105,000.

    Should you make any changes based on these increases?

    If you’re maxxing your 401(k) contribution you’ll want to review your planned contributions for 2024. For IRAs and Roth IRAs, compare your expected income for 2024 to the new limits and adjust any automatic contributions you already have set up.

    If you are unsure where your income will fall or if you’ll have the cash to contribute to your Roth or traditional IRA you can always wait until you file your taxes the next year to make your contributions. So, you could make 2023 IRA contributions up to tax-day 2024.

    Wrap Up

    While it doesn’t quite make up for the spike in inflation we’ve seen the past few years, it is nice to be able to stash away a few more dollars tax-free for retirement. Make sure to review your income and planned contributions for next year to take advantage of additional contribution limits especially if you’ve turned 50 and can start making catch-up contributions.

  • Supercharge Your Retirement Savings With The Mega Backdoor Roth

    Saving for retirement is a critical aspect of financial planning. While traditional retirement accounts like 401(k)s, 403(b)s and IRAs offer valuable tax advantages, they come with contribution limits that may not be sufficient for physicians with substantial incomes.

    This is where the “mega backdoor Roth contribution” comes to the rescue. In this post, we’ll explore how physicians, including self-employed and locum tenens doctors, can harness this strategy to supercharge their retirement savings.

    Key Points

    • With an attending physician salary, you can fill up your tax-advantaged retirement buckets pretty quickly. This can leave you searching for other types of accounts and investments to continue saving for your retirement needs.
    • The Mega Backdoor Roth can help you contribute up to an additional $43,500 to Roth retirement accounts. Since these are Roth funds they grow tax-free and withdrawals are also tax-free.
    • The Mega Backdoor Roth is also a great option for self-employed physicians, such as practice owners or locums physicians, to save more for retirement.

    What is a Mega Backdoor Roth?

    Most physicians have heard of the backdoor Roth IRA before, but what is the Mega Backdoor Roth? With the regular backdoor Roth strategy, you make after-tax contributions to your traditional IRA and then execute a Roth conversion to convert those funds to a Roth IRA.

    With this strategy you are limited to the annual IRA contribution limit, which is $6,500 for 2023. The mega backdoor Roth allows you to execute essentially the same strategy using your 401k in place of your IRA. Since 401(k)s have much higher contribution limits and no income limits this allows you to supercharge your retirement savings.

    How the Mega Backdoor Roth Works

    1. Max Out Your Pre-Tax 401(k) Contributions: Start by contributing the maximum allowed amount to your traditional 401(k). In 2023, the annual limit for employee contributions is $22,500, with an additional $7,500 catch-up contribution for those aged 50 and older.
    2. After-Tax 401(k) Contributions: Some 401(k) plans permit after-tax contributions beyond the pre-tax limit. This provision is required for the mega backdoor Roth to work, so check with your employer to make sure your 401k allows after-tax contributions.

    In 2023, the overall contribution limit for all contributions (including employee and employer contributions) is $66,000 or 100% of your income, whichever is less. This means you can potentially contribute a significant amount of money on an after-tax basis.

    For an example, if you contribute the maximum of $22,500 to your 401k and your employer contributes a flat match of $5,000 you could make additional after-tax contributions of $38,500.

    $22,500 employee contribution + $5,000 employer match contribution + $38,500 after-tax contribution = $66,000 contribution limit

    1. In-Plan Roth Conversion: Once you’ve made your after-tax contributions, your plan may allow you to convert these funds to a Roth 401(k) within the same plan. Since these were after-tax contributions there is no tax associated with the Roth conversion. This is the critical step that turns your after-tax contributions into tax-free Roth assets.

    Some plans may not allow in-plan Roth conversions and may instead allow in-service withdrawals. In this case you would roll your after-tax contributions into a Roth IRA outside of your retirement plan.

    In the case where your 401k allows you to make after-tax contributions but does not allow in-plan conversions or in-service withdrawals you should still consider making after-tax contributions. Even though it is not as advantageous as a plan that allows in-plan Roth conversions.

    When you retire or leave your employer you can roll your after-tax 401k into an IRA at that time. Your after-tax contributions will roll into a Roth IRA, but any growth will be treated as pre-tax dollars and rolled into a traditional IRA.

    Example: You contributed $20,000 to your after-tax 401k which grew to $25,000. You decided to leave your employer and do a rollover of your 401k into an IRA. Your $20,000 of contributions would roll into a Roth IRA. The $5,000 of gains would roll into a traditional IRA.

