Sample Newsletters

A New Way To Get Huge Tax Savings At Retirement For Doctors Who Plan In Advance

Unincorporated sole practitioners get the best tax deal at retirement. When they sell their practices, the amount allocated to goodwill (often the biggest value in a practice sale) is treated as capital gain and taxed at a low tax rate. Incorporated doctors are not so fortunate, because they do not own their practices. The corporation owns the practice, and the doctor owns stock in the corporation. That results in a double tax: (1) first to the corporation in its 35% bracket, and (2) when what remains is passed out to the doctor, it is taxed again on the doctor's personal return. The Tax Court (in the case of an incorporated accounting practice) has now given us the answer to this problem. The crucial issue is to be able to demonstrate that the goodwill is personal to the doctor and does not belong to the corporation. The Tax Court closely examined this issue, and most doctors (both sole practitioners and group practices) should be able to structure their affairs to meet the standards set by the Court. This Newsletter (and several more to follow) are devoted to these issues and the steps you could take (ideally years in advance) to allow your tax adviser to treat most of what you collect at retirement as low-taxed capital gain. This Tax Court case, in combination with an old IRS Revenue Ruling, could help incorporated and unincorporated doctors cut their tax on retirement.

Buy A Retiring Doctor's Practice At A Fair Price

By "fair price" I mean that the practice revenues you expect to retain will provide enough profit to (1) pay the purchase price (typically 5-7 years) and (2) reasonably compensate you for the extra work you are doing. If the seller's office is nearby, work in that office long enough to have a good transition and then close one of the offices and consolidate both practices into one location. The idea is that you can retain most of the seller's revenues but only a fraction of the expenses. This is the fastest way to move to a higher profit plateau, and it keeps the retiring doctor from selling to a young doctor who could be a stronger competitor.

Some Investment Steps To Consider

As measured by the Dow Jones Industrial Average, the stock market reached its all time high 3-1/2 years ago in January, 2000. It has been bouncing around below that level ever since. Twentieth century market history is a sea of alternating long periods of strong and then weak markets unrelated to how the economy was performing. For example, the last 35 years of the century had two remarkably symmetrical, but opposite, stock market periods. In the FIRST 17 YEARS from 1964 to 1981, the market gained a grand total of ONE MEASLY POINT:

	Dow
December 31, 1964	874.1
December 31, 1981	875.0

Then for the NEXT 18 YEARS from 1981 to 1999, the market rose an incredible 13+ times, even though the economy, as measured by the Gross National Product, actually rose twice as fast in the earlier, miserable period:

	Dow
December 31, 1981	875.0
December 31, 1999	11,497.0

This behavior has been the norm. Even though the growth in the economy was fairly steady from decade to decade, the stock market's rise was anything but steady:

20th Cent. Waves	DOW	Full Period Change
1900-1920	66.1 to 72.0	+9% (20 years)
1920-Sep.'29	72.1 to 381.2	+430% (9 years)
Sep.'29-1948	381.2 to 177.3	-54% (19 years)
1948-1964	177.3 to 874.1	+393% (16 years)
1964-1981	874.1 to 875	+0% (17 years)
1981-1999	875.0 to 11,479	+1214% (18 years)
1999-?	11,479 to ?	?% (? years)

So what caused these incredibly different stock market experiences, and what does it tell us about where we are, where we could be going, and what we might do to be prepared?

Call Patients At Night

Do this after any kind of surgery or to give a brief progress report when a patient is undergoing a prolonged treatment. This is the #1 best long-term practice builder. Everyone can do it, but only a few do. It takes discipline. By making a 90-second call after dinner you might avoid having your day disrupted, your patients will be more coherent, and you can address emergencies that might have caused the patient to call you at 3:00 a.m. Calls after surgery or periodic calls in the evening to patients (or parents) to "bring them up to date" are appreciated, establish your reputation as a caring doctor, and will distinguish you from every other doctor your patients have ever had. Doctors who do this tell us their patients tell their friends, and it is a terrific source of new patients.

