Ophthalmology Business

FEB 2012

Ophthalmology Business is focused on business topics relevant to the entrepreneurial ophthalmologist. It offers editorial, opinion, and practical tips for physicians running an ophthalmic practice. It is a companion publication of EyeWorld.

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has to pay tax. His adjusted gross income is $100,000. He gets to deduct the married standard deduc- tion of $11,600 and personal exemp- tions of $7,300, leaving a taxable income of $81,100. The first $17,000 of that is taxed at 10%, the next $52,000 is taxed at 15%, and the final $12,100 is taxed at 25%, for a total tax bill of $1,700+$7,800+ $3,025=$12,525. Physician B has a lot more options. The stock market actually had a bad year, and he was able to tax loss harvest some of his taxable account assets and thus will deduct $3,000 of losses from his taxes. He uses some of his appreciated taxable account assets to make his $10,000 charitable contribution, all tax free. He then uses his HSA to pay his $10,000 in healthcare costs. This leaves him $80,000 in expenses, which he needs to pull out of his tra- ditional and Roth IRA. He pulls $40,000 out of the 401(k) and $40,000 out of the Roth IRA. The $40,000 out of the Roth comes with no tax bill, just like the taxable account and the HSA money. He is able to deduct his $3,000 in invest- ment losses from the $40,000 in income he generated by pulling it out of the 401(k). What is his overall tax bill on the same income as Physician A? He has $37,000 in adjusted gross income. He then deducts his standard deduction and personal exemptions, leaving him a total of $18,100. The first $17,000 of this is taxed at 10% and the last $1,100 is taxed at 15%, for a total tax bill of $1,700+165=$1,865. One doctor pays an overall tax rate of 12.5%, the other pays 1.9%. It's easy to see why tax diversi- fication is beneficial. A wise physician investor should be careful in how he achieves tax diversification. He doesn't want to forgo the huge tax breaks offered for tax-deferred investing that he would get by maximizing his traditional retirement plan contributions. But there are ways to get money into tax-free accounts at both ends of the career path. A resident doctor is in a low bracket and should be using Roth IRAs. A semi-retired or retired physician can do Roth conversions at a reasonable rate. But what about the mid-career physician at the peak of his earnings? The best bet for him is what I call the backdoor Roth IRA. Up until recently, there was an income limit that prevented most doctors from contributing to Roth IRAs AND converting traditional IRAs to Roth IRAs. That limit has now been eliminated for conver- sions. A mid-career doctor doesn't necessarily want to do a Roth con- version, but he would love to con- tribute to personal and spousal Roth IRAs, which would allow him to squirrel away $10-12,000 a year into a tax-advantaged retirement account above and beyond his 401(k). So how can he do this? Step 1: Contribute money into a non-deductible traditional IRA. (The income limit is for the deduction, not the contribution.) Step 2: Immediately convert the traditional IRA to a Roth IRA. Step 3: Repeat next year. There's a catch, naturally. Roth conversions are done "pro-rata" and have to take into consideration ALL of your traditional IRAs, including SEP-IRAs. So before you do this, you need to get rid of your traditional IRAs. You can do this by rolling the money into your employer's 401(k), opening a solo 401(k) and rolling the money in, or by converting your entire traditional IRA to a Roth IRA over one or several years. Making backdoor Roth IRA con- tributions each year can provide the wise physician investor with tax diversification when he arrives at retirement. Your financial advisor or mutual fund company can help you get started. OB February 2012 • Ophthalmology Business eZine 23 Dr. Dahle is a practic- ing, board-certified emergency physician a few years out of resi- dency. For more infor- mation, visit Dr. Dahle's website at http:// whitecoatinvestor.com. Have a favorite app that helps you with business or personal activities? Email smajewicz@eyeworld.org with the app name and how it helped you. Apps selected will be published in Ophthalmology Business and their submitters will receive a $50 iTunes card. You may be selected for a brief interview. Send us your favorite

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