    Benefits of a Mega Backdoor Roth Contribution

    1. Tax-Free Growth: One of the primary benefits of the mega backdoor Roth is that once your contributions are converted to Roth, they grow tax-free. This can be especially advantageous for high-income individuals who anticipate being in a higher tax bracket in retirement.
    2. No Income Limits: Unlike traditional Roth IRA contributions, there are no income limits for the mega backdoor Roth strategy, making it accessible to high-earning physicians.
    3. Higher Contribution Limits: Compared to the regular backdoor Roth you can contribute over 6 times as much to your after-tax 401k, helping to supercharge your retirement savings.
    4. Estate Planning: Roth IRAs can offer excellent estate planning benefits, as they can be passed on to heirs tax-free.

    Utilizing the Mega Backdoor Roth for Practice Owners, Self-Employed, and Locum Physicians

    Being a self-employed physician can be an outstanding career choice for many doctors, but can have the unfortunate downside of losing access to employer retirement plans such as 401(k)/403(b)/457(b) plans.

    Self-employed physicians, whether they are practice owners, 1099 emergency docs or locum tenens physicians, have a unique opportunity to implement the mega backdoor Roth strategy using a Solo 401(k). Here’s how:

    1. Open a Solo 401(k): Self-employed individuals can set up a solo 401(k), also known as an individual 401(k) or one-participant 401(k). This plan allows for both employer and employee contributions, crucially including after-tax contributions.

    * You will want to make sure your solo 401(k) plan allows for both after-tax contributions and in-plan Roth conversions to maximize the benefits of the mega backdoor Roth. *

    1. Maximize Contributions: As both the employer and employee, you can contribute up to the annual limits mentioned earlier, including after-tax contributions.
    2. In-Plan Roth Conversion: Execute your in-plan Roth conversions to maximize the benefits of your after-tax contributions.

    Wrap Up

    The mega backdoor Roth contribution is a powerful tool for physicians looking to supercharge their retirement savings and enjoy tax-free growth on their investments. For self-employed physicians, such as practice owners, emergency doctors, and locum tenens physicians, the solo 401(k) offers an excellent platform to implement this strategy.

    It’s essential to consult with a financial advisor and/or tax professional to ensure that the mega backdoor Roth contribution aligns with your financial goals and retirement plan. By taking advantage of this strategy, you can supercharge your retirement savings and secure a more comfortable financial future.

  • September Financial Resolutions

    As summer fades into the distance, September brings with it a sense of renewal and rejuvenation. For many, it’s a time to refocus on their goals, much like the beginning of the year in January. With the start of school families get back into routines which helps people get organized and set goals.

    While you may have set resolutions in January, the start of the year is a tough time to follow through on them because of post-holiday exhaustion, and the temptation make a big change all at once. September represents a clean slate and offers a unique opportunity to revisit and reevaluate your financial progress.

    Here are seven things you can do this September to give your finances a mid-year boost and set yourself up for success through the rest of the year.

    1. Review Your Financial Goals:

    Begin by revisiting the financial goals you set at the beginning of the year. Take a close look at your short-term and long-term objectives. Are they still relevant? Have your circumstances changed? Use this time to adjust and fine-tune your goals to align better with your current situation and aspirations.

    2. Assess Your Budget:

    A budget is your financial roadmap, and September is an ideal time to check if you’re staying on course. Review your income, expenses, and savings contributions. Are you overspending in certain areas? Are there areas where you can cut back? Make necessary adjustments to ensure you’re saving enough to meet your goals.

    3. Emergency Fund Check:

    One of the cornerstones of financial security is having an emergency fund. September is a great time to assess the state of your emergency fund. Aim to have at least three to six months’ worth of living expenses saved. If your fund falls short, prioritize saving to reach this critical milestone.

    Almost as important as having the right amount saved is the account you are saving in. If your emergency fund is in your checking account consider moving it to a high-yield savings account. Most big bank checking and savings accounts pay very little interest (close to zero percent). Today’s rates on HYSAs are close to 5% and you can transfer your emergency fund with just a few clicks.

    4. Investment Portfolio Review and Rebalance:

    Take a close look at your investment portfolio. How have your investments performed so far this year? Are they in line with your risk tolerance and long-term objectives? Index funds that track the overall stock market and bond market are the best long-term investments for most investors. Are your investments doing what they’re supposed to?

    Rebalance your portfolio if necessary to ensure it remains diversified and aligned with your financial goals. Rebalancing usually means selling some of your investments that have done well and buying more of those that have not. It’s best to rebalance on a set schedule. Choose to rebalance once per quarter, or once per year and set a reminder to stick to it.  

