Wealth Planning Strategies for Doctors and Lawyers

Despite their high earning potential, doctors and lawyers often grapple with substantial student loan debt, irregular income patterns, and complex tax situations.  This article addresses comprehensive financial planning strategies tailored to the distinct needs of doctors and lawyers and covers essential topics such as retirement planning, loan repayment, insurance, and tax optimization.

Retirement Planning

Understanding how much you need to retire comfortably is a critical first step.  Factors to consider include your desired retirement age, lifestyle expectations, healthcare costs, legacy planning / bequests, and life expectancy.  Professional advice and tools such as retirement calculators can help in creating a realistic retirement savings target.  Platforms like Morningstar Retirement Manager, eMoney, and RetireReady are designed to assist with detailed retirement planning.^{1, 2, 3}  Many of these tools are most effective when used with the guidance of a professional advisor.

Many professionals skip retirement planning until they generate substantial cash flow from earnings and investments, but such plans can be simplified by starting the process earlier.

Loan Repayment

Managing substantial student loan debt is a common concern for doctors and lawyers. There are several viable strategies to expedite repayment.

Refinancing can lead to substantial savings over the term of your loan by lowering your interest rates. Start by researching online lenders that offer competitive rates such as NerdWallet, Bankrate, or LendingTree to compare offers.^{4, 5, 6}  Upon approval, your new lender will pay off your existing loans and repayment will begin under the new terms.  To illustrate the potential savings from refinancing, converting student loan debt of $200,000 with 25 years remaining from an 8.6% rate to a 5.4% rate will save approximately $118,000.

Choosing a shorter repayment period is another option, such as moving from a 30-year loan to 15-years, increases your monthly payments but significantly reduces the total interest paid over the life of the loan.  This approach allows you to become debt-free more quickly.  For instance, while your monthly payment might increase from $1,200 to $1,800, the total interest paid will decrease dramatically, leading to overall savings and faster debt elimination.  For example, a $240,000 30-year loan with an 8.0% interest rate will result in approximately $394,000 of interest paid.  Changing to a 15-year term will – with the same interest rate – result in approximately $173,000 interest paid and total savings of approximately $221,000 (see the graph below).  In addition to saving on interest, becoming debt-free sooner allows for financial flexibility and earlier investment opportunities as well as reduced long-term financial stress.

Repayment programs such as Public Service Loan Forgiveness (PSLF), National Health Service Corps (NHSC), and employer repayment assistance can significantly alleviate your loan burden.^{7, 8}  For example, PSLF forgives the remaining balance on loans after ten years of qualifying payments for doctors working in qualifying non-profit hospitals or government entities, providing substantial savings and financial relief for those in public service roles.  The NHSC offers loan repayment assistance to doctors working in underserved geographic areas.  Additionally, some employers include loan repayment benefits in their compensation packages, which can help reduce student loan debt.  For instance, a healthcare employer might offer $10,000 per year in student loan repayment assistance, enabling you to pay off your debt faster while earning a salary.

While it may seem obvious, extra payments and biweekly payment plans are often overlooked strategies that can significantly reduce your loan term and interest costs.  Making additional payments directly towards the principal balance of your loan reduces the principal amount faster, which in turn lowers the amount of interest you pay over the life of the loan.  For instance, if you have a monthly loan payment of $1,000, adding an extra $100 each month directly to the principal can accelerate your loan repayment and decrease the total interest paid.  Similarly, switching to a biweekly payment plan involves making payments every two weeks instead of once a month.  This results in 26 half-payments per year, equating to 13 full payments instead of 12.

While aggressive loan repayment can quickly reduce your debt, it is essential to consider the opportunity cost of this strategy versus investing these funds.  Striking a balance between debt reduction and retirement savings is crucial for long-term financial health.  Using a financial professional or online tools such as NerdWallet or Bankrate to compare and analyze different financial strategies can help.^{9, 10}

To maximize tax benefits, one should claim the student loan interest deduction on your federal tax return.  This deduction allows you to deduct up to $2,500 of the interest paid on qualified student loans during the year, reducing your adjusted gross income (AGI).  This benefit is limited to taxpayers who meet specific criteria: the loan must have been taken out solely to pay qualified education expenses and you must be legally obligated to pay the interest on the loan.  The deduction is available to individuals with modified adjusted gross income (MAGI) less than $85,000, or $170,000 if filing jointly.  To claim this deduction, complete Form 1040 or Form 1040A and attach Schedule 1 to report your student loan interest from Form 1098-E.^{11, 12, 13}

Insurance

Securing disability insurance early in your career can provide financial stability, especially for medical professionals.  By obtaining policies during medical school, residency, or as a first-year associate, individuals can benefit from lower premiums and more favorable terms.  For instance, a medical student might secure a policy for $50 per month that provides a $5,000 monthly benefit in the event of a qualifying disability.  Early acquisition of disability insurance not only helps mitigate the risk of debt default but also ensures a steady income to cover living expenses and loan repayments if a disability occurs.

