Tax-Free Retirement Planning for Your O&P Practice

The nice thing about running a successful O&P practice is that in addition to providing something critically needed by society, you can make a lot of money doing it. The problem is… you are making a lot of money. What can be a blessing, can also be a curse. It can pose some real challenges, particularly in regard to income taxes.

You took the risks and invested your capital; you put it all on the line to build your O&P practice, and now you are finally reaping the rewards. You have various relationships with orthopedic and vascular surgeons, and the money is rolling in. Sure, you are dealing with the ever-changing challenges of health care issues, but generally life is good.

Now you want to set aside as much as you can for retirement so you can slow down some day. You begin researching the maze of where to put this money. From a tax standpoint, you realize the US is trillions of dollars in debt, and it’s getting worse daily. You know there are two ways our country can deal with the debt: reduce expenditures or raise taxes, particularly affecting people like you.

Putting money away in a traditional 401k, or SEP plan doesn’t seem like the greatest idea because you really aren’t avoiding taxes, but postponing them to a later date when taxes will be higher. So you begin thinking of ways to create tax-free income in retirement. You may make too much to qualify for a Roth IRA (for 2012, as a single filer, you make over $125,000, and as a joint filer you make over $183,000), so that’s out. Plus, these plans have very low contribution limits anyway.

You may also investigate a Roth 401K, but that has its own problems, such as the requirement that you provide it for all of your employees as well. You may already pay them enough, or you may feel you need to take care of you first. Plus there are administrative filings to do, and you are already busy enough as it is.

You may wonder where to put the money to get a decent return, while having some protection from an extremely volatile market; The S&P lost 38.49% in 2008 alone. On the other hand, if you just leave your money in liquid cash, it might be safe from market volatility but you totally lose out on any upside opportunities.

Who needs that? Everyone wants the same thing: maximum opportunity with zero losses, right?

Expect the unexpected

From a business owner’s perspective, you need flexible contributions. Things might be going well, but that can change in a hurry. You do not want to be forced into making contributions on an ongoing basis. Additionally, if things go from bad to worse, you may want to access some funds. Many plans won’t allow this, and those that do carry severe tax consequences and IRS penalties.

For example, let’s say you are in the 35% tax bracket, and your state has an income tax of 10%. You are under the age of 59 ½ at the time and desperately need $100,000. You may pay roughly 35% in federal income taxes, 10% in state income taxes, and a 10% IRS early withdrawal penalty for being under the age of 59 ½. That’s 55% in tax. That means in reality, to net the desperately needed $100,000 out of your 401K, IRA or SEP, you really need to cash out $222,222 (100-55=45, 100/45%=$222,222).

On top of that, you are already acutely aware how an accident or a chronic medical condition can result in disability. If that happens, your business could face disaster, and your ability to contribute to a retirement plan will come to a screeching halt.

Furthermore, with a typical retirement plan, your loved ones only inherit whatever you have accumulated in the plan up until your death, a taxable amount that will probably not be nearly enough.

As a high-income earner, you may be concerned about litigation. We live in a litigious society and you may feel this makes you a potential target. Properties can have liens put on them and investment portfolios can be decimated. A strong firewall is in order.

So what’s a successful O&P professional to do? What’s out there than can provide tax-free income in retirement, but still allow access on a tax-free basis without IRS penalties at any age? What can provide an attractive return while still providing safety and protection from market volatility? What can you do to insure your contributions will still be made even if you are disabled? What can pay a handsome tax-free death benefit to your loved ones even if you haven’t been contributing to your retirement plan all that long? What can provide financial security in a way that is protected from creditors?

Little-known strategy

The answer may surprise you. It is a little-known but highly successful strategy that comes from leveraging the benefits of a special type of cash-value life insurance policy called “indexed universal life.” Provided you are healthy, insurable and have someone to protect who needs the tax-free death benefit, it is the ultimate tax-free retirement planning tool, and it addresses all of the above challenges.

