Retirement is a milestone that signifies the culmination of decades of hard work and dedication - especially for physicians who own their practice. As this chapter of life draws closer, it's time to shift the focus from helping others to helping yourself – ensuring that the fruits of your labor are utilized in the most efficient and rewarding manner. 

As you approach a well-deserved retirement, there are a number of key considerations such as when to select social security, which Medicare plan to choose, reviewing your investment strategy, developing a distribution strategy, and so much more. But as a practice owner specifically, you have a unique set of assets, and potential tax bills, that can affect how much you’ll have in retirement. 

In this post, we will explore three key financial strategies specifically for practice owners that can help you not just reduce your tax burden significantly as you approach retirement, but also maximize the wealth you've worked so hard to accumulate. 

Setting Up Defined Contribution and Defined Benefit Plans

When it comes to planning a comfortable retirement, physicians who own their practice have a number of tools at their disposal. Two such tools that often prove invaluable are defined contribution and defined benefit plans. 

Defined contribution plans include account types like 401(k)s, SEP-IRA, and SIMPLE IRA. You decide how much to contribute, and over time, these contributions can grow until you need them in retirement. The best part? Your contributions are typically tax-deductible, which means you could lower your taxable income today. 

On the other hand, defined benefit plans like pensions or cash balance plans, offer a specific monthly benefit in retirement. These plans are particularly attractive because they allow for larger annual contributions - and consequently, larger tax deductions. 

But here's the real kicker - you don't have to choose one or the other. In fact, by leveraging both defined contribution and defined benefit plans, physicians who own their practice can contribute up to $63,000 into a 401(k) and then contribute an additional $265,000 into a cash balance plan. Utilizing both of these plan types can not only help you catch up or increase your retirement savings (and thus your potential retirement income), but it also offers substantial tax benefits. These types of plans can be tricky, and every situation is unique, so it makes sense to meet with a professional who can help choose the right plans for you.

1031 Exchange on Building and Real Estate 

As a practice owner, you may have also invested in real estate over the years, perhaps even owning the building where your practice is located. With retirement on the horizon, selling such assets might be on your mind. Before doing so, it's critical to understand the tax implications of these sales. 

A 1031 exchange allows you to defer capital gains taxes when you sell an investment property, as long as you reinvest the proceeds into a 'like-kind' property. For instance, you could sell your business property and reinvest in another commercial property that you plan to rent out.

There are a number of rules to remember, such as identifying a replacement property within 45 days and closing the deal within 180 days. It also requires the use of a Qualified Intermediary to hold your proceeds and facilitate the exchange. 

Despite the number of rules (which a qualified professional can help you navigate), when done correctly, a 1031 exchange can offer a significant boost to your retirement savings by keeping your money invested and growing, rather than paying it out in taxes.

Tax Implications of Selling a Practice

Another consideration likely on your mind is selling your practice. But this decision doesn't come without its fair share of tax considerations. 

The sale of your practice can result in capital gains, which can carry a hefty tax burden if not handled strategically. The first step in navigating this complex landscape is understanding how your practice is valued. This can be influenced by a variety of factors, from your patient base to your practice's reputation, and even the value of physical assets like medical equipment or property. 

When it's time to structure the deal, options such as an outright sale, an installment sale, or merging with another practice can each have different tax implications. For example, an installment sale could spread out the tax burden over several years, potentially offering tax savings. 

Continuing to work at your practice after its sale can be a strategic move. Your seasoned expertise can ease the transition for the new owner, potentially enhancing the value of the sale. Additionally, this approach might offer more versatile payment arrangements. As touched upon earlier, spreading the sale amount over several years through an installment sale can distribute the tax implications over that period, potentially preventing you from entering steeper tax brackets.

Take the Next Step Toward a Tax-Efficient Retirement

While these strategies are all powerful tools that can offer tax benefits while maximizing the assets you’ve worked so hard to earn, the effectiveness of each of these strategies relies heavily on your unique circumstances and careful planning. If you would like help determining the best course of action, and then implementing a tax-efficient retirement plan, we’d love help. To schedule a complimentary consultation, call us at 215-393-0700 or email us at hello@handwerkconsulting.com to get started.

About Matt 

Matt Handwerk is the head of operations for Handwerk Consulting, which offers a variety of financial planning services for physicians and senior medical professionals in the state of Pennsylvania. Matt spends his days making sure everything is done correctly behind the scenes to provide a perfect presentation for families. Every idea that comes out of a meeting usually requires 10 steps to implement—and that’s what Matt does on the back end. He enjoys seeing the strategies implemented successfully and knowing the family’s interests are being fully expressed, while helping them save money and better understand the complex accounting, legal, and financial framework in which we live. 

Primarily in the accounting industry and helping clients with tax returns, Matt is also the owner of Advanced Accounting and Tax Solutions, a full-service accounting and consulting firm out of Lansdale, PA. Matt has a bachelor’s degree from Penn State, an MBA from Lehigh University, and is currently pursuing his financial licenses. Outside of work, Matt and his wife enjoy traveling, meeting up with friends, visiting local favorites in surrounding towns, and spending time at home with their cat-dog (a cat that goes outside on walks). To learn more about Matt, connect with him on LinkedIn.

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