By Iván M. Mendoza, CFA, CFP, CLU, ChFC, CDFA
When physicians start earning real money, their financial challenges change dramatically; no more scraping by on limited funds in residency. At the same time, however, they have to contend with new tax implications and more complicated financial plans. For physicians who own their own practice, a cash balance plan, in combination with a 401(k) profit-sharing plan, can be a game-changer.
A cash balance plan combines the best features of a 401(k) with the guaranteed benefits of a traditional pension. But unlike a typical 401(k), cash balance plans are designed for business owners—including physicians, attorneys, and entrepreneurs—who want to make larger pre-tax contributions, accelerate retirement savings, and significantly reduce their taxable income.
Here’s how a cash balance plan worked for one of my clients.
The Surprise Challenges of a Big Career Shift
A client of mine referred a young surgeon to Mendoza Private Wealth. (Let’s call him Scott—not his real name.) Scott had finished medical school, served his residency, and wrapped up his fellowship. The big money was coming his way, just in time for taking on the expensive South Florida lifestyle.
Scott’s career took off quickly. He started a private practice. His reputation skyrocketed, putting him in more demand. But when he began getting his tax bills, the amount he owed eclipsed his entire annual income from just a few years before.
Our challenge was pretty straightforward: We had to stabilize Scott’s cash flow and optimize his retirement fund contributions. We set about looking for a solid strategy and found one with a cash balance plan.
How Our Plan Worked
Scott maxed out his 401(k) plan at standard contribution limits. We then deployed profit-sharing, allowing him to use additional employer contributions above those limits. In a few years, Scott added a cash balance plan with potential for larger contributions and an appetite for significant tax deferrals.
Soon, Scott was able to contribute over $200,000 in pre-tax savings. This also reduced his adjusted gross income, lowering his tax burden even further. Needless to say, Scott and his hardworking CPA were pretty enthused. The CPA had heard about cash balance plans but had no personal experience working with them.
We explained how combining a traditional 401(k) plan with a defined-benefit, cash balance plan approach could lead to higher tax-deductible contributions. Scott’s medical practice had grown rapidly, so we believed a cash balance plan with its minimum three-year commitment would be manageable.
How the Cash Balance Plan Works Today
Today, we team up with Scott’s CPA and payroll company to make contributions in a timely manner, according to IRS guidelines. We also coordinate with a third-party administrator who performs all of the plan’s actuarial calculations at the end of the year. We’re in continuous contact with those parties and circulate all the data and paperwork that busy surgeons like Scott just don’t have time for.
Scott’s tax payments are much less than they were, but his ability to make larger contributions to retirement has unlocked other opportunities.
His long-term retirement plans suddenly seem a lot more flexible. His annual revenue, which is typically seven figures, affords him and his family the chance to travel as much as they’d like. Another side benefit specific to Florida is that all of Scott’s retirement plan assets are shielded from creditors and lawsuits.
Even though Scott’s contributions now total hundreds of thousands of dollars, the cash balance plan strategy helps him save that much in taxes. His retirement fund is now worth over $2 million, all of it in tax-deferred liquid assets.
Best of all, Scott’s retirement is still more than a decade away. That’s a lot of time to keep doing what he loves and building a nearly bulletproof retirement fund.
Innovative and Effective Financial Planning With Mendoza Private Wealth
At Mendoza Private Wealth, we enjoy working with physicians and other high earners to optimize their financial standing. Whether it’s through cash balance plans or other financial vehicles, we offer clients who connect with us a range of options for building financial strength and investment opportunities. Schedule a Fit Meeting here.
About Iván
Iván M. Mendoza is the Managing Principal and a Financial Advisor for Mendoza Private Wealth, a fee-only boutique, private wealth management practice with a focus on research, planning, and investment management. Working with clients in Miami and throughout South Florida, Iván provides investment and wealth planning advice to individuals and families and to their respective trusts, estates, foundations, endowments, and pension plans.
Iván began his career with Prudential in 1999, where he quickly advanced to Manager of Financial Services, overseeing a team of financial planners. In 2012, he joined Sanford C. Bernstein’s private client group as Vice President and Financial Advisor. Driven by his commitment to providing objective advice, he founded Mendoza Private Wealth in 2016. Iván holds multiple designations, including CFA®, CFP®, CDFA®, CLTC®, CLU®, and ChFC®, and is passionate about creating confidence in clients through sound financial planning and investment strategies.A first-generation American of Peruvian heritage, Iván resides in Miami with his wife, Ana, and their two sons, Emiliano and Alessandro. He enjoys traveling, discovering new restaurants, all things science, World Cup soccer, and staying active through running and biking. An advocate for education, he draws inspiration from his grandfather, a former Minister of Education in Peru, and supports educational causes in his community. Iván is also a music enthusiast with a wide range of tastes, from jazz to reggae to heavy metal. To learn more about Iván, connect with him on LinkedIn.