Additionally, policies obtained early often have fewer exclusions and allow for increased coverage as income increases. This proactive approach ensures long-term affordability and flexibility, enabling a seamless transition from corporate to private practice without significant cost increases. It is crucial to ensure these policies are comprehensive, with strict clauses such as own-occupation coverage to guarantee protection against any unforeseen circumstances that may threaten your career.  Own-occupation disability insurance provides benefits if the insured is unable to perform the specific duties of their own profession or occupation – even if they can still work in another capacity.

Tax Optimization

Starting a Roth IRA as soon as you have earned income is encouraged, and many professionals can begin as early as residency or summer internships.  While not specific to doctors and lawyers, starting a Roth IRA is often overlooked.  A Roth IRA is a retirement account that allows for tax-free growth of investments, meaning taxes are not paid on interest, dividends, or realized gains.  Additionally, qualified withdrawals in retirement are tax-free provided certain conditions are met (such as the account being open for at least five years and the account holder being 59½ or older).

Roth IRAs offer other benefits: after five years from your first contribution, even if it was only just $1, you can withdraw your principal / contributions without penalty.  There are also numerous exceptions for withdrawing from any appreciation before age 59½ that deferred retirement accounts do not offer.  These include using the withdrawal (up to a $10,000 lifetime maximum) for a first-time home purchase, paying for qualified education expenses, covering certain emergency expenses, and using the withdrawal for birth or adoption expenses.

Roth IRAs allow for a 10-year withdrawal period for heirs, offering tax-free benefits.  This may be especially advantageous for doctors and lawyers as their children have a 15-20% chance of going into the same high-income line of work.¹⁴ 

A backdoor Roth IRA strategy can facilitate contributions for high-income earners who exceed the income limits for direct Roth IRA contributions.  This process involves opening a $0 balance traditional IRA, funding it with the maximum annual contribution ($7,000 in 2024 or $8,000 for those 50-years and older), and then transferring the funds to a Roth IRA.¹⁵   This method allows you to take advantage of the unique benefits of a Roth IRA, such as tax-free growth and withdrawals.  In doing so, it is crucial to ensure your taxes reflect a non-deductible IRA contribution and that all necessary tax forms are accurately coded.

Similarly, a mega Roth conversion involves converting traditional IRA or 401k assets into a Roth IRA but requires paying taxes on the converted amount upfront.  It is especially beneficial for high-income earners during years of lower income or career transitions when their tax rate might be temporarily reduced.  By paying taxes now, you can benefit from tax-free withdrawals in the future, potentially saving a significant amount in taxes during retirement.

Another option is a 457 plan which includes relatively higher contribution limits ($23,000 and an additional $7,500 catch-up contribution for those aged 50 and older in 2024).¹⁶  Contributions are made pre-tax, reducing current taxable income, and allow tax-deferred growth until withdrawal.  These plans have flexible early withdrawal rules, unlike other IRS qualified plans, which can help during early retirement or even transitioning from a corporate structure to your private practice.

For those aiming for private practice, additional tax optimization techniques are available.  For example, by forming your practice as an S corporation, an owner can help reduce their self-employment taxes which include Social Security and Medicare taxes, totaling 15.3% of your net earnings.  With an S corporation, you can potentially save on these taxes by paying yourself a reasonable salary and taking the remaining profits as distributions, which are not subject to self-employment taxes.  However, the benefits of an S corporation might not outweigh these costs for everyone, particularly if your practice is not generating significant income.

More importantly, private practice allows for retirement plans beyond Roth IRAs.  One effective option is a defined benefit pension plan, which allows you to contribute and accrue a predetermined retirement benefit amount based on factors like salary history and length of service. This plan is particularly advantageous for high-income earners or those with a stable income, as it enables larger contributions compared to many other retirement plans.  In general, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of:

• 100% of the participant’s average compensation for the three highest consecutive calendar years, or
• $275,000 (for 2024).¹⁷

Another option, the cash balance plan, is a variation of a defined benefit pension plan which increases your account balance with a set percentage of your annual compensation plus interest.  This plan can be particularly beneficial for small business owners or partners in professional firms who wish to make substantial retirement contributions while benefiting from tax deferrals. For a self-employed business owner who wants to contribute the maximum lifetime limit to a cash balance plan, the owner’s annual tax-deductible contributions to the plan will generally range from $100,000 to $300,000 annually (depending on income and the owner’s age).¹⁸   The annual contribution is generally not fixed and will go up or down depending on a variety of criteria.