Tax Benefits Of Pension And Profit Sharing Plans

Whether your staff is older or younger than you, the new tax law changes can improve your situation. For example, a SIMPLE Plan can let you annually fund between $0 and $20,000+ (with your spouse or children on the payroll) with a staff contribution of not more than 3% of their pay. New cross-tested plan designs are often getting doctors up to the maximum $40,000 contributions (and possibly that much for spouses on the payroll) with a 5%-of-pay contribution for staff. I have written a special Newsletter just for new subscribers that describes these possibilities. If your retirement plan is not working as well for you as it used to, or if you are considering one for your practice, this special Newsletter is for you. From The "Never Take Tax Advice From A Salesperson" Department: VEBAs Are Being Promoted Again By Aggressive Insurance Sales Agents. Run away as fast as you can. VEBA is an acronym for Voluntary Employee Beneficiary Association. An example of the original idea behind the VEBA concept would have been a local group of coal miners in the early 20th century pooling their quarters into a fund to provide a death or accident subsidy for the families of those injured or killed in mining accidents. When our income tax was enacted around World War I, it didn't take Congress long to include these obscure little savings pools among the list of tax exempt entities so that the earnings on the accumulating coins could grow tax free for the benefit of the unfortunate families. About twenty years ago, I began seeing aggressive insurance agents creating their own captive VEBAs as a device for selling expensive life and disability insurance to trusting doctors and family business owners on the theory that these unrelated insurance buyers would qualify as members of a voluntary association. The salesperson would claim that the "contributions" to the VEBA by the practice or business would be a deductible business expense, the VEBA would then purchase life and disability insurance (analogous to the coal miners’ death and accident benefits), and, best of all, the program could discriminate in favor of the business owners. It didn't take long for Congress to tighten the laws and the Tax Courts to rule against these aggressive insurance sales schemes. That has not stopped some insurance agents from trying to fine tune their programs to get around the objections. These fall into the "If it looks too good to be true ..." category. If it were me, I would stay away from these no matter how much the salesman and the tax lawyer he supplies say this will work.

Why I Like U.S. Savings Bonds As A Safe, High Interest Alternative To Cash That Will Not Be Needed Within A Year

Traditional one-year Treasury notes are currently paying around 1%. Savings bonds, which can be cashed in after one year (but there is a three-month interest reduction if redeemed before five years), are now paying 2.66% for the Series EE bonds (the rate adjusts semi-annually to be equal to 90% of the 6-month average of 5-year Treasury notes) and the Series I bonds (that adjust for inflation every six months plus a fixed rate) are currently earning 4.66% - even in these low inflation times. Some other advantages include: the interest is tax-deferred until the bonds are redeemed, and the interest is exempt from state income tax. Once the first year is up, the bonds act like a higher-interest money market fund in that they earn fluctuating interest, the principal value won't fall when rates turn up, and they can then be cashed in at any time. See the Treas. Department’s savingsbonds.gov Website for the details. While I just bought both Series EE and Series I bonds, my not-terribly-strong-preference is for the Series I bonds. If you have money that won’t be needed in the following year that is earning the microscopic rates of a money market fund or short-term bond fund, these are worth considering. One other neat feature: The bonds can be bought via the Website with a credit card. That gave me a huge number of free frequent flyer miles along with my investment.

Deducting Specialty Graduate School Costs (And The Interest On Graduate School Loans)

Periodically we review the great Revenue Ruling (No. 74-78) in which the IRS approved the deduction of specialty school costs by a general dentist who returned to dental school for a graduate program in orthodontics. IRS decided the studies were to improve existing skills (deductible continuing education costs) and not to qualify him for a new profession (which would be non-deductible personal education costs). While we have not seen anything specific on the subject, it would be logical that if the specialty school costs are deductible as a business expense, then interest on related school loans could also be deductible. If that possibility applies to you (or your child), it is certainly worth reviewing with your accountant. You might also review the idea of the student deducting the payments of principal on the graduate school loans. Your accountant will be able to obtain a copy of the IRS’s Revenue Ruling.

