Hello from a young doctor who is not starving anymore! Looking for a play-by-play!

[alwaysjammin]

Hi all! I recently stumbled on your forum and this is exactly what I have been looking for! A group of people as enthusiastic and dedicated to keeping our hard-earned money in our pockets to fund our golden years!

My stats: I'm a 28 y/o resident doctor who is finally able to do some moonlighting and I am trying to come up with options on how best to set aside my money for retirement. I live very simply and have no problem continuing this life style as i am single with no kiddos. My only goal right now is getting my retirement funded as quickly as possible with the ultimate goal having the option to retire by the time i'm 36 (a little far fetched, but hey, gotta dream!)

My resident wage is 45,000/year before taxes. After state/fed income tax and after my state-owned hospital takes out a DCP 7.5% of my monthly check, I am left w/ $3,000/month. Through this employer, I have the option to contribute to both a 403b plan and a 457b plan.

Now for my moonlighting:

Employee - I intermittently work for an outside hospital that I am employed with that takes taxes out of my paycheck. They have a 401k plan that i can contribute to as well. I don't know much about the plan at this point. I have grossed approximately 11,000, with a net of about $7500 this year so far.

Independent contracting - I am also an independent contractor for several different places. They pay me just a gross income so i am responsible for paying all the taxes including medicare and social sec. I hope to make around 2000-3000/month with a target in the coming months of $5000/month.

Questions:
1) Should I incorporate vs. staying an independent contractor?
2) Should I just max out the 403b and 457b through my residency program as I make enough on the side to cover my rent/bills? Or should I set up a solo-401k vs. SEP IRA?
3) Can I max out the 403b/457b plan and still be able to max out my own or my corporations 401K/Sep IRA?
4) Could we set up scenarios where an independent contractor is making say $300,000. How would you approach sheltering this money?

i have a ton of questions and have done a good deal of reading to attempt to educate myself. If somebody could tell me which thread to post to in the future, I would greatly appreciate it. I am totally open to talking via phone/email to anyone with any ideas or has learned through experience and is willing to help guide me. Just shoot me a private message/email. thanks!
A.J.

 

[jambo101]

You went through all that presumably expensive schooling to become a doctor and at 28 you want to retire at 36? I thought the big money for doctors only started rolling in once they get into their 40's.
Welcome to the forum alwaysjammin You'll find the real guru's of money management in the
Fire and money section.

 

[Rich_by_the_Bay]

You went through all that presumably expensive schooling to become a doctor and at 28 you want to retire at 36? I thought the big money for doctors only started rolling in once they get into their 40's.

<sigh>

Welcome to the board, alwaysjammin. I was just getting my final med school loan payments made when I was about 40. You're way ahead of where I was at your stage.

Just curious -- what went wrong to lead you to abandon such a great profession at the midnight hour? Something in the back of my mind keeps chanting, "Careful what you wish for..." Nothing wrong with being financially aware and disciplined, of course, but it's not common even today to see someone focus on retirement at age 28, after spending the last 12 years in rigorous training.

Anyway, this is a great place to learn some real-world investment and planning ideas, along with a touch of philosophy.

P.S. Jambo, the $$ do not necessarily start rolling in in your 40s in medicine. HIghly depending on specialty, but in many cases, income plateaus in the early to mid-40s and holds or even drops a little in the mid-50s, if I recall. But I do agree, the timing here speaks of other undisclosed issues.

 

[Meadbh]

Welcome to the forum, aj. Another doc here, from Canada.

I can't comment in detail on the financial issues related to incorporation in the US, but in Canada it is a key strategy for any professional who can save.

Sounds like you are doing a lot of moonlighting. My advice is to keep this to a reasonable amount and focus on the residency. Above all, don't get so tired that you become a danger to patient safety.

 

[Coach]

alwaysjammin, welcome to the forum! Your financial questions are "above my pay grade" but I like your attitude. People try a lot of paths, but hard work and saving are the way to FIRE.

I note you said "the option to retire by the time I'm 36". That's the FI part of FIRE, financial independence -- and a whole world of options open up when you get there.

Best of luck in your career!

