Being an independent contractor provides a bit of financial flexibility including the ability to save substantially for retirement… and subsequently enjoying a significant tax break. Some of the basic tax-deductible retirement accounts available for 1099 physicians allow you to save as much as $57,000 in 2020*. See here for more details on these options.
Sometimes we have clients that want to find ways to save substantially more than $57,000 in a year. There are various reasons for this request. Some of the more common reasons are scenarios where someone didn’t start saving early in their career, lost assets in a divorce or simply wants to save every penny possible in taxes. Enter “Defined Benefit Plan” (DBP). This plan essentially allows independent contractor providers to build their own pension plan. Although DBPs are more complex than a SEP IRA or Individual 401(k), you can save quite a bit more money in a tax-deductible plan with this strategy ($100,000+). Those who use this plan typically don’t have debt and don’t have a lot of other expenses. Their contributions to a DBP are 100% tax deductible. To further illustrate that point, someone putting away $100,000 from the 24% tax bracket will save $24,000 in taxes in that year.
Some things you need to know about a DBP:
- You can use it in conjunction with an Individual 401(k)
- The administration costs are higher than other plans (but tax deductible)
- You are asked to commit to funding a DBP for at least 3-5 years
Aren’t ready for a DBP plan? There are other strategies that aren’t quite as aggressive but allow you to make tax-deductible contributions on top of the $57,000 max. Checkout when and why you would hire your spouse, backdoor Roth IRAs, or give us a call to discuss your specific situation.
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*$63,500 for age 50+
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