If structured properly, it can provide tax-free retirement, or money for emergencies and opportunities at any age without IRS penalties, and it requires no reporting of any kind on tax returns, regardless of your earned income now or at retirement. Contribution limits are quite liberal and extremely high, provided they fit within the guidelines of the IRS definition for life insurance. You are not mandated to provide it to every employee. You can pick and choose and get a tax deduction for your contribution.

Additionally, the “indexed” part of the policy provides peace of mind, protection and safety from all market exposure by providing guarantees for both your principal and interest. These policies have a guaranteed floor of typically zero to 2% interest no matter what the market does.

On the upside 

These policies, unlike traditional whole life policies, provide the upside gain of stock indices such as the S&P 500, or the Russell 2000, up to a competitive cap, such as 12%. That means if the S&P 500 made 15%, you would earn 12% and the writing life insurance company would keep the remaining 3%. What you get in exchange is zero losses, possibly a minimum guaranteed interest rate, and your gains are locked in annually so they cannot go down again even if the market goes south.

Furthermore, if you become disabled, some policies provide either a waiver of premium or a total disability rider, which means the company will continue making that $50,000 annual contribution for you on your behalf, at no taxable event to you.

Additionally, because this is life insurance, the insurance company provides a nice tax-free death benefit all at once to your loved ones, even if you have only made a payment or two.

One unique feature about life insurance policies and annuities is they are protected from creditors, which provides peace of mind when both your cash values for retirement and your death benefit for your loved ones are protected. State variations do apply and it’s good to know what your state says about it.

Specialized policy

You may be thinking this sounds too good to be true.

 The answer lies with the fact that this is a highly specialized field. Plus, not all life insurance companies even offer this type of policy. On one hand it is an insurance product, but many agents are too busy with insurance to deal with or understand investments and retirement planning.

On the other hand, it is an investment, and many financial advisors and money managers are too busy dealing with IRAs, SEPs, 401Ks, stocks, and moving money around to deal with insurance. This means a lot of insurance and financial advisors simply do not understand it and won’t even mention it. But those who do are adept at both the inner workings of cash-value life insurance as well as tax-free retirement planning. This is not your daddy’s basic whole life insurance, so to speak, and it is definitely not a basic term policy to cover a mortgage. It is imperative if you wish to get this kind of planning that you work with a professional highly versed in it.

Some limitations

So what’s the catch? Are there any caveats? One is this: Because it is life insurance, you need to qualify for it by applying, and submitting to a medical exam and underwriting. For those in poor health, the costs of the insurance might be prohibitive and outweigh the benefits outlined above.

Also if you are single, and have no one you want to protect or leave the death benefit to, it might not be a good option. And if you take a tax-free income stream, you must keep the policy in force until the day you die. If you cancel it or lapse it, you can end up owing the IRS taxes on the gain. A feature to look for in quality policies is a rider that provides a paid-up death benefit to help keep this from happening. 

What about costs? These policies are not inexpensive. But what you stand to lose in costs, you can benefit more in tax-free income, peace-of-mind and value-added safety features. Plans do vary, however, and working with a professional who understands these plans can help you shop and compare.

For those running a successful O&P practice who want to plan for a tax-free retirement at a time when taxes will undoubtedly be through the roof, a properly designed indexed universal life insurance policy might be the perfect strategy. It provides a tax-free retirement, with no downside market risk on a guaranteed basis, while still providing room for handsome returns, locked-in annually. It allows access to funds at any age with no IRS taxes or penalties, and provides a nice tax-free death benefit to those you love. It provides the peace of mind of knowing your policy will not lapse and your retirement contributions will continue to be made, even if you are totally disabled. Lastly, it can provide protection from creditors for both your cash values as well as your death benefit. What more could you want?

 TODD RADWICK is president of Radwick Financial Group LLC. He can be reached at (800) 314-2999; email:; This article is for information purposes only, and is not intended to provide legal or tax advice. For these areas, consult with your attorney or certified public accountant.

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