    5. Review Your Retirement Account Contributions:

    If you’re not maxing out your contributions to retirement accounts like a 401k or an IRA, September is a good time to increase your contributions. The maximum you can contribute to your 401k/403b for 2023 is $22,500, or $30,000 if you’re 50 or older. The max for your traditional or Roth IRA is $6,500, or $7,500 if you’re 50 or older.

    Increasing your contribution by just 1% each year can really add up. If you’ve received a bonus or a pay raise during the year and your paycheck has increased consider making an even bigger contribution.

    Along with your retirement accounts don’t forget about your HSA. These can also be used as stealth retirement accounts, and maxing out the contributions is a great idea. The contribution limits for HSAs in 2023 are $3,850 for singles and $7,750 for families.

    6. Backdoor Roth IRA Contribution

    If you make too much to contribute to a Roth IRA, consider making a backdoor Roth IRA contribution. The income phaseout for Roth contributions starts at $138k for single filers and $218k for MFJ. Most bonuses and raises are paid by September, so at this point you should have a good sense of your income for the year.

    Unlike the direct contribution to your Roth IRA, you only have until December 31st to make a backdoor Roth IRA contribution. Direct contributions to traditional or Roth IRAs are allowed all the way up to tax-day the next year.

    7. Tax Planning:

    It’s never too early to start thinking about taxes, and there are many decisions you can make in September to put yourself in a more favorable position.

    Now is a good time to review your federal income tax withholding. Withhold too little and you could have a hefty tax bill due next year as well as possible fines for underpayment. Withhold too much and you’re essentially providing Uncle Sam with an interest free loan. Don’t worry, it’s easy to adjust your withholding by filing a new W4 form with your HR department.

    Consider making additional 529 plan contributions. In most states contributions to a 529 plan have to be done before year end, while some states allow you to contribute until tax-day the next year. Many 529 plans offer state tax deductions and the investments grow tax-free.

    If your income for the year has been less than normal, perhaps due to switching jobs or taking time off consider making a Roth IRA conversion. Converting funds from a traditional IRA to a Roth IRA means paying taxes on the conversion now, but prevents you having to pay taxes on withdrawals later. A year with a lower income and lower tax rate is a good opportunity not to be wasted.

    Wrap Up

    September is indeed a month of fresh beginnings, and it’s a perfect time to revisit your financial resolutions, assess your progress, and make necessary adjustments. By taking these proactive steps, you can set yourself up for financial success in the months and years ahead. Remember that financial planning is an ongoing process, and staying proactive will help you achieve your goals and build a secure financial future.

  • 7 Reasons Why Physicians Shouldn’t Buy a House During Residency

    When you start working as a resident it’s tempting to take the next step and buy a home. After all you’ve graduated from med school, haven’t you also graduated from apartment living to a place of your own? Maybe, but below are 7 reasons why physicians shouldn’t buy a house during residency.

    Residency is a relatively short, busy, and intense period where you continue to learn and develop skills you will hone for the rest of your career. Buying a home during this time can add an additional layer of stress and financial headaches.

    Owning a home is often more costly and time consuming than renting. If you are thinking of buying a home during your residency, read on for 7 reasons you should re-consider your decision.

    1. Residency Only Lasts 3-5 Years, Maybe a Few More With a Fellowship in the Same Place

    The longer you own a home, the greater the chance it will be a good investment. Which is a good reason not to buy a home when you only expect to live in it for 3-5 years.

    When you purchase a home, you can expect to pay 5% of the home’s value in closing costs. Then you can expect to pay roughly 10% in realtor fees and other expenses when you decide to sell. You’re also not building up much equity in the home. During the first few years of your mortgage the vast majority of your payments go towards the interest on the loan, and a tiny amount goes towards the principal.

    U.S. home prices have grown an average of 4.4% per year since 1991. Based on the average growth it’s hard to do much more than break even on a house when you own it for three years. Is that really worth the extra time and effort that comes with owning a home versus renting?

    2. You Don’t Have a Down Payment

    This might not seem like an issue, after all aren’t there special loans specifically designed for young docs that don’t have a down payment saved up? Why yes there are, they are called Physician Mortgage Loans, and while they do exist that doesn’t mean they are the best option.

    Buying a house is a big proposition. Saving up a down payment, even if it is only a small percentage, provides an indication that you are ready for this next step in your financial journey.

