Dr. Patel is a 37 year old physician. Previously he had worked at a hospital. However in 2016 he made a lifestyle change and decided to work as an independent contractor and become self employed. His new career game plan was to work as an independent contractor for at least 3 years and if he liked it he may continue to be self employed permanently. For legal protection he established an LLC that was taxed as a sole proprietorship and he didn’t have any W-2 employees. In 2016 his net income after expenses was 400k. To maximize his tax deductions we setup a 401k and profit sharing plan combined with a defined benefit plan for a total contribution of $103,719.
The math works out to be $69,819 for the fully insured defined benefit plan and $18,000 401k and $15,900 for the profit sharing plan.
Previously Dr. Patel was only able to contribute 18k to his 401k with his employer when he worked at the hospital compared to 103k when he setup his own pension plan for his LLC.
By setting up this 401k/PS/DB combination plan Dr. Patel was able to maximize his retirement savings by making 103k contribution. Dr. Patel was able to get an additional 85k tax deduction when compared to when he was working at the hospital. This helps him save more money so he can retire sooner which is his primary goal.
Ironically some physicians feel that are behind saving for retirement when they are age 30 to 45 compared to their successful peers given their high incomes. Physicians may not be able to max out their 401k plan until they are age 29 to early 30s or so.
Here are case studies providing more examples.