Tax-Smart Investing For Physicians: An Actuarial Perspective

Physicians dedicate their lives to caring for others. The demands of building a practice and providing top-tier patient care can easily consume your time and focus. It’s understandable why long-term financial planning sometimes takes a back seat. Developing a consistent savings and investment plan is essential for achieving your financial goals – both in retirement and along the way. 

This article lays a foundation for understanding investing strategies tailored to high-net-worth Canadian doctors. We’ll focus on building wealth inside and outside your corporation, managing income fluctuations, and ensuring your retirement savings align with your vision for the future. Our goal is to help you make informed decisions that support your overall financial well-being. 

Investing 101 for Physicians

Before exploring strategies specifically aimed at physicians, let’s review some core investing principles that provide a solid foundation for your plan:

• Start early and invest consistently: Time in the market is more important than trying to buy investments only when they’re low and sell them only when they’re high (called ‘timing the market’). Develop a consistent savings and investment plan and stick with it.
  
• Prioritize tax-advantaged accounts: Maximize contributions to RRSPs (Registered Retirement Savings Plans) and TFSAs (Tax-Free Savings Accounts) before investing in taxable accounts. This strategy ensures your investment gains grow as efficiently as possible.
  
• Manage risk through diversification: Spread your money across different assets like stocks, bonds, real estate, and potentially other alternative investments. You then reduce the impact of volatility in any single market.
  
• Be mindful of fees: High expenses can significantly erode investment returns over time. Carefully consider the value you’re receiving when choosing both investment products and professional wealth advisors.
  
• Focus on after-tax returns: Taxes can significantly impact your investment earnings over time. Prioritize strategies that help keep more of your investment gains.
  
• Rebalance periodically: As the value of assets in your portfolio changes, you’ll need to rebalance occasionally by selling some assets that have grown and buying those that have declined.

Aligning your investments with your long-term goals includes carefully evaluating whether professional guidance could enhance your plan and improve your financial journey.

Trading Hours for Returns: The Benefits of Wealth Advisors

With a hectic schedule, the convenience of DIY online brokers for managing your investments can be tempting for doctors. However, working with a professional wealth advisor can provide significant advantages. An experienced advisor helps create a customized investment plan based on your unique risk tolerance, goals, and cash flow needs. They handle day-to-day investing activities, like rebalancing and tax-loss harvesting, saving you valuable time.

Advisors provide objective guidance to avoid emotionally driven decisions, especially during market volatility. They proactively monitor your portfolio, making adjustments strategically as your situation and overall economic conditions change. The long-term value added by an advisor typically outweighs their fees through greater returns, enhanced risk management, and reduced stress.

Seek an independent wealth advisor empowered to act in your best interest. Advisors tied to institutions or medical associations often face hidden constraints that limit their ability to tailor solutions to your unique goals. Next, ask about their experience working with doctors – this deep understanding of your career and its challenges is vital. At Taxevity, we can connect you to independent wealth advisors we trust to manage physician portfolios prudently.

Leaving investing to specialists frees up time for your loved ones, hobbies and yourself.

Managing Income Volatility

One of the biggest financial challenges physicians face is income volatility. You may start your career with a relatively low income as a resident or new attending physician. Income often jumps substantially once you finish training and build your practice. However, it takes time to grow a patient roster. Moving or changing practices can cause wide income swings that make it difficult to save steadily for retirement. 

Since physicians have significant earning potential, the temptation to ramp up lifestyle expenses during peak earning years is powerful. While a nicer home or travel experiences may seem justifiable, prioritizing investment growth offers long-term stability for the physician and their family. When income later decreases in retirement, maintaining that spending often requires drawing down the assets that were grown during their working years.

To mitigate income volatility, aggressively build your investment portfolio during your higher earning years. Try to max out registered accounts and make lump-sum contributions. These funds provide a buffer when income decreases, helping you avoid making rash financial decisions out of necessity.

