Updated: Nov 3, 2022
If you're an independent contract physician you need to do a checkup on your retirement.
As an independent contract physician, you are solely responsible for planning and saving for your own retirement. The average retirement age for a physician is sixty-five or younger. With the extensive amount of time you spent in medical school you naturally got a later start building wealth than other professionals.
Just because you started later in life saving, it does not mean you cannot catch up. It is never too late to identify the “magic contribution percentage.” The percentage of your income you contribute just needs to be aggressive enough to make up for lost time. I know that 25% may seem aggressive, but if you run the numbers like you track the milliliters of blood you go through in the ER, you will see very quickly that you have some catching up to do.
Once you set this percentage, you will become accustomed to a lifestyle that lets you fund your retirement and build upon your wealth as a physician.
A SEP IRA would allow you to get the higher percentages required to catch up on your retirement savings. A SEP IRA (Simplified Employee Plan) offers the chance to save for retirement simply, hence the “simplified” name.
Advantages to a SEP IRA:
The SEP IRA is a pre-tax contribution which offers a tax deduction for the amount contributed each year.
Easy and inexpensive to set up and operate.
Contribution limits (2022) are higher than other qualified plans with up to 25% of annual employee compensation or $61,000. o When self-employed, this is based on self-employed earnings; if you operate as an S Corporation, it is based on the wages you pay yourself.
Contribution percentages each year can, with a Discretionary Formula, be selected in the Adoption Agreement.
You have control of your investments in a SEP IRA and have a wider investment selection, including alternative investments not correlated to the stock market.
No annual tax filings by you. o The Custodian that holds custody of the SEP IRA will complete the necessary tax reporting requirements annually.
The SEP IRA may provide a level of asset protection. o State protections for IRA funds in a lawsuit vary in each state.
Disadvantages of a SEP IRA:
Elective salary deferrals and catchups over age 50 not permitted.
You must make employee contributions if you have employees other than yourself. o Employee contribution percentages must be the same percentage you are paying yourself.
Required Minimum Distribution (RMD) required after age 72.
Watch for the next blog post where we discuss compare a 457(b) or 403(b) to the SEP.