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Jason Cross, J.D., CFP®, CTFA Apr 26, 2022 2:58:29 PM 5 min read

Medical Professionals: If Your Income Rebounded in 2021, Consider These 4 Money Moves

After experiencing financial hardships in 2020 caused by COVID-19, 2021 was a banner year for many medical professionals.

I’ve spoken with several dentists who experienced income growth of 20% or more last year, rebounding nicely after enduring temporary office closings and patients canceling or delaying their appointments due to the pandemic.

For these professionals, this situation presents a unique opportunity: how to best invest this windfall and still minimize their 2021 tax bill. And because doctors and dentists – as business owners -- can wait until September 15 to file their business tax returns, there is plenty of time to make the best use of any extra income while still cutting taxes.

Here are four recommendations on steps to take now:

Establish a Cash Balance Pension Plan for 2021

Many medical professionals don’t know they have until they file their business returns, including extensions, to open and fund a Cash Balance Plan for the 2021 tax year. For example, in 2022’s first quarter, I opened a Cash Balance Pension Plan for a client who was able to save an additional $200,000. This decision will save them a substantial amount of money on their 2021 tax return.

Like a traditional pension, a cash balance plan provides business owners with the option of a lifetime annuity. However, unlike pensions, cash balance plans create an individual account for an owner. These plans are an attractive option, allowing medical professionals to potentially save a substantial amount for retirement annually in a tax-deferred retirement savings account.

Once the owner reaches retirement, they have the option of taking these savings in an annuity spread out over several years or as a lump sum. For those who saw business rebound in 2021, it’s a great tool to catch up on retirement savings while paying less in taxes.

Upgrade Your Retirement Plan for 2022

Many medical professionals use the same retirement plan strategy year after year without much thought, but now is a great time to consider changing the plan’s design to allow more savings. For example, if you only have traditional Individual Retirement Accounts (IRAs), consider putting a 401(k) Plan in place.

With an IRA, doctors and dentists can save $7,000 into a traditional IRA if over age 50. While there are other differences and considerations, a 401(k) retirement plan offers higher contribution limits for dentists and staff - up to $67,500 including profit sharing and catch-up contributions for 2022. There are many different retirement plan designs, so speak with your advisory team about all the options.  

Make the Most of Your Equipment Expenses

Federal tax law allows medical professionals to depreciate 100 percent of their spending on new equipment through the end of the year. If you plan to buy new equipment in the next few years, consider accelerating plans by purchasing it this year. Of course, don’t make any unnecessary investments – if it isn’t something you planned to purchase already, don’t do it.

Fund Future Charitable Contributions by Setting Up a Donor Advised Fund

Many medical professionals annually contribute thousands of dollars to their favorite nonprofit organization. For those who plan to continue making donations for several years – and desire to get a bigger tax break in one tax year – I recommend setting up a Donor Advised Fund (DAF).

A DAF allows anyone to contribute and receive a charitable deduction in one year, but to spread out the distribution to one or more charities over future years. By doing so, a person will receive a tax deduction at the time of the gift while also making a generous donation.

For example, a medical professional who usually gives $20,000 annually could fund three years of charitable giving by setting up a DAF and contributing $60,000 into the DAF, and taking the tax deduction in the current year. While the deduction helps offset the high income – thereby lowering taxes -- the money can be dispersed over time.

This strategy works particularly well in the year a medical professional sells their practice or has another large one-time tax event. After they retire, their taxable income and itemized deductions are significantly lower so they often use the generous federal income tax standard deduction instead.

2021 was an unusual year for many medical professionals who own their practice. Taking one of these four steps can save thousands of dollars in taxes while contributing a substantial amount to retirement accounts for future financial independence.

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Jason Cross, J.D., CFP®, CTFA

Jason’s background serving high-net-worth families in addition to his education and experience in advanced wealth transfer techniques, helps him serve client’s unique needs.