Health Savings Accounts (HSAs)

These were added to the tax laws in 2004 as an inducement for people to switch to high deductible health insurance plans (HDHPs) and thereby become more careful purchasers of health care. The HSA is a personal account at a bank or other investment firm. It is used to receive deductible contributions to pay the out-of-pocket costs under the person’s HDHP, to invest unspent money tax-free, and to eventually distribute the accumulated funds tax-free to pay for health care in later life. But health insurers and investment firms have been slow to embrace the concept of a high deductible health policy coupled with a tax-favored investment account. Thus few practices have had a practical HSA alternative available to them. We see this changing. In fact our practice this year is converting our standard health insurance to the HDHP/HSA combination. We expect cost savings and tax savings from the switch. HSA Tax advantages: An HSA deposit is even better, tax-wise, than an IRA or retirement plan contribution: (1) money deposited in the HSA is deductible (even by those who do not itemize), (2) the unused money grows tax-free while in the HSA, and (3) withdrawals are tax-free when spent on health care costs we would have otherwise paid for with our non-deductible dollars. Those are three tax advantages. An IRA or retirement plan, by comparison, gives us two tax advantages: (1) the money grows tax-free while in the retirement account, and (2) we get a tax advantage either at the time of contribution or at the time of withdrawal, but not at both times as with the HSA. For those who can afford to cover their HDHP’s out of pocket costs each year from other sources (as we intend to do), each year’s annual HSA contribution will get added to its predecessors and accumulate and grow in this triple-tax-favored environment. Then, years later, the money will be used to cover retirement-era health costs. This, in essence, becomes a specialized (health care) retirement funding account. This is such a great tax break that I want to find ways to maximize the contributions. We will write more about our experience as we work with our new HDHP/HSA. The new law makes helpful changes to some of the HSA tax rules. Because more of us will have HDHPs and HSAs in the future, these changes may be the most important part of December’s new law. Here are some of the HSA changes: Raising The Limits On Deductible Contributions - The old rule had been that HSA contributions could be no higher than the deductible under the HDHP. Many HDHPs were designed with their deductibles at or near the minimum required to qualify as an HDHP (for 2007, an HDHP’s deductible must be at least $1,100 for single coverage and $2,200 for family coverage). Beginning in 2007, HSA contribu-tions can be up to $2,850 for singles and $5,650 for family coverage, even if the HDHP’s deductible amount is lower. [EDITOR’S NOTE: The extra $800 annual HSA “catch-up” contribution discussed in this paragraph is not new. The topic is covered here because it interrelates with the new contribution limits.] For those at least age 55 during the year, there is an additional HSA catch-up contribution available of another $800. If both spouses are 55+ and insured under an HDHP, each can get the extra $800 contribution, but each must have his and her separate HSA to capture both. That is not a problem. For example, there can be one family coverage HDHP covering both spouses, each can have his and her own HSA, the $5,650 regular contribution can be allocated between the two HSA’s as the couple agrees, and each’s HSA can get the extra $800 (result: $7,250 can go in tax-free, grow tax-free, and one day all can come out tax-free). One-Time Rollover From An IRA To An HSA - This new provision allows a person to make a one-time HSA contribution directly (but only via a trustee-to-trustee transfer) from his or her IRA. The rules do not allow this from a Simplified Employee Plan (SEP) or a SIMPLE IRA. This IRA-to-HSA transfer is not taxable, there is no 10% penalty if under age 59½, and no deduction is obtained. The advantage is that this re-positions money from the IRA, where distributions will eventually be taxable, to the HSA, where distributions can be tax-free. The amount that can be transferred is limited to the person’s HSA contribution for the year. While this is a useful feature for funding an HSA, it is not the best way to do it. An even better result can be had by leaving the money in the IRA and funding the HSA from personal funds. The personal funds contributed will be deductible and the result will be moving the money from the "worst" of all places (my taxable accounts) to the "best."

