Some questions about Income reporting/taxes as a Physician Scientist

[someqsaboutstuff]

I recently learned about Defined Benefit Plans and Cash Balance Plans (which are a subset of DBPs) that have a very high ceiling for pre-tax contributions for retirement. It seems that private practice or independent contractor docs are able to create/participate in these plans.

I was wondering if a physician scientist with protected research/academic time could "split" their salary such that their clinical work is paid as a 1099 and their academic work is paid as a regular W2 employee. This would enable their clinical income to be contributed towards their personal DBP.

In terms of splitting salary in this way, is this or any similar type of split possible?

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[solitude]

anything is possible, but what you are describing would be rare for most academic physician-scientists. You can work in PP or industry/consulting and may be able to do something like this, but probably not doing bench research. You can work in academics as W2 and make lots of money as 1099 on the side for consulting, such that you may be able to utilize this.

these plans are complicated, there are limits, and liquidity lock-ups. Generally speaking, most academic/non-profit institutions have very favorable pre-tax retirement savings plans. I am able to save nearly 100K pre-tax between employer/employee contributions, annually. If you do that for an entire career (plus save with other post-tax vehicles, backdoor Roth, etc.), one can become rich even as a physician-scientist.

 

[SurfingDoctor]

A vast majority of physician-scientists I know are employed by hospital systems and universities and the grant “salary” goes to the institution, not the individual. Same with wRVU generation, ie even though there are multiple “sources” of income, in reality, there is only 1 source.

Contributing to a Roth on top of a 403 is a good way to pack away money though, assuming you can afford to.

 

[tr]

Agree with above posters. I just wanted to add that your primary employing academic institution has no incentive to allow you to split your earnings this way. The institution will swipe up all your clinical revenue and all the indirects from your grants and dribble you back a measly percentage as academic salary. As a consolation prize, as noted by @solitude, the benefits (including institutional matching for retirement savings, etc) are generally better than what you would get in the private sector.

You can 1099 at an outside institution for whatever expertise you are able to offer and whatever consulting fee you are able to negotiate.

 

[someqsaboutstuff]

Thanks everyone for their insight! It is a bit of a shame that DBPs are not an option as they seem very well-equipped to lower AGI. I am curious if there are other methods to lower AGI for physician scientists beyond the standard retirement contributions.

@solitude May I ask how exactly the total employee/employer contribution totals to 100k? What vehicles beyond 401k does the employer contribute to?

 

[solitude]

Thanks everyone for their insight! It is a bit of a shame that DBPs are not an option as they seem very well-equipped to lower AGI. I am curious if there are other methods to lower AGI for physician scientists beyond the standard retirement contributions.

@solitude May I ask how exactly the total employee/employer contribution totals to 100k? What vehicles beyond 401k does the employer contribute to?

many universities have multiple retirement account options. For example, there is often a mandatory retirement plan, with a university contribution that can range between about 4 and 12%, often on the higher end, and then a mandatory employee contribution often half of the university contribution. This applies up to the IRS limit, which this year is 330K. So say you have a 12% employer contribution and a 6% employee contribution, that's 18% of 330K. Then, on top of a mandatory plan, most universities have a supplemental 403b and supplemental 457 with no employer contribution, but employee contribution up to 22.5K (in 2023). There is a max IRS retirement account contribution limit of I think 66K, but mandatory plans are not counted in this, which is how the total amount can often reach near 100K or more: 18%*330 + 22.5 +22.5. Many universities have these available as a Roth option but this rarely makes sense for high earners.

other options for lowering AGI include HSAs. Non-AGI lowering account options to minimize taxes include Roth/backdoor Roth and 529 accounts.

so it is possible to save lots of money as a physician scientist. However, the reality is that as a physician-scientist, you are taking a massive paycut. If you want to maximize your income, there are much easier ways to do it than becoming a physician-scientist and using all of these savings accounts. The amont of money you make in private practice will dwarf the benefits of these accounts.

 

[dl2dp2]

Thanks everyone for their insight! It is a bit of a shame that DBPs are not an option as they seem very well-equipped to lower AGI. I am curious if there are other methods to lower AGI for physician scientists beyond the standard retirement contributions.

@solitude May I ask how exactly the total employee/employer contribution totals to 100k? What vehicles beyond 401k does the employer contribute to?

On a rare occasion, you can do this (split W2 and 1099). I do this. I looked at CBPs and ruled it out. Maybe you don't want to defer your retirement ;-) Having a lot of assets in tax-deferred accounts that do not allow easy leverage beyond 50k is very problematic IMO if you have capital needs. Tax savings are only one component of the allocation puzzle. You should consult your accountant and financial planner if you can't figure this out yourself. You need asset diversification in addition to tax diversification. ERISA plans are also a huge pain for things like converting to donor-advised funds, etc. They are a one-trick pony--save for retirement. To use them for anything else is a pain.

This is more common when you work for an independent research institute that has no clinical work or a department (i.e. public health) that doesn't care about this. A restrictive covenant is a way for departments to protect their turf. If the research affiliate has no such turf to protect, they often don't care if you work for a practice somewhere else during your spare time.

In terms of logistics, this is the same question whether as an academic physician, I can moonlight clinically somewhere else and get a 1099. Most academic medical centers, no. There's a restrictive covenant. However, this is not universally true. Ask around and see if you can find out more. However, most don't care if you consult (nonclinically) as long as you disclose and there's no COI. If you bill $1000 an hour and consult 20 hours a week you can probably afford to set up a CBP. LOL

But yes @solitude is right in that usually you don't make enough for any of this to be relevant. If you run a big practice there are also often alternatives that are more attractive than dumping money into a CBP to lower AGI (e.g. capital investments). This is why CBPs are actually fairly uncommon.

Dream the big dream, young grasshopper.