Today on The Physician’s Guide to Financial Wellness we’re going to talk about something we come across frequently with employed physicians— side income— from things like moonlighting, speaking, consulting, or writing. There are financial planning opportunities available so we’re going to talk about what those are and how to take advantage of them. The four main themes we’re going to discuss are the initial setup and organization of your side income, ways you can maximize business expenses, ways you can save on taxes with additional retirement savings, and how to think about investing those retirement contributions.
Outline of this episode
- Four steps to maximize the benefits of your side income [0:47]
- Making sense of your side income [1:54]
- Understanding side income taxes [2:18]
- Setting up a business entity [3:32]
- Taking advantage of expenses & deductions [6:10]
- Opening up an individual 401k or SEP IRA [9:10]
- The benefit of investment flexibility [13:19]
- Keeping your investing costs as low as possible [14:39]
Is setting up a business entity right for you?
Setting up a business for your side income has a number of benefits. By default, you are a sole proprietor which means you are your own employer. Often, and especially when the income isn’t significant, people may just co-mingle this business income with their other income in a personal bank account. However, that creates headaches around tax time and makes it less likely that you will be able to take advantage of deductions for business expenses. We recommend setting up a business entity and a business checking account to help separate the two, which we discuss in more detail in this episode.
Retirement planning as the “employer” of your side business
Outside of taking advantage of business expenses, you can save even more in taxes by using your side income to create a retirement plan for it. This is the biggest area where most physicians can really move the needle in terms of saving on taxes related to their side income.
Between employer and employee contributions, there is a limit on the total amount of contributions that can be made in a year. In 2020, that limit is $57,000 (or $63,500 if you’re age 50 or older). As the employee, you are only allowed to make one employee contribution across all possible retirement plans. However, each employer can make contributions up to that $57,000 or $63,500 combined maximum. This is important because with your side income, you are both the employee and the employer, and can therefore contribute the full amount to that business retirement account (assuming you have enough side income) even if you’re already maxing out your 403b or 401k at work. It’s a lot to try to cover here, so be sure to tune in to the episode for a more in-depth explanation.
Investment flexibility when you have an individual 401k plan
When you have a SEP IRA or an individual 401k, it’s a little different from your main job where you have a set lineup of investments to choose from. With these accounts, you have more flexibility with how you invest the money. While it might seem overwhelming to have a wider variety of options, we view this as an opportunity to access a better mix of investments. Choosing the right mix of stocks and bonds for your situation is also important. If you’re earlier in your career, maybe that means you’re comfortable having a 100% invested in stocks. Whereas if you’re closer to retirement, you may want to add more in bonds since the time horizon until you’ll need the money is much shorter.
Resources & People Mentioned
- Podcast episode #5 – The 80:20 Rule of Investing