Require Outside Financing on the Practice Sale But, If Necessary, Self-Finance the Building Sale

In most cases, outside financing will be available to a practice buyer. Lenders recognize that doctors are such good credit risks that they will offer financing even though the doctor may already have a home mortgage and significant school debt. There are limits, however. For example, the lender must be able to project adequate cash flow for the buyer after the sale. And many lenders will also want to see that the buyer has worked for a few years and most will shy away if the buyer has a horrible credit history. If the office building is part of the sale, the buyer may not be able to obtain outside financing for both the practice and the building. We recommend that the selling doctor require "cash at closing" (i.e., outside financing) for the sale of the practice, and that the purchaser use his or her best efforts to get outside financing for the building. To the extent it is unavailable, the seller would then finance the rest of the building purchase. The key reason for this is if the buyer were to default, it’s easier for the seller to foreclose on a building mortgage than to take back the practice. Once a doctor retires it can be hard, physically and emotionally, to come back and ramp up the practice and look for a new buyer. So if there is a limit on the amount of outside financing available, structure the sale so that it first gets applied to the sale of the practice. You would like the practice to be paid off as soon as possible and the building would take longer.

When Funding Early In the Year Makes Sense and Doesn’t Make Sense

Lately we’ve heard of two doctors who, as a convenience for themselves, pre-paid the entire annual 401(k) amounts their employees had elected to hold back from their compensation. The temptation to pre-fund this way is understandable but should be resisted. Let’s say you pay your staff every other week (26 pay periods per year), and an employee is having $25 per pay withheld ($650 for the year). You would find it easier to just contribute the $650 for her in one lump sum instead of 26 separate deposits. However the 401(k) deferral cannot be funded prior to the time the employee earned this much money. And another obvious problem is that the employee might leave and would be fully vested in that account. The typical way to contribute a staff member’s 401(k) contributions is ratably each pay period within a week of the time it was withheld. This does not mean that you must do the same thing. If you have the cash, consider taking an extra large pay early in the year so that you can fully fund your 401(k) deferral in one, or a few, deposit(s). Your pay would be grossed up for social security, medicare and any other state or local payroll taxes. (If it is a Roth 401(k) then it would also be grossed up for income taxes). Check with your CPA or payroll service about how large the grossed-up pay must be so that, when the taxes and 401(k) contribution are withheld, your net pay is at (or a bit above) zero.

A Review Of Term Vs. Whole Life Insurance

It seems that there are doctors who cannot simply say “No” to a life insurance salesman and, for some misguided reason, feel they need to give an explanation to justify their decision not to buy. But not feeling confident that their positions will persuade the salesman, they contact us for backup. First off, this is a mistaken belief that we will convince a salesman that we shouldn’t buy what’s being sold. Rene Descartes said it best hundreds of years ago: “No man will understand an argument that interferes with his income.” I buy life insurance to cover the risk that I might die early and leave behind insufficient assets and income to cover the financial commitments I’d be leaving behind. When I was younger with a young family, the gap was enormous. I considered cheaper term insurance, but whole life policies, with their many-times-higher premiums, were promoted by salesmen who told me the premiums would be cheaper than term when I was older - plus there were investment and tax saving advantages to boot. At the time I was less knowledgeable and bought some of both. Had I been more knowledgeable, I would have realized that in time my wealth would rise, my commitments would shrink (as the kids got educated and our debts were eliminated), and the risk that drove me to buy life insurance in the first place would be over. Many years ago I became more knowledgeable and cancelled any cash value policy and replaced it with much cheaper term insurance. Most doctors we deal with, over time, become wealthy enough that their surviving family will be financially well off. As their wealth built and their family commitments shrank, they scaled back their life insurance and eventually ended it. But what about the investment and tax advantages of the cash value policies? Not impressive. Compared to other alternatives, the high costs and low investment returns associated with these policies outweigh any potential tax benefits that Congress may permit decades from now. With that as the background, my conclusion has been that I would rather buy the much cheaper term policy (keeping it as long as needed to protect my family) and invest the difference. I would expect to become wealthier by that strategy. About the only time I’d suggest a cash value policy is for those who habitually spend all they make and won’t save. For them, the forced savings feature of a cash value life insurance policy may outweigh its disadvantages. Fortunately that exception doesn’t apply to readers of this Newsletter.