Coach

 

[FinanceDude]

Look at it this way..........if you "miss" the mark and it takes until age 40, it's still a home run....

 

[Nords]

Welcome to the board, AJ.

Have you read "The Physician's Guide to Investing"? Valuable insights into the invincibility of doctors at choosing their investments, and the professionals who prey on them. The doctors, not the investments.

You could also search the board for keyword "physician" to find posts from other doctors. Not too many of them around here... they tend to be more involved in doctoring than in ER'ing...

 

[plex]

Hey there,

I am in a similar position, though in a different field (a specialized form of law). I am also still finishing up my training stage, currently making 45k working 30 hours a week while taking 2/3s of a full course-load (more work than I would really like, but it is the minimum in order to properly do both). Still have a couple more years to go, but regardless, including undergrad and graduate school, I will have gone through 9 years of "training", half of that time has been spent working so I can graduate without student loans. My goal is reach FI somewhere between 39-41, depending on how my spending habits develop.

I would suggest using something like the millennium-X calculator on the homepage for determining when you can comfortably retire, it helped me get a good grasp of exactly what age range I will be when I become FI and what sort of savings rate I will need to achieve it.

You might be able to do something similar to what I am planning. Right now with renting and a roommate, I spend 10k/year after-tax (60% of this is rent), but I expect this will increase to about 20k once I have my own home (if I will be living without a roommate). My calculations are significantly more conservative though, the age 41 date was based on spending 48k after-tax each year, by then I shouldn't have a mortgage and should be able to put the former mortgage paymetns towards a high-deductible private health insurance plan (crossing my fingers for an affordable basic national health care system being in place by then).

 

[jIMOh]

Welcome. If you do the 1099 route, you have the ability to possibly contribute upwards of 42k per year (tax deferred) into a retirement plan. There are limitations and qualifications you will need to do this.

If you are working more than 1 W-2 job, and your combined W-2 salary exceeds 102k (for 2008), you can claim excess SS paid on 1040A or 1040 long form. Depending on your situation and who does your taxes, look for this on your return.

 

[alwaysjammin]

wow! thanks for the responses!

Hi all, thanks for all the responses! I enjoy medicine very much and i don't plan on actually retiring by the time i'm 36, but i want the option to do so if i choose. just wishful thinking. i would like to post more, but i am not sure if this is the appropriate thread. i will start one in the early retirment forum and anyone, please contribute. thanks for those that left specifics. thanks again!

 

[Martha]

Questions:
1) Should I incorporate vs. staying an independent contractor?

Why do you want to incorporate? You will continue to have personal liability for your negligence so you won't get much liability protection. You still will have pass through taxes if you use an "S", professional corporation.

2) Should I just max out the 403b and 457b through my residency program as I make enough on the side to cover my rent/bills? Or should I set up a solo-401k vs. SEP IRA?
3) Can I max out the 403b/457b plan and still be able to max out my own or my corporations 401K/Sep IRA?

You might want to read some FAQ on retirement plans for the self employed. One advantage you have is that, IIRC, you can fully contribute to a 457b and have a solo 401k and also fully contribute to that plan. The same is not the case if you have both a 403b and a 401k.

 

[alwaysjammin]

Incorporation vs. independent contractor

Hi Martha, the reason i would like to incorporate is to minimize the amount of social security tax/medicare i have to pay. my theoretical stragegy is to pay myself a reasonable salary (as a resident, justifiably minimal-around $500/month). I start a solo 401k and I contribute as an employee and also my corporation can contribute as an employer. both contributions should be tax deductible. for the purposes of being sued, i think i should have some personal protection with the corporate veil. I would also like to be able to give myself corporate perks like a car, corporate 'awards(<$1400/year so it won't be counted as income)," eventually a defined benefits pension, and other perks that maybe others have thought of. What do you or anyone else think?

 

[Martha]

I question your strategy of using a corporation to designate only part of the results of your services as salary and the rest as a dividend. Generally speaking, it is tough for a personal service corporation to claim that any of the money earned from services (after expenses) is not part of what should be designated ordinary income.

It is unlikely that you will get much liability protection, maybe from trade debt that you don't personally guaranty, because as I said, any negligence from your own acts (such as malpractice) will carry personal liability.

