Top 5 Questions Asked by New Physicians

Starting out as a new physician is exciting, and the general assumption is that you’re sent out into your profession with everything you’ll need. But there are aspects of your practice and finances that medical school won’t prepare you for. A few key questions to consider for any physician starting out—and even some with experience under their belt—are listed here.

ONE: As a physician, do I incorporate?

One of the most common questions asked by new physicians is, whether or not to incorporate. The fact is, there have been both personal and corporate tax changes over the past few years which can add a layer of complexity to this decision, and the answer should be determined on a case by case basis.

For most doctors, it’s not a matter of if they should incorporate, but when.

It makes sense to incorporate if one is able to leave income within the corporation to save for the long term, because there’s a benefit to working with a greater amount of present dollars to compound for your retirement. One could have over 40% more savings working for them today if comparing the corporate small business tax rate (12.3% in Ontario), vs the top personal marginal income tax rate of 53.53%. Although income splitting opportunities have been reduced over the years, there can still be planning opportunities to assist with income splitting through retirement.

There are many factors to consider when properly analyzing one’s situation, which is why we suggest establishing a financial plan which examines your various cash flow, tax and financial planning objectives.

TWO: Do I save up my money, or pay down debt?

Once you start practicing, a common question is “Should I save or pay down debt?”. Debt from medical school can average close to $100,000, therefore it’s a question that often comes up.

Deciding what works best for your personal situation depends on many factors. When meeting with recently graduated physicians, we often ask them the following questions:

• What type and amount of debt do you have? This may include student debt, mortgage, credit card, other line of credit, and more.
• What are the various interest rates?
• Are you incorporated? This debt often must be paid with personal after-tax dollars, and withdrawing large sums from your corporation to pay off debt may impact your tax management strategy.
• What is your monthly cash flow situation?
• How do you feel about carrying debt?

Everyone’s answer to the above questions will be slightly different, and upon reviewing your answers with your family office, a clear plan of action will become evident.

THREE: Where do I save? RRSP, Corporation or TFSA?

Most physicians are self-employed, which means they do not have employer-funded pension plans; thus, physicians must work to build their own individual “pension plan”. There are many types of investment accounts available to meet a physician’s retirement and tax planning goals. These three are the most common:

Professional Corporation (PC): This is generally a key component to a physician’s personal savings plan. Due to the up to 40% tax deferral differences between corporate and personal savings, physicians can generally accumulate a significantly greater amount of savings when compared to other investment accounts.

Registered Retirement Savings Plan (RRSP): This type of account has an annual limit which can be contributed to based on your personal income. Contributions to this account provides a tax deduction towards your income. In addition to the tax deduction advantage, one benefits from the deferral aspect of the RRSP as you do not pay tax on the growth of the account until funds are withdrawn – generally in retirement when one’s income is lower which reduces your tax rate.

Tax Free Savings Account (TFSA): A TFSA allows a doctor to save money in a manner that grows tax-free. There are no tax deductions offered on contributions to the account, however there’s no tax to be paid when funds are withdrawn.

FOUR: What types of insurance should I have?

You made a significant investment to become a physician and your ability to earn income for you and your family is one of your greatest assets. A death, disability or the diagnosis of a serious illness can have a material impact on a physician’s financial plan. This risk can be mitigated with the proper risk management plan in place.

Life Insurance: The main role of life insurance is to provide financial capital for your dependents to maintain a standard of living should you pass away. The two most common types of life insurance plans are term and permanent insurance.

• Term Life: This is temporary life insurance coverage that lasts for a set period of time and automatically renews in most cases. With term insurance, the payments (premiums) you make won’t change during that specific time period. Term life is generally the most cost-efficient form of insurance if the need is a defined, shorter time period.
• Permanent Life Insurance: Is guaranteed lifelong coverage that protects you and those you care about. There are several types of permanent life insurance, some of which have investment components, tax advantages and access to capital in the future. Permanent insurance can often be an integral tool utilized in strategic estate planning.

Disability Insurance: More relevant for physicians now than ever. Disability income insurance works when you can’t. It can provide you with tax-free monthly income to help you and your family with your ongoing expenses should you become ill or incur an injury which prevents you from working. There are often lifetime discounts offered to residents and physicians in their first year of practice.

Critical Illness Insurance: Critical illness coverage can provide you with a tax-free lump sum amount of money if you’re diagnosed with a serious condition. The most common conditions covered are cancer, heart attack, strokes, and nearly two dozen other illnesses. In addition to the coverage, there are options that can be added which returns 100% of your premiums (payments) to you should you not incur an illness.

FIVE: I Want to buy a home – what do I need to know?

There will be a point in time where new physicians will think about buying their first home. Items to consider are the following:

• How will you fund the down payment of your new home?
• Do you currently have any other debt?
• What is your current cash flow situation?
• What can you afford to fit within your overall financial plan while still being able to focus on your retirement savings plan?
• What are your requirements within a home? (location, size, required maintenance)

The answers to the above questions will ultimately have an impact on the type of home you decide to purchase. By establishing a financial plan and by working with an accountant and mortgage professional, we can assess and quantify the impact of your home purchase towards your overall financial plan.

Just as drug contraindications lead to poorer health, financial contraindications lead to lower wealth.

Pharmaceutical contraindications are known to adversely affect health. Similarly, financial decisions made in isolation from one another can negatively impact wealth. In the fiscal world, these contraindications can range from uncoordinated financial advice, to unintegrated tax strategies, to haphazard insurance purchases .

The result can be slower-than-necessary wealth accumulation, needlessly higher taxation, and financial goals not being realized. Individual investment vehicles and decisions must be coordinated by a financial quarterback working closely with a team of specialists. One-by-one analysis of financial recommendations should only take in the context of an overall financial management plan.