    Having a down payment can also protect you on the other side of your home purchase. By putting money down, you already have some equity in your home which can help if the market turns when you need to sell. As discussed above it is hard to break even when you own a house for a short amount of time. Equity provides a cushion when it’s time to sell and your house is worth the same or less than it was when you bought it.

    With a down payment you can choose between more loan options and save on fees like Private Mortgage Insurance (PMI is a lender fee required when you put less than 20% down). You can decide if a lower rate conventional mortgage or if a Physician Mortgage Loan with a slightly higher rate is a better fit. Without cash available for a down payment your options are much more limited.

    3. You Already Have One Mortgage (Student Loan Debt)

    It’s common for med students to graduate with $200k or more of student loans. Managing these loans can already be a stressful situation, before adding an additional mortgage payment to your budget.

    If you have a hefty chunk of student loan debt your available mortgage options are reduced, leaving you with Physician Mortgage Loans as pretty much your only choice.

    4. You Don’t Have Enough Time

    Residency is an extremely important part of your career. During this time is when you are learning, developing, making mistakes and growing within your specialty. All to set you up for success after residency.

    You may enjoy spending your free time in a home that you own, but realistically, how much time will you really have? Rather than spending it on home maintenance tasks, your free time would be better spent resting, recharging, and getting ready for your next shift.

    5. People Underestimate the Time and Costs Associated with Owning a Home

    As a resident you don’t have a ton of free time or extra cash, let alone extra hours to spend mowing a lawn and cleaning out gutters. What about that air conditioner that looks 30 years old and sounds like a rusted jet engine when it starts up? That’s your project to fix or pay to have repaired when it breaks.

    Homeowners can expect to spend between 1% to 4% of their home’s value in maintenance costs each year. These are expenses that you don’t have to worry about when renting. If your toilet breaks and floods your apartment you get to call your landlord to fix it. In your house, you are the one doing the repairs or more likely paying someone else to do it since you don’t have the time as a busy resident.

    6. You Won’t Want Your Residency House as an Attending

    When you finish residency and start receiving your attending paychecks, you’ll probably be ready for a new house. It’s a great idea to “live like a resident” for as long as you can to build a solid financial foundation, and staying with the same home is only possible if you don’t have to move after residency anyway.

    Now that you’re making more as an Attending it can be hard to resist the temptation to keep up with the Joneses. Lifestyle creep can set in, you need extra garage space for your new Tesla, and suddenly your cozy 3-bedroom resident house just doesn’t cut it anymore.

    7. You Can Rent a House

    If you are tired of living in a dorm or apartment, or you absolutely need a house with a yard for your Golden Retriever, you can always rent a house instead. By renting a house you get the benefits of a home without the headaches. It’s easier to budget, there’s less worry about unexpected maintenance costs, and you can move on hassle-free after residency.

    Sometimes buying a house can be the right decision. If you plan to be in the same place for Residency, Fellowship, and as an Attending then it might be the right choice for you. But for most situations the 7 reasons above are why most residents should rent instead.

  • Life Insurance for Physicians

    Insurance can be a very complicated topic, and life insurance especially so. Along with estate planning, life insurance is one of those areas of planning that a lot of people put off until “later”. But getting the right amount of life insurance for physicians is very important and can usually be accomplished quickly and relatively painlessly.

    After you’ve protected your greatest asset by getting disability insurance, the next step in insurance coverage for a physician is to purchase the right life insurance policy. My hope is that after reading this article you’ll feel confident enough to choose a policy that fits your situation.

    Key Points

    • There are two main types of Life Insurance: Term and Permanent.
    • Term Life Insurance is usually the best option. If you are considering buying permanent life insurance (or more likely it’s being sold to you) do your homework and make absolutely sure you understand why it’s a better fit for your situation than a term policy.
    • Getting a term policy when you are younger and don’t yet have a family to help support can still be a smart financial decision. Life insurance gets more expensive as you get older, and you never know when a health issue that makes you uninsurable may occur.

    Two categories of life insurance: Term & Permanent

    There are two main categories of life insurance: Term and Permanent. A term policy lasts for a specified period of time (5, 20, 30 years, etc.), and a permanent policy lasts until the policy holder’s death as long as someone continues to pay the premiums on the policy.

    Term policies tend to be much less expensive, because they have an end date and may not have to pay out a death benefit. In fact, according to some studies 98% of term policies are never used.