I might be wrong, but I thought that defined benefit plans were available to the self employed. In any event, a defined benefit plan can be very useful (but not without problems) so I would talk to a tax adviser about it. It is the plan where you can put away the greatest amount towards retirement, but there also is a lack of flexibility that can get get you in trouble on occasion. You could be required to make a contribution but not have enough money to do so because contributions are mandatory.

Many of the fringe benefits that are available to employees of corporations and deductible by the corporation are not available to those who own more than 2% of the business. Odds are you will not be able to give yourself a tax free employee achievement award.

You might want to read this FAQ: http://www.early-retirement.org/for...-and-those-with-multiple-employers-30751.html

Anyway, see my signature line and be sure to talk to a legal or tax professional about the benefits and draw backs of a corporation and defined benefit plans.

 

[Meadbh]

aj, listen to Martha. She's a real smart legal eagle. And she has a whip!



As I said, I don't live in the US, but my personal liabliligy for malpractice claims continues even though I have a corporation. This appears to be specific to medical practice.

Re: the financial aspects, I suggest checking with a tax accountant with expertise in professional corporations in the US.

 

[Martha]

Generally speaking people are liable for their own negligence, even if they are on the job. Doctors, lawyers, and the guy who moves carts in the grocery store are all liable for their own negligence. Generally, liability insurance and malpractice insurance of the employer is used to pay for any damages resulting from negligence of employees. However, if the insurance isn't sufficient, the injured person could come after the one who injured them.

 

[alwaysjammin]

Hi all, I return from a hiatus! I have decided to incorporate but looks like an S corp is my best option. Does anyone know whether a professional can incorporate in a different state than where I practice...I am in California but would prefer incorpating in Nevada where there is no state corporate tax, $800 franchise fee, etc...

I am looking at getting my corporation set up via LegalZoom.com, but the only thing stopping me is that I don't know whether I need to put anything specific in the articles of incorporation. Any ideas or suggestions?

 

[dex]

I'm amazed at the low starting pay of doctors.
From my observations -
Accountants from a no name college start at 45 to 50k
If they make a mistake with a debit or credit no one is dead.

Lawyers from a name college can start at 125K

Welcome AJ - I'm guessing what you want to achieve is financial independence or security - a good goal.

If I were a doctor I might have stayed working or moved into volunteer work like Drs Without Borders.

 

[Meadbh]

I'm amazed at the low starting pay of doctors.

AJ is a resident and as such is considered a trainee. Training includes up to 5 years of residency, and up to 3 years of fellowship if one is doing a specialty. After residency is when physicians begin to earn more......and pay back their student debts.

The data you see here Physicians and Surgeons refer to physicians who have completed residency and are already "in practice".

Here's a blog on residents' salaries: Physicians / Doctors Salaries & Incomes in USA and the World.

 

[alwaysjammin]

Yup...still in training making less than minimum wage...

Hi, yeah, i'm still in training making well less than minimum wage considering the overnight calls i have to take and the 'more humane" 80 hr workweek (much better than what it used to be though). My plan as above is to save as much for retirment as possible now, so that it can compound as soon as possible either tax deferred and/or tax free with a roth. I am going to start a corporation, would prefer a LLC but considering i'm a professional in california, I will open a S-corp. Anybody have any experience with legalzoom? any ideas of anything that should be included in the articles of incorporation? would like to have my own health flex plan as i already have full insurance through my training program and don't qualify for an HSA. any input would be greatly appreciated!

 

[Martha]

I would get a lawyer to do your professional corporation to make sure that you do all the things you need to do. Only one example is the form of corporation, which is slightly different for professional corporations. http://www.sos.ca.gov/business/corp/pdf/articles/corp_artsprof.pdf
The lawyer can instruct you on the formalities necessary in California to maintain a professional corporation. The lawyer's office can spit out the forms you need. You aren't paying much for the forms, the cost will be the advice and instructions that go along with the forms.

As far as forming a corporation in Nevada to avoid certain California costs, I don't know if you can do that in California with a professional corporation. You certainly can for other types of corporations. But even if you can, you still have to register to do business in California and pay the yearly franchise fee. Also, as funds are earned in California you will pay California income taxes.