If cash flow permits, also consider permanent life insurance. Besides providing protection, the tax-sheltered compounding inside the policy steadily builds up a pool of assets. You can then take tax-free loans in lower-income years. This buffer provides essential peace of mind, allowing you to maintain your investing discipline despite shifting income. To learn more about how life insurance can mitigate the risks of fluctuating income, read our post on life insurance for physicians or contact us.

Tax-Sheltered Investing

Because of your high income, taxes can devour a considerable portion of your investment returns. Strategic account selection is crucial to combat tax-caused erosion and build wealth efficiently.

Max out your available RRSP room each year. Contributions directly lower your income tax bill, providing immediate savings. Plus, investment growth inside an RRSP compounds tax-sheltered until withdrawn, though you will face eventual taxes upon retirement distributions.

TFSAs are another powerful tool for physicians. While contributions don’t reduce income tax today, all investment growth and later withdrawals are entirely tax-free. With your high earnings, you rapidly accumulate savings within a TFSA.

An Individual Pension Plan (IPP) offers substantial tax deferral for incorporated physicians. Contributions are deductible against corporate income, significantly reducing current tax burdens. Funds compound tax-sheltered until retirement, and employer contributions further enhance future benefits upon withdrawal.

Beyond registered accounts, permanent life insurance also provides notable tax advantages in addition to protection. Cash value growth is tax-sheltered, and you can access these funds through tax-free withdrawals or loans for uses like supplementing retirement income or funding major expenses. 

While maximizing tax-advantaged personal accounts like RRSPs and TFSAs is crucial, it’s only part of the picture for high-earning physicians. Your corporation offers additional tax-efficient investment opportunities. Building assets strategically both inside and outside your corporation is key to unlocking your full financial potential and long-term flexibility. Let’s explore these distinct strategies and the advantages they offer.

Building Assets Inside Your Corporation

If you run your practice through a medical professional corporation, strategically growing a pool of assets inside your corporation offers flexibility and long-term advantages. This pool of funds can be deployed opportunistically as your retained earnings increase, including purchasing less liquid corporate investments like commercial real estate or a medical building. Even without buying those illiquid assets, having readily accessible money provides crucial operating liquidity as a cushion against income fluctuations. 

Many investment options exist within your corporation, one key difference being their tax treatment. Corporate class investments offer tax-deferred growth on assets held within your corporation, allowing funds to compound quickly. Speak with your accountant and independent wealth advisor about using corporate-class funds to enhance your potential returns further. 

Your corporation can also invest passively in a diversified portfolio of publicly traded stocks, bonds and ETFs. While investment income earned this way is taxed at higher corporate rates (e.g., 50.17% in Ontario), the resulting boost in retained earnings can have notable benefits if that tax on passive income is lower than your high personal marginal tax rate. 

In terms of registered accounts, consider setting up an IPP funded by corporate dollars. An IPP offers many of the same tax-deferred benefits as an RRSP but with a higher contribution room and other advantages.

Building Assets Outside Your Corporation

Investing personally outside your medical corporation is essential for a well-rounded financial strategy. You get more diversification and protection if changes in regulations or healthcare models negatively impact corporate earnings. 

If setting up a corporate IPP isn’t a priority, continue maxing out your personal RRSP and prioritize maximizing your TFSA annually. With major expenses handled by your corporation, you likely have greater personal cash flow available for investing.

Permanent personal life insurance policies offer significant advantages for physicians. Besides the death benefit protection, you can rapidly build up tax-sheltered cash value, providing a flexible source of funds for various personal needs.

Building substantial assets inside and outside your corporation maximizes your long-term financial flexibility. This strategic wealth accumulation empowers you to navigate tax landscapes more effectively in all stages of your career. 

Investing for Retirement

 As a physician, your ultimate investment goal is likely achieving a comfortable retirement. Your retirement investment journey involves two distinct phases:

• Accumulation Phase: Throughout your high-earning working years, the focus is on rapidly building assets by strategically using various accounts for their tax advantages. Prioritize registered accounts like RRSPs, TFSAs, and IPPs for tax-deferred growth. An advantage of some permanent life insurance policies is the potential for supplemental tax-sheltered growth alongside your other savings.
  