    Permanent policies tend to be more expensive for a few reasons. They don’t expire like a term policy, so as long as someone continues to pay the premiums, they will have to pay out a death benefit someday. These policies can also include investment options and other complicated provisions and options that you can adjust later on.

    For Physicians, a Term Life Insurance policy is almost always the best option

    Before going any further, I want to say that there are probably some people for whom each of these types of policies is a fit, but many people are sold permanent life insurance policies (whole, universal, variable) when a term policy would be much better – and less expensive – for them.

    The insurers tend to make more money from permanent policies, so the commissions (what the insurance salesperson earns when selling a policy) tend to be much, much larger for permanent policies than term policies. Since the salesperson is incentivized to sell permanent policies, more permanent policies are sold. This is another place where getting guidance from a fiduciary advisor, who is legally bound to look out for your best interest, can help you analyze your insurance needs and options and make sure you don’t end up paying more for insurance coverage you don’t need.

    For a physician in their prime working years, life insurance is there to provide financial support for their spouse and/or children if they were to suddenly pass away. A term life insurance policy does this quite well.

    Term Coverage Example

    A 35-year-old can buy a 30-year term policy to help pay for their kids’ college education and provide for their spouse in the event they should pass away. By the age of 65, the need for this insurance coverage has passed and they should be fine letting the policy expire.

    A permanent policy will be more expensive and by the time you reach 65 you will be in the same boat and shouldn’t need the policy any more. At that point you face the difficult decision of continuing to pay the premiums for coverage you don’t really need or letting the policy lapse and losing any future benefit.

    A term policy is as simple as it gets in the life insurance space. Proponents of permanent policies will argue that you can use their policies to build cash value and invest as well, but these options are more complex and expensive. You are almost always better off buying a term policy and investing in your retirement accounts or a brokerage account.

    Different Types of Life Insurance

    Term Life Insurance: expires at the end of the term, set premium, set death benefit, easy to compare between providers, less complex

    Term life insurance policies last for a set term (length of time). Typical term lengths are 10, 20, or 30 years. Term life policies are typically much cheaper than permanent life policies for this reason.

    With a permanent plan the insurer knows that they will have to make a death benefit payment as long as the insured continues to make their premium payments. However, with a term policy once the term is up the insurer is off the hook for the death benefit.

    A possible downside to term insurance – though rare – is that you might outlive your policy. If your need for insurance still exists after the term has expired you will likely have to pay more in premiums for an additional term.

    Term insurance is by far the least complicated type of life insurance. There are only two components to decide on: the length of the term, and the value of the death benefit. Because of this it is much easier to compare between term plans from different insurers, and there are many places online where you can compare quotes for the same policies from different companies.

    For almost all physicians, a term life insurance policy is the best option.

    Whole Life Insurance: policy is permanent, premium is set, death benefit is set

    Whole life insurance, sometimes called “ordinary life” insurance is a type of life insurance which is guaranteed to remain in force for as long as the premium payments are made until death or until maturity if a maturity date is part of the contract (typically maturity dates can be 10, 20 years or to age 65).

    The premium for a whole life insurance policy is typically fixed (meaning the premiums will always be the same, also called a “level premium”) at the time the contract is purchased.

    Upon the insured’s death and payout of the policy, the payout is typically paid tax free. When discussing permanent insurance policies, you will often hear the term “cash value”. As the premiums are paid in a whole insurance policy, part of the premium pays for the death benefit and a portion goes into the cash value of the policy and builds over the whole life of the policy. In some cases, a policy can be cashed out prior to the insured’s death (policies differ, but usually the premiums paid must be more than the value of the life insurance), in this case the dollar amount paid over the value of the insurance will be taxed as ordinary income.

    Universal Life Insurance: policy is permanent, builds cash value you can use to offset premiums, option to adjust death benefit

    Universal life is similar to whole life in that it provides a death benefit and remains in force as long as the premium payments are made. A main difference is that later on in the policy you can use a portion of the cash value of the policy to pay your premiums, lowering your out of pocket costs for the policy.  The interest rate is typically tied to a market rate, so as rates change your ability to tap into the cash value to adjust your premium fluctuates as well.

    Within most universal life policies there are also options to adjust the death benefit. Raising the death benefit amount will probably require additional underwriting, while lowering it will probably not. In either way you can expect to pay some additional fees to make the change to the policy. The ability to tap into the cash value and adjust the policy are benefits of a universal life policy, but the added complexity comes with an added cost versus a whole life policy.