Keep in mind that your training program is employing you, not your corporation. You need to clear your plans with your program. You might be jumping the gun on having a professional corporation.

See my signature line and see a California lawyer. It will get you on the right track.

 

[freebird5825]

hello AJ and welcome!
i am unable to answer any of your questions, but it is very interesting reading from this side of the aquarium glass. you certainly have a lot going on!

 

[alwaysjammin]

overall plan

Thanks for the reply Martha! My plan is to just use the corporation to funnel the money to me from independent contractors and pay myself a small salary. I will continue to have my university employeeing me so that I can personally contribute to the 457b plan, while simulataneously contribute to my individual 401k through the corporation. Any insight or additional ideas would be greatly appreciated. Also, if anyone has any clever deductions I can use, those hints would be much appreciated as well. Thanks again all!

 

[eridanus]

Thanks for the reply Martha! My plan is to just use the corporation to funnel the money to me from independent contractors and pay myself a small salary.

What will the S-corp do with the rest of the income? Pay it as a dividend? Two words: BAD IDEA.

The IRS really, really, dislikes people who hide income and they know how the S-corp dividend game works. They also pay more attention to higher earning people.

If you have full insurance that isn't an HDHP plan, you can't get an HSA. Period.

Martha is right - the self employed can have defined benefit plans.


You're not only pushing the envelope here, you're going way beyond what any accountant would recommend. It'll work until it doesn't. You'll know it has failed when that letter from the IRS arrives.



But this is of course internet advice. You get what you pay for.

 

[alwaysjammin]

Pay Out

Unfortunately, it seems like it is very hard for an S-corporation to pay a dividend, period. I have been told that the income that passes through to me will be taxed at the rate of my personal income tax bracket, but I will not have to pay medicare/social security tax on the distribution. what do u think?

 

[Nords]

what do u think?

Others much more tactful than me have been making their points. Let me try a different approach.

Reading back over your questions & comments on this thread, here's what I think "u" should consider:
- People have a tendency to overestimate their financial skills-- the foundation of investor psychology. (And the lifetime employment of investor psychologists.)
- Highly intelligent, confident, articulate, and driven people tend to overestimate their financial skills even more dramatically than those who are less so.
- Your energy and focus is probably much more profitably directed toward perfecting your chosen avocation than toward tweaking your incorporation plans and finagling your tax obligations.
- It's not really different this time, and you probably aren't either. Do you feel that you've discovered an oversight that hasn't been found by any of the thousands of doctors who've gone before you? Is it possible that your "edge" doesn't exist, or that these medical people were busier focusing on the "medical" side of their business? Do you really think that you're the Buffett of medicine? It doesn't matter what I think-- only what you think.

Your situation is compounded by the appearance of getting your advice from Internet strangers. You say you've done a ton of reading but you don't seem to have been able to apply that study to determine what to put into your articles of incorporation, let alone assess the reputation of LegalZoom.com. You don't seem to have found another doctor who's used your contemplated methods to achieve riches in their 30s and retire to a life of self-directed exploration. Is it possible that these mentors don't exist? Is it possible that your sought-after methods don't work? I guess it'd be a stretch to expect you to actually pay a real no-foolin' experienced legal professional the money it would take to either do it right or to learn an effective way to set up your practice.

If you've been reading this board, you'd form the impression that the #1 contribution to ER is living below your means. Minimal spending and extraordinary savings. Mainstream ER doesn't come from brilliant investing or tax [-]evasion[/-] avoidance or even (very often) from stock options. It mainly comes from saving a gargantuan amount of money to compound for a little time, or saving a goodly amount of money to compound for a longer time. It mostly happens while people are doing other things like practicing their chosen profession or learning enhanced methods of applied frugality.

I don't have much faith that you'll bother to do the legwork, but for the benefit of other MDs who may be reading this thread I'll recommend a book that was suggested to me by an MD who is well on his way to ER:
"The Physician's Guide To Investing: A Practical Approach to Building Wealth". The author, also an MD, has some tough love for guys like you.