Specialty Practices Are Having A Harder Time Finding Junior Doctors

In certain specialties, like dentistry’s oral and maxillofacial surgery, there are too few new doctors being produced. Combine this with the outsized number of specialists trained in the mid-1960s now looking for junior partners or practice buyers, and we are seeing an imbalance of supply and demand. We are not necessarily seeing a sharp fall in practice prices, but we are seeing senior specialists taking longer to find their younger counterparts. Even though the most profitable practices we see are often in towns we’ve never heard of, this specialist shortage problem can be compounded when the practice is located in a smaller place where one of two spouses doesn’t want to settle. We have seen several situations lately where senior doctors believed that junior doctors were over-reaching in what they are asking for in associate pay or buy-in/buy-out terms. However, the reality is that the junior doctors may only be asking for what is now competitive. If you are the senior doctor and have many years left to practice or you are in an area where there are a lot of junior doctors, you might have more margin to be firmer in your terms. But if not, then you definitely risk losing a potential successor by being too dogmatic or inflexible. Most issues can be negotiated to a point where both sides are satisfied (or only a bit unsatisfied). When one party, senior or junior, enters a negotiation with a "take it or leave it” mind set, the odds are very high that the other party will look elsewhere.

Another Loophole - Section 529 Education Plans For You And Me

These are a tax-free way to save for college and graduate school. We get no federal tax deduction when we put money in, the money inside the plan grows tax-free, and withdrawals for college and graduate school are also tax-free. That is similar to a Roth IRA, but without the low $4,000/$5,000 per year IRA limits. I’m planning to set up a Sec. 529 plan for me. I’ll use the Ohio plan. Ohio gives me a state tax deduction for home-state plan contributions, the investment options are acceptable and Ohio’s plan has annual expenses that are about as low as any state’s. This turns out to be the equivalent of a specialized retirement plan targeted at future education expenses. If I intend to take college (or graduate level) courses in retirement, the earnings can be withdrawn tax-free to pay the bills. While we can’t use the money to pay for alumni foreign travel, we can use it to pay for legit- imate courses. If I do not use it all, I can take back the money (that would be taxable plus a penalty) or (this is what I would do) I would simply transfer the left over funds to a grandchild’s 529 plan. Here is a similar idea for young parents who are not done having children. If they have the savings capacity to do so, this young couple could set up a Sec. 529 plan for one (or both) of themselves. They could fund their plans many years in advance of a birth. When a child is born, they would set up a Sec. 529 plan for the child and roll some or all of their balances into the child’s 529 plan. The tax effect is that they are getting a head start on their future child’s college funding and the money they have dedicated for that purpose is growing in a tax-free environment even before the child is born. EDITOR’S NOTE: We Are Constantly Asked For Additional Tax Shelter Ideas By Doctors Who Have Fully Funded Their Retirement Plans And Seem Desperate To Find More Tax Shelter Opportunities: These are people who can save more than they’re allowed to contribute each year to their retirement plans. Often they are so desperate that they fall prey to dumb or crooked “tax saving” plans brought to them by tax shelter salesmen. Rarely do those salesmen-provided programs live up to expectations and sometimes the doctors lose all of their investment. This Newsletter issue covers several tax shelter concepts that also permit the person to retain complete control over the money. Another is the Health Savings Account, discussed in the January 1st Newsletter. Before buying unneeded insurance or some other product for its supposed tax advantages, consider these ideas and other low-tax investments such as stocks or low turnover mutual funds.

Why I Think Each of Us Should Have A Roth IRA Once the Tax Laws Permit (Either Beginning This Year or In 2010) - Even If the IRA Holds Only A Token Amount at the Beginning

