2. Adopt a "stealth IRA" plan
You're probably familiar with a traditional individual retirement account (IRA). You may even know about the Roth IRA and
the simplified employee pension (SEP) IRA. Well, get ready for what I like to call the "stealth IRA"!
Congress passed a widely overlooked yet powerful saving tool years ago and it still doesn't receive proper respect from newly
graduated doctors. It's the so-called "Section 529 College Savings Plan," which is offered by most states and offers myriad
saving and wealth-building opportunities.
Ordinarily the two biggest future expenses that young professionals save for are a house and college education for future
children. Meanwhile, the two biggest obstacles to setting aside money for those objectives are federal income taxes and state
income taxes. The good news is that the 529 stealth IRA provides relief from both of these obstacles. Here's why it's so terrific:
The 529 College Savings Plan allows folks to deposit money into a low-management-fee investment account for future education
expenses. Unlike a traditional IRA, the contribution limits are extremely generous. Unlike a Roth IRA, the 529 plan generally
provides a state income tax deduction for contributions. (Check your state's policy online to be certain.)
These accounts work well for health professionals because they permit a nice, early start for saving toward a future child's
education. You don't even need to have children to begin the program—you can be your own beneficiary until the little ones
come along. When you start contributing early, your money begins the process of tax-free compounding for a nice long time.
Then later, you can use accumulated principal, interest and dividends for education expenses for children with no income taxation
on the withdrawals.
It's tough to find drawbacks to these investment programs. Here are more reasons I support them:
> The investment options are easy to understand. Your state doesn't leave you at the mercy of some marginally qualified stockbroker or inexperienced financial planner. You
pick from a reasonably sized list of professionally managed mutual funds. You don't need a finance degree to start accumulating
a return, which can be several times what banks pay.
> Withdrawals for educational purposes are tax-free. This is usually true at both the federal and state level. And qualified tax-free withdrawals can be used for many other expenses
beyond just tuition.
> College not in the cards? No problem. If your children decide not to attend college, you can use the accumulated account yourself. Or you can send your spouse
to graduate school. Or you can help out some other relative—all different types of family members can qualify, and the money
still comes out tax-free.
> Better safe than sorry. Even if you withdraw the money for a nonqualifying purpose, you might still be better off than if you hadn't used the plan—the
growth of the funds in the 529 plan over time can far outweigh any taxes and penalties you pay. (Note: A 401(k) or other employer
arrangement may still offer a better option, particularly if your employer matches contributions. Be sure to check with your
accountant regarding your individual circumstances.)
In the end, we all realize that veterinary school tuition isn't going to come down any time soon. And we are acutely aware
that new-graduate salaries have been stunted—along with so many other professions—by the Great Recession and its ensuing aftermath.
But I suggest that rather than see that combination of disappointing realities as a reason to throw your hands up in helpless
despair, develop a creative—even aggressive—strategy to use all means available to achieve personal financial prosperity.
It will take more creativity than just eating out at restaurants less often.
Dr. Christopher Allen is president of Associates in Veterinary Law PC, which provides legal and consulting services to veterinarians.
Call (607) 754-1510 or e-mail