• Drawdown Phase: Transitioning to retirement shifts your focus from asset accumulation to generating a reliable income stream from those investments. Develop a comprehensive withdrawal strategy for maximum tax efficiency, potentially starting with non-registered assets first and moving to registered accounts later on. Tax-free loans using your life insurance cash value as collateral provide added flexibility when strategically incorporated into your plan.  

Consider holding dividend-paying stocks and bonds personally if seeking lower-taxed investment income. Leverage your corporation to optimize benefits from income-producing assets like commercial real estate, ensuring a smooth transfer with favourable tax outcomes later upon selling your practice to another doctor. 

Investing for retirement as a physician often requires navigating specialized tax strategies and maximizing personal and corporate contributions. Considerations like these underscore the complexities in developing a personalized plan for efficiently building, managing, and ultimately withdrawing your retirement assets. An independent, collaborative wealth advisor offers crucial expertise.

Estate Planning for Physicians: Investment Implications

Tax-smart investing goes beyond securing your comfortable retirement – it also impacts the legacy you leave behind. Estate planning considerations influence how certain assets can best serve your heirs tax-wise and for practical accessibility.

RRSP/RRIF assets face significant taxation on your final tax return unless a surviving spouse is your direct beneficiary. A strategic retirement drawdown plan might involve adjusting your withdrawals to optimize for both your current income needs and minimizing the eventual tax liability for your estate.

TFSAs and permanent life insurance provide significant inheritance advantages. Proceeds typically pass tax-free directly to your designated beneficiaries, bypassing the often lengthy and costly probate process.

Life insurance also functions as a supplementary inheritance planning tool. Beyond traditional ‘death benefit’ protection, cash value growth inside specific policies can add another layer of wealth you control when and how heirs receive it without complex estate considerations.

We collaborate with your wealth advisor to help you maximize the efficiency of your various accounts and corporate assets within your intergenerational wealth transfer goals. For a comprehensive look at estate planning for physicians, explore our deep-dive guide. 

Investment FAQs: Tailored Guidance for Doctors Like You

Facing investment uncertainty? Here are answers to common questions physicians ask us.

What common investment pitfalls do doctors unknowingly get trapped in?

Any physician can experience common investment hurdles due to their demanding workload and complex finances. Fortunately, the following traps are easy to side-step with simple proactive steps:

• Delaying Investing: Don’t underestimate the power of early contributions and compounding returns — small, regular savings early in your career matter.
  
• Lifestyle Inflation Trap: As your income climbs, avoid the mistake of mirroring that in spending. Increasing your investment contributions proportionally has a lasting impact.
  
• No Clear Plan: A documented investment strategy allows you to combat emotional impulses during market swings, promoting greater long-term success.
  
• Misunderstanding Tax Burdens: Doctors face intricate tax scenarios. Seeking expert advice on optimal account usage (corporate v. personal, etc.) minimizes unnecessary taxes on investment gains.
  
• “I Can Do It Myself “: Your professional skillset in medicine shines brightest within a team. Apply this mindset to finances. You get unique solutions for your physician-specific challenges when you work with independent, collaborative specialists in investing, tax, insurance, law, and financial planning.

How much should physicians invest each year?

No single ‘magic number’ fits all physicians. Creating a plan based on your unique life goals is crucial. 

Here’s an approach successful doctors use to ensure their finances support their demanding yet fulfilling professional paths:

• ‘Budget’ Isn’t a Dirty Word: Understanding where your income currently goes is the first step to freeing up capital for investing. Budgeting doesn’t imply drastic cutbacks but mindful spending choices within your high-earning potential.
  
• Automation is Your Ally: Schedule regular hands-free investment contributions to ensure you save consistently, regardless of busy weeks in the practice. ‘Out of sight, out of mind’ is a positive tool.
  
