Physicians: How to Create a Tax-Free Retirement, Part I

Key takeaways

  • The 2020 election may affect taxes
  • See an overview of tax rates: past, present, and future
  • Learn individual tax strategies to create a tax-free retirement

We’ll be covering how to create a tax-free retirement in this first of two blog posts on this topic. First, we’ll go over the implications of the most recent U.S. election and what tax rates have looked like in the past and present, along with predictions for the future. Then we’ll dive deeper into specific tax planning strategies you can implement now for a tax-free retirement.

The impacts of the U.S. election

It’s important to understand that no matter if Republicans or Democrats are in control of the government, not much is likely to change in the near future as far as:

  • Massive deficits for the country as the government continues printing money
  • The pandemic relief or stimulus package
  • Tax code changes

These items will be a reality for years to come.

Tax rates, then and now

What have taxes looked like in years past? The highest federal marginal tax bracket in U.S. history was 94% from 1944 to 1945. At that time, if you made over $200,000 per year, you were taxed 94%.

The highest federal marginal tax bracket during the 1970s was 70%.

Today, the highest federal marginal tax bracket on earned income is 37%. But in the 1970s, we didn’t have the other taxes we have today. FICA, Medicare, and self-employment tax add 15.3%, and employees pay half of that.

The Medicare surtax is an additional 0.9% for income over $200,000 for individuals and $250,000 for married-filing-jointly taxpayers. The subtotal for all of these tax rates is 53.2%.

The rates mentioned above are just federal tax rates. What about state taxes? Some states have pretty high individual income tax rates, like New Jersey, California, and New York.

If President Joe Biden introduces the tax plan he has presented, it will impact taxpayers who make over $400,000 in taxable income. They’ll be taxed at 39.6% of that income, plus a Medicare tax of 2.9%, an additional Medicare tax of 0.9%, and an additional FICA or self-employment tax of 12.4%, which is a new tax for taxpayers in that bracket above $400,000. Itemized deductions will be phased out and capped at 1.19%. All of these taxes put high-earning individuals at 57.99%, just for federal taxes. 

If you add state taxes on top of that—which are as high as 13.3% in California—you’re looking at rates that could reach 70% and above.

By the year 2030, tax rates are probably going to continue to increase. The government has a significant amount of debt, and it will continue to spend on big national costs like:

  • Interest
  • Medicare
  • Defense
  • Social Security
  • Infrastructure
  • Pensions
  • Stimulus
  • Healthcare
  • Welfare

A note on Social Security

Social Security was first established in 1935 during the Great Depression. At the time, 42 people contributed to the Social Security fund for every one person who took it out, and you had to be 65 to withdraw. The average life expectancy was 62 in 1935. If you made it to 65, you really only had about two years on average to use that Social Security money. 

Today, three workers are contributing for every one person taking it out. In 10 years, that will be two to one. The earliest age you can withdraw Social Security today is 62, and if you begin taking it at that age, you’ll have on average 23 years to live on that money. This is all quite a difference from the situation in 1935.

Unless something changes, this financial burden will only continue to grow exponentially, and tax rates will continue to rise. According to a former comptroller of the U.S. David Walker, the national debt will increase $2 trillion every year until it tops out at $53 trillion if tax rates don’t change.

Creating a tax-free retirement

Needless to say, tax rates will probably be higher when you’re in retirement. Let’s look at the different savings account options and how they’re taxed:


  • Savings 
  • CDs
  • Money market
  • Stocks
  • Bonds
  • Mutual funds

Tax-deferred (pay tax in retirement):

  • IRA
  • SEP
  • 401(k)
  • 403(b)
  • Profit-sharing
  • Defined-benefit plans


  • Muni-bonds
  • Back-door Roth IRA
  • Back-door Roth 401(k)
  • 7702 plan


  • Management C corporation with fringe benefits
  • Health savings account
  • 401(h) 
  • 1202 corporation
  • Restricted property trust
  • Family endowment plan
  • Closely-held insurance company owned by a Roth IRA/401(k)
  • S corporation management company owned by ESOP

Individual strategies to build a tax-free retirement

How should you approach tax planning for retirement? Here’s what you need to know about four strategies that will help avoid taxes when the time comes.

Health savings account

Health savings account (HSA) benefits include:

  • Tax-deductible contributions
  • Growth is tax-free
  • Distributions for qualified medical expenses are tax-free
  • Investments can be self-directed (for example, if you own an LLC that owns real estate)
  • Employer-provided account is portable


  • Must be covered under a high-deductible health plan
  • Must have no other health coverage, like an FSA or HRA
  • Must not be enrolled in Medicare
  • Cannot be claimed as a dependent by someone else

Minimum annual deductible: 

  • Self-only coverage: $1,400
  • Family coverage: $2,800

Maximum annual deductible and other out-of-pocket expenses:

  • Self-only coverage: $1,400
  • Family coverage: $13,800

Annual contribution limits for 2020:

  • Individual: $3,550
  • Family: $7,100
  • Over age 55: additional $1,000

If you’re eligible, an HSA is a must-have.

Back-door IRA

A back-door IRA can be another good option. First, you put money into a traditional IRA. Then you simply convert that contribution over to a Roth IRA.

If you’re married filing jointly, and your modified adjusted gross income is less than $196,000, you can contribute the full amount, which is $6,000 for 2020. If you make $206,000 or more, you can’t contribute anything, and in between the two is a phased-out number. If you’re single, that number is less than $124,000 to contribute the full amount and zero at $139,000 or more.

Back-door Roth Solo 401(k)

If you have schedule C income or are in a partnership, for example, you can put money in the Roth 401(k) portion, then contribute the lesser of 20% of schedule C or 25% of W-2, up to $37,500 (the total amount you can contribute was $57,000 in 2020). Then, make sure your solo 401(k) plan terms allow you to take distributions while you’re still employed. You can then roll that contribution into a Roth IRA. The difference from the back-door IRA is that you’re using the profit-sharing portion to do it.

Rolling over to a Roth IRA

A traditional IRA produces the same after-tax result as a Roth IRA, as long as the annual growth rates are the same and the tax rate in the conversion year is the same as the tax rate during the withdrawal years. The only way the conversion works in your favor is if you keep your income low today or your tax rate is lower today than the year you contribute. Roth IRAs aren’t guaranteed to come out ahead, in other words. 

Reasons to convert:

  • You have significant tax attributes that are happening this year, such as a charitable deduction carry-forwards or investment tax credits
  • You expect the converted amount to grow significantly
  • Current income tax rates are lower than they probably will be at distribution
  • You have available cash outside the qualified account to pay income tax due to the Roth IRA conversion
  • Converted funds aren’t required for living expenses now or for awhile
  • You expect your spouse to outlive you
  • You expect to owe estate tax

You must understand tax brackets and their likely trajectory to be successful with Roth IRA conversions. You should also take into account the Medicare surtax of 3.8%, phase-outs of tax benefits, and the impact of the alternative minimum tax (AMT).

Note that there are a couple of Roth conversation alternatives if you don’t decide to go that route: a Land Conservation Partnership Interest or a Family Endowment Plan.

Working with a tax professional to plan for retirement 

There are many different factors to weigh and analyze when creating your retirement plan so that you avoid taxes—and stay tuned for part two in this series.

To learn more about your eligibility for these different scenarios and get assistance in reaching your goals, work with the team at Physicians Tax Solutions. 

Physician Tax Solutions supports busy medical practitioners with proactive strategies and full-service tax preparation services that dramatically reduce tax bills. Contact us online or by calling 1-855-693-7829 to start saving today.

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