However, these plans tend to have conservative investment guidelines and rules which are required to ensure the interest is earned.  As such, growth can be more limited.

A solo 401k is designed for self-employed individuals or business owners with no full-time employees other than a spouse.  This plan allows you to contribute both as an employer and an employee. This dual-contribution potential significantly increases your contribution limits compared to some traditional retirement accounts.  In 2024, contributions to a solo 401k can reach up to $69,000 for individuals under 50 and $76,500 for those aged 50 or older.¹⁹  See the graph below for a comparison of various solo 401k contribution limits.

One should consider several other attributes of solo 401ks before implementing a plan in private practice such as more complex administration and tax filing, flexible loan provisions, and more feasible opportunities for a Roth component.  Lastly, and most importantly when assessing asset growth potential, investment choices have a wider range of options with a solo 401k relative to an employer plan which are typically somewhat limited (due to the fiduciary responsibilities of the company).

A Section 162b executive bonus plan, also known as a non-qualified executive bonus plan, is a powerful tool for business owners to attract, retain, and reward key personnel, such as doctors and lawyers, while also providing them with life insurance benefits.  Unlike qualified retirement plans (e.g., defined benefit pension plans, cash balance plans, etc.), non-qualified plans are not subject to the same restrictions and requirements (for example, contribution limits and non-discrimination rules).  In a 162b plan, the business pays premiums for a life insurance policy for the executive.  These premiums are considered taxable income for the executive and are a deductible expense for the employer. The employer can provide an additional cash bonus to cover the taxes, making it a tax-neutral benefit for employees.

At retirement, an executive bonus plan typically offers several outcomes based on the plan’s structure. The executive may receive a lump-sum payout if fully invested, or defer payouts until a certain age, etc.  Taxes on these plans are generally tax-free although some withdrawals may be taxable.  The life insurance component includes cash value and a death benefit.  One can access the cash value through tax-free withdrawals or loans up to the premiums paid while the death benefit provides a tax-free payout to beneficiaries.

Each executive bonus plan can have unique features and conditions, so it is important to review the specific details of their plan and consult with a financial advisor to optimize the benefits and manage tax implications effectively.

Conclusion

Effective financial planning is essential for doctors and lawyers to navigate their unique financial challenges and achieve long-term financial security.  By seeking professional advice, strategically managing student loans, and optimizing tax strategies, these professionals can build a robust financial future.

Endnotes

1. “Morningstar Retirement Manager.” Morningstar, rm.morningstar.com/rmaltdataintegration/login.aspx.
2. “Financial Planning Software | EMoney Advisor Financial Planning Software.” EMoney, 2019, emoneyadvisor.com/.
3. Empower, 2024, retirereadytn.empower-retirement.com/participant/#/login.
4. “NerdWallet: Make All the Right Money Moves.” Nerdwallet, 2020, www.nerdwallet.com.
5. “Bankrate: Master Life’s Financial Journey.” Bankrate, www.bankrate.com.
6. “LendingTree: Shop and Compare Everything.” LendingTree, www.lendingtree.com.
7. Federal Student Aid. “Public Service Loan Forgiveness.” Federal Student Aid, 26 Dec. 2018, studentaid.gov/manage-loans/forgiveness-cancellation/public-service.
8. National Health Service Corps. HRSA, 2019, nhsc.hrsa.gov/.
9. lbid
10. lbid
11. IRS. “About Form 1040, U.S. Individual Income Tax Return | Internal Revenue Service.” IRS, www.irs.gov/forms-pubs/about-form-1040.
12. lbid
13. “About Form 1098-E, Student Loan Interest Statement | Internal Revenue Service.” IRS, www.irs.gov/forms-pubs/about-form-1098-e.
14. “Econ Focus, Fourth Quarter 2017 – Federal Reserve Bank of Richmond.” Federal Reserve Bank of Richmond, 2017, www.richmondfed.org/publications/research/econ_focus/2017/q4/feature1.
15. “Retirement Topics – IRA Contribution Limits | Internal Revenue Service.” IRS, 2019, www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.
16. “Retirement Topics 457b Contribution Limits | Internal Revenue Service.” IRS, www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-457b-contribution-limits.
17. “Retirement Topics – Defined Benefit Plan Benefit Limits | Internal Revenue Service.” IRS, www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-defined-benefit-plan-benefit-limits.
18. Sundin, Paul. “Cash Balance Plan Contribution Limit for 2024 [Age + IRS Maximum].” Emparion, Emparion, 18 Nov. 2018, www.emparion.com/cash-balance-plan-lifetime-contribution-limits/#:~:text=The%20contribution%20limit%20at%20retirement%20is%20%243.5%20million.
19. “One Participant 401k Plans | Internal Revenue Service.” IRS, www.irs.gov/retirement-plans/one-participant-401k-plans.