When looking at Retirement Plans for Medical Doctors, it can be confusing. Many doctors do not save or accumulate money in a personal account, and will need to rely on a retirement account, however are not clear which is the best benefit plan for them.

There has been an increase in doctors joining group medical practices, and the hospitalist role is also growing in popularity among doctors. This means that there are multiple options available for retirement plans for medical doctors.

Physicians typically get a late start to retirement planning.  This is because they typically do not start earning higher levels of income until their early thirties. Therefore a doctors retirement goals typically require a higher contribution rate. Some physicians will contribute more than 20 percent to 30 percent of her pre-tax income toward retirement.

Here are the basic options for Retirement Plans for Medical Doctors and their teams:

SEP and SIMPLE IRAs

If you are a doctor working in a solo or smaller practices, you may want to first consider a Simplified Employee Plan (SEP) or Savings Incentive Match Plan for Employees (SIMPLE), both of which are Individual Retirement Accounts (IRA). They are relatively easy to establish and maintain, but eligibility and funding options are limited.

One of the main benefits of a SEP or SIMPLE IRA is that eligibility requirements are minimal. A SEP offers a maximum eligibility of 3 years of service out of the previous 5 years. A year of service is credited to any employee that performs any service during the year, regardless of the number of hours worked.

The SIMPLE’s maximum eligibility is 2 years of service.  A year of service is credited for anyone who earned more than $5,000 during the year. Employees may contribute their own money to a SIMPLE on a pre-tax basis through payroll deductions up to a maximum set by the Internal Revenue Service each year. These salary deferral options are available to the eligible owners and staff.

Another important factor to consider  is that SEP and SIMPLE plans are easy to set up, participants control their own accounts and there are no added tax filings for these plans.

Qualified plans

Qualified plans are broken into two different components: Profit Sharing (PS) and 401(k) feature. 

The PS plan is similar to a SEP, in that it is funded entirely by the employer. Employee eligibility is based on hours rather than wages earned (typically set at 1,000 hours per year).  The PS plan’s eligibility can be set to a maximum of 2 years of service, unless a 401(k) feature is added in which case the eligibility is limited to 1 year of service.

Just like a SEP, the Profit Sharing Plan alone does not allow for staff contributions. However, by adding a 401(k) feature, an eligible employee can redirect a portion of his or her wages into the retirement plan through payroll deductions. Each participant decides how much to defer from his or her salary up to a maximum amount established by the IRS each year. The 401(k) feature can be designed to allow participants to defer on either a pre-tax basis for a traditional 401(k) or on an after-tax basis for a Roth 401[k].

Defined Benefit Plan

Higher-earning physicians may want to consider a Defined Benefit Plan (DB).  A DB sets a pension level at retirement age and then requires an actuary to calculate what you must put in today to have enough in the future to pay out the promised pension. In this way, it starts at the finish line and works backward to determine today’s annual required contribution.

The DB plan allows substantially higher annual contributions than the current $51,000 maximum permitted under a PS or 401(k) plan.  This plan design typically works best if a doctor is 45 or older. The IRS sets an annual compensation limit, which for 2013 is $255,000.  Anything above this threshold is ignored for retirement plan testing purposes.  Staff costs can vary but typically range from 7.5% to 10% of wages in an optimum situation.

For any doctor, saving for the future is an important decision. Finding the retirement plan that best serves your needs is critical. The best retirement plans for medical doctors will offer attractive features, prudent investments and overall cost-efficient administration.  Most importantly it will help secure their financial future.