4 Critical Ways Doctors Can Protect Themselves Against Malpractice Lawsuits
Max Out Those Retirement Plans
The BEST way to protect yourself from creditors is the tried and trued philosophy of…
PAY YOURSELF FIRST
Simply, every paycheck you receive- do one simple act. Take money out and put it into your retirement plan. Not only will this give you a tax deduction TODAY, but the money is also out of the reach of creditors!
In the Freedom Formula for Physicians, I lay out 5 specific steps you can take to reduce your taxes. ONE of them is maxing out your primary retirement plan.
Just think about it- if you put money in a 401k or 403b, let’s say you put in $18,000 and your combined federal and state bracket at your highest income level is 50%, that’s $9,000 you are saving in taxes NOW!
Then, on top of that, you are protected from potential plaintiffs.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) extended to not only have 401ks protected from bankruptcy but also included 403bs and IRAs and Roth IRAs.
This means that under current federal legislation you can get sued for malpractice and if creditors reach for your personal assets, you could declare bankruptcy (if necessary) and your retirement plans don’t get touched!
There are a few caveats to be aware of:
- Employer-sponsored plans covered under ERISA (like 401k, 403b) are protected from BOTH civil lawsuits & bankruptcy. Contributory IRAs are purely covered from bankruptcy, but possibly not a civil lawsuit. See more on different types of IRAs in #4 and # 5 below.
- If for some horrible reason you are caught in a malpractice lawsuit, DO NOT withdraw from your retirement plan as that money now becomes fair game.
- The same rules apply to 401k or 403b loans! DO NOT TAKE OUT A LOAN from your retirement plan if you are going through a lawsuit. To add insult to injury, you may no longer to be able to repay the loan and it gets treated as a withdrawal that you would owe federal & state income taxes (let’s say 40%) on plus possibly an early withdrawal penalty (10%). Ouch! Half your money is gone.
- IRAs and ROTHs that you CONTRIBUTE to (contributory IRA/Roth) have a cap, inflation-adjusted $1,000,000 threshold. Considering that most of us may only contribute $5,000/year to an IRA or a Roth, this should be a very distant problem.
- WHAT IF I ROLLED OVER A 401K TO AN IRA? Rollover IRAs have NO CAP. Thus, are completely protected.
- THUS- MAKE SURE YOU HAVE SEPARATE ACCOUNTS FOR A ROLLOVER IRA and a CONTRIBUTORY IRA. If you mix the two, it could be a litigation nightmare!
- SIDE NOTE: 529 plans are ALSO partially covered by this same law.
I’m not usually a big fan of 529 plans due to withdrawal restrictions and the lack of financial aid that they can create.
Most people put $2,000 or $5,000 in these plans and are never truly serious about saving beyond that amount. It’s another neglected silo that often decays in a forgotten state. They’d be better doing other stuff with that cash such as having a larger cash cushion or getting out of debt.
The difference in your taxes of $500 of earnings will not even move the needle. You won’t even realize it.
However, I am a big fan of the tax deferral AND the bankruptcy protection.
These assets can have the contributions & earnings made MORE than two years previously be completely protected.
If you have less than $20,000 stashed for the kiddo, I still think joint accounts are better due to liquidity reasons.
However, if you having $30,000 or $40,000 or $50,000 (or could get there quickly) in non-qualified money, then I believe a 529 plan could be very effective cuz now we are talkin’ serious money!
Remember it needs to be in there for over 2 years. You can’t just suddenly stash it away when you get served.
If you have missed any of the other 3 Critical Ways Doctors Can Protect Themselves Against Malpractice Lawsuits check out my blog at www.davedenniston.com/blog
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