Married Doctors with $950,000 of self employed income

Dr Q and Dr M are married and work as self employed doctors with combined income of $950k. They both have their own S corporation and they have no other W-2 employees. Dr Q is age 45 and Dr M is age 44 and they have 2 children ages 4 and 6. Their CPA contacted our firm because he was tasked with helping his clients with their tax planning strategy. Because they are in the 39.6% federal tax bracket, their goal was get the maximum allowable tax deduction. We worked with their CPA to run proposals based on various W-2 incomes to optimize the contribution limits based on the profitability of their individual businesses. The solution was to setup a combination 401k and profit sharing plan with a fully insured defined benefit plan for each of them. To maximize their annual tax deductible contributions the defined benefit plan was funded with an annuity and whole life insurance. The annuity and cash values in the life insurance are guaranteed by the insurance company.

Dr Q had income of 700k and he paid himself a W-2 of 270k (the IRS maximum compensation used to calculate defined benefit contributions is 270k). The 2017 total contribution to the 401k/PS/DB plan is $184,277. Here is the math - ($16,200 profit sharing plan) + ($18,000 401k) + $150,077 in the defined benefit plan combined between the annuity and $5,373,214 of whole life insurance. The minimum guaranteed policy values for the annuity and guaranteed cash values for $5,373,214 of life insurance at retirement age 62 on 2/1/2033 is $2,688,782.

Dr M had income of 250k and she paid herself a W-2 of 130k. The 2017 total contribution to the 401k/PS/DB plan is $109,471. Here is the math - ($7,800 profit sharing plan) + ($18,000 401k) + $83,671 in the defined benefit plan combined between the annuity and $3,147,209 of whole life insurance. The minimum guaranteed policy values for the annuity and guaranteed cash values for $3,147,209 of life insurance at retirement age 62 on 2/1/2034 is $1,625,774.

In 2017 $60,000 of combined contributions can be made into the 401k and profit sharing plan. Annual contributions may potentially increase in the future with IRS increases to the contribution limits. The value of the 401k and profit sharing plan at retirement would be determined based on market performance. These values are not guaranteed. The 401k and profit sharing would supplement the $4.3 million that is a guaranteed minimum that is available when they are age 62.

Dr Q and Dr M liked this solution because it satisfied several goals:

  1. They were able to aggressively save for their retirement since the combined annual contribution was $293,748.
  2. They were able to get a $293,748 tax deduction. Based on a 39.6% marginal tax bracket this saved them $109,471 annually in federal taxes.
  3. They were able to buy $5,373,214 of permanent whole life insurance for Dr Q and $3,147,209 for Dr M. The life insurance provided protection for their family should they pass away prematurely. Should they continue to be healthy and live a long life then the permanent life insurance will be used for estate planning and to leave a legacy for their children or grandchildren.
  4. Based on an annual contribution to the defined benefit plan of $150,077 for Dr Q and $83,671 for Dr M, the minimum guaranteed value in their annuity at retirement age 62 is over $4.3 million (total includes both plans).
  5. In addition they will have the value of the 401k and profit sharing plan. The value of the 401k and profit sharing plan at retirement would be determined based on market performance. These values are not guaranteed. The 401k and profit sharing would supplement the $4.3 million guaranteed minimum in their annuities at retirement at age 62.

Here is a case study of a similar client, but he is a single physician age 37 with 400k of net income. He was able to contribution $103,719 into a combination 401k/PS/DB plan. His plan didn’t include life insurance.

2018-01-08

Beacon Capital Management Advisors provides defined benefit plans to the self employed, entrepreneurs, independent contractors and small business owners and is registered in all 50 States. Contact us if you have questions and need advice or if you would like to receive a defined benefit plan proposal.