Here are some basics. We get no deduction on money going into a Roth IRA and, if two requirements are met, we pay no tax when money is eventually withdrawn. That’s defi-nitely an advantage if we are in a higher tax bracket in our withdrawal years than in the years of our contributions. A second Roth IRA advantage is that its money is not subject to the mandatory distribu-tion requirements after age 70½. A third advantage deals with estate planning - inheriting a tax-free Roth IRA will be more valuable to my children or grandchildren than inheriting a taxable, traditional IRA. Generally, the two requirements for Roth tax-free withdrawals are that they are made (1) after age 59½, death, or disability, and (2) after five consecutive taxable years have been completed. Because Of Those Potential Advantages, I Would Like To Have A Roth IRA Already In Place And Past The 5-Year Qualification Period - So If Future Developments Make A Roth IRA Desirable, I will Not Have To THEN Begin The 5-Year Countdown To Effectiveness: If I want a pre-positioned Roth IRA in order to have as many future options as possible, the prob-lem has been that until this year there have only been two ways to get money into a Roth IRA. And both of those paths are barred if your income is over certain levels: (1) Annual contributions can be made to a Roth IRA if your income is not over $110,000 for single taxpayers or $160,000 for joint filers, or (2) transferring (“converting”) money from a traditional IRA to a Roth IRA and paying tax on the amount converted if your income is not over $100,000 (married or single). Beginning This Year There Is A Third Way For Some Of Us To Fund A Roth IRA, Regardless Of Income Levels, And Beginning In 2010 There Will Be A Fourth Way For Everyone: Starting this year, 401(k) plans can be amended to allow participants, no matter how high their incomes, to designate some or all of their salary deferrals (up to $15,000 - or $20,000 for those age 50+) to be treated as a Roth 401(k) contribution. They’ll get no current deduction, but future distributions from their Roth 401(k) account will be tax free if the two requirements mentioned above are met. We have done this for our plan. My idea is that the 401(k) part of each year’s profit sharing contribution ($20,000 out of $49,000 for 2006) will eventually be transferred into a Roth IRA and get the Roth treatment. The problem is that Roth 401(k)s have two potential procedural problems - each of which can be reduced with planning. Age 70 ¹/₂ - Unlike money in a Roth IRA, money in a Roth 401(k) is subject to the minimum required distribution rules after age Age 70¹/₂. This can be dealt with by annually transferring all but a token amount of the Roth 401(k) funds into a Roth IRA before year-end. In that way, the Roth 401(k) account will hold, say, only $100 at each Dec. 31 and each year’s minimum distribution from the Roth 401(k) sub-account will be based on that trivial amount. Roth IRAs And Roth 401(k)s Must Meet Separate 5-Year Rules - Eventually the money in my Roth 401(k) will be transferred to a Roth IRA. The problem is that the Roth IRA must meet its own 5-tax-year rule and the time the money was in the predecessor Roth 401(k) doesn’t count toward the IRA’s 5-year test. This is another reason I would like to transfer at least some amount from my Roth 401(k) account to a Roth IRA (all but $100 if I’d be over age Age 70¹/₂.) This will start the Roth IRA’s 5-year clock running now instead of years from now. In order to do this, a plan must have a provision allowing distributions while working, but distributions from 401(k) sub-accounts are generally not allowed for those under age Age 59 ¹/₂. Thus younger persons will generally not be able to use this tech-nique for starting an early Roth IRA. A Second Way That Money Can Get Into A Roth IRA, Regardless Of A Person’s Income Arrives In 2010: Starting that year we will be able to convert money from a traditional IRA to a Roth IRA regardless of how much we make. This summer’s tax law changes remove the $100,000 income maximum beginning in 2010. For those who cannot get money into a Roth IRA now, opening a Roth IRA in 2010 and converting to it at least a token amount to start its 5-year countdown will make sense. That would be a good way to keep as many future options open as possible. Unexpected Logistical Problems In Transferring Money From My Roth 401(k) To A Roth IRA: My Roth 401(k) is at brokerage firm Charles Schwab. To keep things simple, I wanted to open my new Roth IRA at Schwab, and let their back office move the money. I wanted the transfer completed by Dec. 31. The glitch was that Schwab’s IRA experts said that their Roth IRA documents were being amended to accept Roth 401(k) transfers, but they would not be ready before year end. To their credit, they suggested that I go to a competitor, rather than wait. Fidelity was ready, willing and able. A Fidelity phone representative walked me through their Internet site (fidelity.com) and the new Roth IRA was opened while on the phone. The next day, Schwab delivered a check to me, drawn on my Roth 401(k) account and made payable to my new Roth IRA account. I delivered the check and funded the Roth IRA with $100. Even with this token amount, 2006 will begin my Roth IRA’s 5-taxable-year countdown.