As a financial advisor, one of our main goals is to help clients establish retirement savings, particularly, setting up an Employer Sponsored Retirement Account, typically their 401(k). When a client happens to be the business owner, this becomes a little more complicated as their primary goal for the plan grows:
Participant: Save for retirement
Business Owner/Plan-Sponsor: Attract and retain key employees
This is an overly simplified description and there are a lot more goals we could include, but it allows us to focus on the most obvious: 401k investing allows you to save in a variety of ways. This post will discuss how we have worked with clients who choose to employ their family members to take advantage of some additional tax benefits.
We thought this was a very timely post given the recent second-round of stimulus checks being delivered and some medical residents being eligible to receive them. So, before we get into the 401(k) for Medical Families, here are the highlights if you were eligible for that second stimulus check:
We are going to use a family of four, as an example of a household receiving the stimulus check, which would be $5,600 if your AGI is under $150,000 (after maxing out 401ks, HSAs, etc).
Family Medicine LLC distributes $225,000 to the Jones Family annually. Mr. Jones handles the operations of the business. Dr. Jones provides all medical care, and their two children provide marketing support.
**This is based on a real example where a physician client’s children are paid models and their photos are used in the marketing materials of the clinic.**
(As with any tax strategy we urge you to contact your tax preparer/accountant as well as your attorney for any legal advice.)
Fortress manages the Family Medicine LLC 401(k) Plan for the business and the four participants referenced above. Since they are all eligible based on the plans governing documents and receive reasonable compensation for their duties, they all participate. It does take significant attention to detail and some additional understanding to set up correctly. (Not to imply that it is brain surgery).
This family of four contributes their $19,500 maximum 2021 employee contribution for a total of $78,000. They also contribute the maximum of $7,000 into a family HSA. Here is where the benefits of holistic financial planning really start to compound.
We started off by saying that Family Medicine LLC distributions $225,000 to the family in the form of income. This is noticeably over the $150,000 AGI limit that makes a family eligible for the second round of stimulus checks.
With the planning they’ve done, their contributions into their 401(k) and HSA contributions, totaling $85,000 decrease their income from $225,000 to $140,000 meaning they are eligible to receive that stimulus check. An additional $5,600 in their pockets thanks to effective planning.
Let’s say the Jones’s have a 1-year-old who is so effective at marketing that they give him an additional $6,000 per year (wow pretty close to the tax savings they got via the stimulus checks, amazing how that works out). This baby gets the same bonus every year for 18 years and invests the money in their Roth IRA (which is also allowed). They would have contributed $108,000 over these 18 years. Assuming an 8% annualized rate of return, this baby would have over $5,000,00 in this tax-free retirement account by the time they retire (age 60) from these contributions alone!
This is just an example and values are estimated to help express the point that proper tax planning is a crucial part of any financial plan. As with any tax strategy, we urge you to contact your tax preparer/accountant as well as your attorney for any legal advice.
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Talk soon,
Chris
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Fortress Physicians by the Numbers
🏡 42 Physician Households as Clients
💰 $680,000 Avg Household Income
👩 Average Age 44
💸 $3.25 Million Net Worth
📈 29% Average Savings Rate
Securities and Investment Advisory Services offered through Fortress Private Ledger, LLC. Member FINRA/SIPC