Top 10 retirement planning strategies - Part 2

Aug. 1, 2010
Doctors face more financial decisions in the five years preceding retirement than at any other time in their lives.

John K. McGill, CPA, MBA, JD, and Brad Kucharo, CPA, CFP®

For more on this topic, go to and search using the following key words: tax planning, Roth IRAs, retirement planning, assets, investment, John K. McGill.

Doctors face more financial decisions in the five years preceding retirement than at any other time in their lives. Getting these decisions right can add hundreds of thousands of dollars to the doctor's nest egg in retirement. Conversely, making mistakes can cost hundreds of thousands of dollars as well – possibly forcing the doctor to postpone retirement. Since there are no financial "do-overs," it's important to plan for retirement correctly the first time. Last month we discussed four of the top 10 planning strategies to help doctors achieve financial security in retirement. This month, we discuss the remaining six.

5. Establish legal residency in a no-income-tax state before withdrawing retirement plan or IRA distributions or receiving practice sale proceeds. Doctors who establish legal residency in a no-income-tax state before receiving practice sale proceeds or withdrawing retirement plan and IRA funds can eliminate state income taxes on these amounts for huge savings.

6. Rent the personally owned office building to the buyer for as long as possible. In connection with the sale of the doctor's practice, the selling doctor should lease his or her personally owned office building to the purchaser for as long as possible in order to generate needed income in retirement and reap the benefits of continued appreciation. The rental arrangement should be structured as a "triple net" lease, and should include a 3% automatic annual rent escalator for inflation.

7. Use a Section 1031 tax-free exchange to avoid federal and state income taxes. Typically, the lease provides the purchaser with an option to purchase the office building at any time during the lease term. If the buyer exercises this option, the doctor should use a Section 1031 tax-free exchange to swap the office building for other real estate held for business or investment purposes, and defer federal and state income taxes. While taxes on the gains are only deferred until such time as the doctor sells the replacement property without entering into another Section 1031 tax-free exchange, taxes can be completely eliminated if the doctor maintains ownership of the replacement property until his or her date of death, says Blake W. Hassan, a tax attorney and CPA specializing in practice transitions.

8. Convert office building gain to tax-free cash. Moreover, doctors can also convert their office building gains to tax-free cash through careful advanced planning. Rather than selling their office building in a taxable transaction, they can use a Section 1031 tax-free exchange to swap the office building for real estate (personal residence) that they rent out for two years following the transaction. Thereafter, the doctor can evict his or her tenants and convert the rental property into his or her personal residence. As long as the doctor lives there for at least five years as his or her personal residence, he or she can later sell the property and receive up to $500,000 of tax-free cash from the sale.

9. Maximize tax-free cash from the sale of a personal residence and second (vacation) home. Married doctors who sell their personal residence can receive up to $500,000 of gain in tax-free cash, provided that they have used the property as their principal residence for at least two of the five years prior to the sale. Moreover, doctors who sell their personal residence can then move into their second (vacation) home, which may have been purchased many years earlier. After living there for two years as their personal residence, they can then sell that property and exclude a portion of the gain (up to $500,000) from the sale.

10. Establish optimum investment asset location to maximize tax benefits. Once doctors have established the proper asset allocation as they approach retirement, these investments must be located within the proper accounts (taxable vs. tax-deferred) for maximum tax benefit. For example, doctors should invest most of their fixed income assets inside retirement plan and IRA accounts, since the interest earned will accumulate on a tax-deferred basis.

Investing most of the personal funds in stocks will allow the dividends and long-term capital gains to be taxed at a maximum rate of 15% currently. Moreover, unrealized capital gains are not taxed at all until sold. Accordingly, this strategy allows doctors to make charitable contributions of highly appreciated stocks and/or real estate and receive a charitable contribution income tax deduction equal to the full fair market value of the property, while the unrealized appreciation goes untaxed.

John McGill and Brad Kucharo provide tax and business planning exclusively for the dental profession and also publish the popular newsletter "The McGill Advisory" through John K. McGill & Company, Inc., member of The McGill & Hill Group, LLC. The Group's members and affiliates serve as a one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. For more information, visit or call (704) 424-9780.

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