There are many traditional ways of saving money for retirement such as a 401(k) tax-deferred plan, a traditional Individual Retirement Account (IRA) and a Roth IRA. Each one has it's purpose, limitations and benefits.
401(k) and IRA's can be a great way to defer taxes until a later time. There are many people that think they won't have to pay taxes on these types of plans if they don't access the money until they retire. Sadly, that is far from the truth. If you don't access the money until age 59 1/2 you will avoid 10% federal penalty tax but you will still have to pay the federal and state taxes.
A Roth IRA is free of taxes on earnings after the age of 59 1/2 but if you access the earnings before the age of 59 1/2 you will pay taxes and a 10% federal penalty tax. Contributions can be accessed before the age of 59 1/2 tax-free. The tax advantages on a Roth IRA may be appealing but this type of account may be the best type a retirement savings for a doctor since it has certain limitations.
You can contribute a max of $5,500 per year if you're under age 50
You can contribute a max of $6,500 per year if you're age 50 or older
If you're single and your income is $135,000 or more you don't qualify for a Roth IRA
If you're married filing jointly and your income is $199,000 or more you don't qualify for a Roth IRA
If you're married filing separately and your income is more than $10,000 you don't qualify for a Roth IRA
Most doctors earn more than the income limitations and want to save more than the contribution limits of a Roth IRA.
Why doctors love Indexed Universal Life Insurance as a retirement vehicle?
Since most doctors earn a significant income and are prone to lawsuits, using an Indexed Universal Life Insurance policy as a retirement vehicle can be a great benefit for several reasons.
Protection from lawsuits
In most states (not all, please check your home state), Indexed Universal Life protects your cash value from bankruptcy, lawsuits, creditors, leins and other judgements. Sure, malpractice insurance may protect you from a lawsuit but this type of policy has limitations. There is an "individual limit", usually $1,000,000, which is the most that will be paid for any one claim and an "aggregate limit", usually $3,000,000, which is the most that will be paid in any policy year for all claims.
If you are sued for more than the malpractice policy limit, you can be liable to pay the suing party the cash amount over that limit. Unfortunately, 401(k) plans and all types of IRAs are not protected from lawsuits. That means you can be ordered to pay from your cash accounts, retirement accounts, stocks, mutual funds and other investments.
Since life insurance is technically not considered an investment, even though it has a cash value, it is considered a life insurance policy. Therefore, the cash value is protected against lawsuits.