    Variable Life Insurance; policy is permanent, option to invest cash value in mutual funds, option to adjust death benefit (VUL)

    A variable life insurance policy, is similar to a universal life policy, but whereas with a universal policy the cash value grows within a savings account in the policy, with a variable life policy you can invest your cash value in mutual funds. But, rather than in a brokerage account where you have access to all manner of investment options, with a VUL you only have access to the fund options available with that insurer.

    With a variable life policy, the death benefit is typically fixed, as it is with a whole life policy. You can also find a sub version, a variable universal life (or VUL) policy which possesses the investment options of a variable policy along with the policy flexibility traits of a universal policy. As I stated above, along with the additional options and flexibility involved in a variable or VUL policy comes additional expense and complexity.

    Other Life Insurance Offerings

    The four types of insurance listed above are the main types of life insurance offered, but by no means are they the only kinds available.

    Declining benefit insurance: Where the value of the death benefit declines over the term of the policy. These are usually designed to match the mortgage amortization schedule on a home, so that if the insured dies prematurely the death benefit from the insurance policy will pay off any remaining mortgage balance.

    Joint life insurance policies: Where two people are covered with the same insurance. These can be designed to pay out when the first person dies or after the second person dies, depending on the underlying reason for the insurance.

    Final Expense Insurance: Often called burial insurance, is a policy designed for older individuals who want to make sure their final expenses are covered and their family do not have shoulder the costs after they pass.

    Wrap Up

    When evaluating insurance, you should ask yourself the question “what am I insuring against?” and keep this Einstein quote in mind.

    “Everything should be made as simple as possible and no simpler”

    For most physicians the simplest answer is a term policy that protects their family during their prime working years. If your situation requires something different or you were too intimidated to look into life insurance before, you now have a bit more information to help you with your search.

  • How to Lower Your Taxes as a Physician

    As a physician you spend so many years in training and fellowships that it feels like you’re never going to earn the “big bucks”. When you finally do start making that attending pay it can feel awesome until you realize you’re paying Uncle Sam in taxes about as much as you used to earn as a resident.

    Today’s article is about highlighting the steps you can take to minimize your tax bill and keep more of what you earn. And if you take these steps you’ll pay less in taxes today and for the rest of your career.

    Key Points

    • Maximize your retirement contributions – 401k/403b/457b etc. You’re probably already contributing to these accounts, but make sure you are making the maximum contribution to really juice their impact on reducing your tax bill.
    • Don’t forget about your other tax advantaged accounts. Utilize 529 plans, HSA accounts, and backdoor Roth IRA contributions for added savings.
    • Make smart decisions in your taxable brokerage account. Tax-loss harvesting, optimal asset location, and donating stock to a Donor Advised Fund can all help minimize your taxable income.
    • Investigate Real Estate investing and whether it’s a good fit for you. Investing in Real Estate can provide a way to build additional wealth while reducing your tax bill as long as you meet a few requirements.

    Max Out Your Retirement Contributions

    It can be hard to contribute to your retirement accounts while you’re still in training, but once you finish with Residency and Fellowships it’s time to boost those contributions into high gear.

    One great side effect of increasing your contributions and reducing your taxable income is that it will also lower your required monthly loan payments if you’re on an Income Driven Repayment plan. Great news for those pursuing PSLF!

    The maximum you can contribute to a 401k, 403b, or 457b plan for 2023 is $22,500.

    * One note for those of you over 50, you can also make what’s called a “catch-up contribution” of an additional $7,500 per year. This can be extremely helpful for physicians who got a late start on their retirement contributions due to working in a specialty with a long training timeline.*

    401k and 403b plans are basically interchangeable, and if you have access to both, the total contributions between the two can’t be more than your $22,500 limit. But 457b plans are counted in a different bucket. This means you can make the max contribution to both your 401k/403b and your 457b. That’s $45,000 you can sock away and reduce your taxable income.

    457b plans are also great accounts to use to turbocharge your efforts to achieve early retirement. If you want to learn more you can read this post all about 457b plans and how to maximize their effectiveness.

    Some employers, like Ohio State University, also offer physicians and staff access to a defined benefit plan (pension) in addition to the other retirement accounts. Your contribution to these plans is usually set at a percentage of salary that you can’t adjust, but is another chunk of money that you are contributing to reduce your taxes today.

    How Tax Brackets Work

    A quick diversion on how tax brackets work and why it’s so beneficial to reduce your taxable income, especially for those in the highest tax brackets.

    In the U.S. we have a progressive income tax system where the tax rate you pay gets progressively higher the more you make. A common mistake that people make is thinking that when they earn enough to get into the next tax bracket, let’s say moving from the 12% to the 22% bracket, that they pay 22% in tax on their entire income.

    That’s not the case, a single filer would pay 10% of their income up to $11,000, they would pay 12% on only the income between $11,001 and $44,725, and 22% on any income between $44,726 and $95,375.

    For example, here are the tax numbers for someone earning $80,000

    While someone earning $80,000 is in the 22% tax bracket their average tax rate over their entire income is only 16.%.

    The higher your income the more benefit you get from making contributions to retirement accounts. For someone in the 32% tax bracket, every dollar contributed to a pre-tax retirement account today saves 32 cents in taxes, grows tax free, and is withdrawn in retirement, likely at a much lower tax rate.

    If you are in the 32% tax bracket, maxing out your 403b and 457b will save you $14,400 in taxes ($45,000 x 32% = $14,400).

    Max out your HSA

    If you’re healthy and don’t expect too many healthcare expenses, then selecting a high-deductible health plan with an HSA is a great choice. HSAs are another account where you can contribute pre-tax dollars and reduce your taxable income. The contribution limits are $3,850 for an individual and $7,750 for a family.

    HSAs can also serve as a “stealth” retirement account. Most HSAs allow you to invest the money in your account similar to a 401k or brokerage account. If you don’t use or need your funds for health expenses when you reach age 65 you can withdraw them for any use without penalty. In essence they become another IRA, since contributions are pre-tax you will pay tax on your withdrawals if you don’t use the funds for healthcare expenses.

    To learn more about HSAs and how to maximize their triple tax advantage check out this blog post here!

    Maximize 529 Plan State Tax Deduction

    529 plan accounts are great tool for saving for your children’s college expenses, but some also come with some nice tax advantages as well. Most states that have a state income tax provide a state income tax deduction for contributing to a 529 plan.

    The tax benefits vary greatly from state to state. For example:

    • States without an income tax offer no state tax deductions
    • Ohio offers a $4,000 deduction per beneficiary, meaning if you have 4 children and contribute $4,000 to each child’s 529 in a given year you can deduct $16,000 from your income for state taxes
    • Idaho offers a $12k deduction for MFJ (Married Filing Jointly), $6k for single filers regardless of the number of beneficiaries
    • Indiana has one of the best perks – a 20% tax credit, instead of a tax deduction, up to a total of $1,500 for a married couple, $750 for a single filer

    Depending on your state and the size of your family you can make a decent dent in your state income taxes.

    Invest Smartly in Your Taxable Brokerage Account

    You may read the word “taxable” and think that you should stay away, but these are your standard brokerage investment account and the word taxable is mainly used to differentiate them from your pre-tax or Roth accounts.

    While you don’t get a tax deduction for contributing to your taxable account, there are many benefits from investing in a taxable account.

    • No contribution limits – unlike 401ks, IRAs, or HSAs you can contribute as much as you want.
    • No withdrawal penalties – you don’t have to wait until age 59 ½ to access your money, or use it for a specific purpose like an HSA or 529 plan.
    • Flexibility – along with the above points, you can invest in whatever you want within a taxable account. Not just the options that your 403b plan provider has available.
    • Capital gains tax rates – Rather than paying income tax on your withdrawals like in a retirement account, you only pay taxes on your gains, and at the much more favorable long-term capital gains rates (own your holdings for at least 1 year + 1 day).

    As long as you own your holdings for at least 1 year + 1 day before selling you will be taxed at the long-term capital gains rates rather than the federal income tax rates.

    Tax-Loss Harvesting

    For holdings that have lost value you can take advantage of tax-loss harvesting, where you use the losses in parts of your portfolio to offset gains in other parts of your portfolio. When using this strategy be mindful of the wash-sale rule. You can’t purchase the same thing you just sold within 30 days or else you face a penalty.

    But even if you don’t have any gains in your portfolio to offset this is still beneficial because you can use your loss to offset up to $3,000 per year in ordinary income, which is usually taxed at a much higher rate than the long-term capital gains rate.

    Optimize for Asset Location

    A way to improve the tax efficiency of your taxable brokerage account is to own assets that will appreciate, rather than provide dividends or interest payments. A share of stock that appreciates in value can later be sold and the gain can be taxed at capital gains rates. While a bond or dividend stock will produce interest or dividend payments that are taxed at income tax rates.

    Optimizing for asset location is more art than science, because there will be times when you don’t want your entire taxable account to consist of risky assets like stocks, but it’s a good thing to keep in mind when you start investing in a taxable account.

    A champagne problem to have in your taxable account is a stock or fund that’s experienced a massive gain, and will still incur a hefty tax bill, even at long-term capital gains rates. Think Apple stock that you bought in 2010 for $10 per share that’s now worth $200 per share.

    For cases like this a donor advised fund (DAF) can really come in handy.

    Donor Advised Fund

    This is a really handy account that can help you out tax-wise in a number of ways while also helping you meet your charitable giving goals. A DAF is an account that you can donate stocks to and then the DAF can sell the stocks and give the proceeds to the charities you designate.

    In the case of our Apple stock above, you receive the charitable tax deduction for the full value of the stock donated to the DAF, and neither you nor the DAF owe taxes on the gain, win-win!

    Why would you go through this process rather than donating the stock directly to the charity? One reason is that some charities can’t receive stocks, and in most cases would much rather just get cash. Another is you can make the donation to the DAF and dole out the proceeds over as much time and to as many different charities as you like.

    DAFs are also a great tool if you regularly give to charity but your total deductions aren’t enough for you to itemize (i.e. you still end up using the standard deduction when you file your taxes: $13,850 single, $27,700 MFJ).

    With a DAF you can make a larger contribution in one year, in order to itemize your deductions, and then make contributions to your chosen charities from the DAF for multiple years.

    Backdoor Roth IRA

    While it technically won’t save you taxes this year, contributing to a backdoor Roth IRA will save you from paying taxes on those contributions ever again. If you’re not familiar with it, a backdoor Roth IRA is a two-step process to contribute to your Roth IRA even if you make too much income to qualify. The income limits to contribute to a Roth IRA for 2023 are $153k for single filers and $228k for MFJ.

    To perform a backdoor Roth IRA, you contribute after-tax dollars (i.e., you don’t deduct them from your income) to a traditional IRA, and then do a Roth conversion on that contribution. Voila! Your after-tax traditional IRA contribution is now a Roth contribution. Since the funds are now in a Roth account they will grow tax-free, withdrawals will be tax-free, and you won’t have to worry about RMDs!

    You do need to make sure you don’t have an existing balance in your IRA before conducting a backdoor Roth or you’ll run afoul of the pro-rata rule, where you will end up owing taxes on part of your contributions, which is the opposite of what we want here.

    Real Estate

    The last item in this article is probably one that most physicians have heard about or thought about investigating. With good reason. Investing in Real Estate is a great way to diversify your investment portfolio while also potentially lowering your tax bill, but there are some hoops you’ll need to jump through.

    First off, real estate investing isn’t for everyone. For every story of a low-maintenance property and perfect tenants, you’ll hear one about midnight water heater leaks and busted pipes. This article is focused on ways to lower your tax bill and real estate investing is certainly an attractive option, but do your homework before jumping in to becoming a landlord.

    One of the biggest advantages for real estate from a tax perspective is that you can own a property that provides real world cash flow, while showing an on-paper loss due to depreciation and other factors. The challenge for physicians is capturing that on-paper loss and deducting it against your earned income. The IRS says you can’t deduct your passive real estate losses against your income if your earned income is above $150k. However, you can get around this rule in one of two ways.

    Real Estate Professional Status (REPS)

    The first way to be able to deduct your real estate losses is by obtaining Real Estate Professional Status. To do this you need to spend over 750 hours per year in real estate and not spend more than 750 hours per year doing another job, like being a doctor.

    The easiest way to accomplish this in a physician household is if one non-working spouse manages the real estate duties, so this is not a possibility for everyone. You need to be careful with this and take detailed records of your involvement in managing your properties. You don’t want to run afoul of the IRS on this one.

    Short-Term Rental Loophole

    With the Short-Term Rental (STR) Loophole, you don’t need to obtain REPS to be able to deduct your real estate losses. There are a few criteria you still need to meet, but they are much easier than obtaining REPS and don’t preclude you from also working a full-time job.

    There are several different criteria you can meet to qualify, but I’ll mention two here. If you own a short-term rental where renter stays are less than seven days, and your participation was greater than 100 hours and equal to that of any other individual, then you would potentially meet the STR loophole and be able to deduct your losses against your income!

    Wrap Up

    As you can see there are many strategies that you can use to reduce the amount of taxes you pay as a physician. And many of these tips only require you to maximize your use of accounts that you already contribute to.

    My hope is that after reading this article you can take few steps today to reduce your tax bill for this year and for the rest of your career going forward.