• Registered Accounts Are Key: Maxing out TFSAs and RRSPs (or IPPs) provides tax benefits and helps assets grow faster. This approach lessens the need to rely on riskier assets to hit ambitious long-term goals.
  
• Insurance as an Investing Tool: In addition to risk protection, whole life and universal life offer a tax-sheltered savings component known as the cash value. This value can grow over time, providing an additional source of long-term savings for retirement.
  
• It’s a Journey, Not a Sprint: While target savings percentages like 15-20% can motivate, focus on a sustainable saving habit. Progressing steadily over time beats feeling defeated by aiming too high in the early stages. 

How can physicians get help creating an investing plan?

Crafting an investment plan that reflects the complexities of a doctor’s career and income patterns requires specialized expertise. 

Here’s how to ensure your hard-earned savings receive the attention they deserve, maximizing growth opportunities tailored to your unique needs:

• Seek Advisors Focused on Doctors: Standard investment advice often overlooks the challenges physicians face, such as fluctuating income, practice-related liabilities, and the specialized use of corporate holdings. A team understanding these hurdles ensures a personalized strategy for your long-term success.
  
• Embrace a Full-Picture Approach: At Taxevity Insurance, we believe collaboration with a network of independent experts – including lawyers, accountants, and wealth advisors – delivers the best outcomes for busy physicians like you. This integrated, collaborative approach reduces conflicting strategies and unnecessary expenses while optimizing every aspect of your financial ecosystem.

What portfolio allocation is best for physicians?

The optimal physician portfolio balance changes significantly throughout your career and with market conditions.

Consider these guiding principles in partnership with your advisor:

•  Early vs. Late Stage Matters: Young physicians with long time horizons can typically tolerate more risk than those nearing retirement age. However, even early on, factoring in practice ownership, income volatility, and tax structure makes the meaning of ‘aggressive’ vastly different from that of non-doctors.
  
•  Bonds Don’t Equal ‘Boring’: Fixed-income assets and alternatives play vital roles for physicians. They ensure cash flow remains consistent during market down cycles when you don’t want to sell equities at depressed prices, reducing overall volatility. This aligns well with income swings you may already be accustomed to managing.
  
•  ‘Typical’ Allocations May Not Be Ideal: While 60/40 portfolios seem standard, physician income levels often skew needs differently. A wealth advisor specializing in medical professionals may design more sophisticated mixes factoring in income from your corporation, personal assets, and even potentially non-traditional investments as part of your entire profile.
  
•  Rebalancing as Routine: Don’t set it and forget it! Physicians see constant life changes that affect portfolio suitability. Working with a wealth advisor on structured rebalancing maintains that ideal mix to meet your goals as risk needs evolve. 

Should physicians own real estate?

Real estate investing presents specific challenges for physicians that require careful consideration alongside the potential benefits.

Here’s what you should ask yourself before adding significant real estate exposure:

• “Hands-On” vs. Passive: While potentially owning clinical space may make sense, rental/ investment properties bring landlord liabilities. The requirements may clash with demanding on-call hours and a desire for genuine leisure time when not improving patients’ lives.
  
• Illiquidity Is Risky: While stocks can have instant ‘sell’ potential, real estate requires extended timelines and expenditures during transactions. This hinders swift access to your investment gains if you encounter career changes, tax issues, or other scenarios.
  
• Diversification’s True Goal: Adding real estate can be beneficial if done with careful planning. However, if core holdings (stocks, bonds, etc.) already provide strong coverage, the hassle associated with property acquisitions or management may not be the best path.

Ready to Invest Strategically as a Physician?

This guide has provided a starting point for understanding physician-specific investment considerations. However, personalized planning focused on your unique medical career leads to better outcomes than relying on generic information alone. Let’s discuss strategies addressing:

• Tax-efficient maximization of after-tax gains by factoring in corporate/personal assets.
• Asset allocation that accommodates practice income volatility and evolving life goals.
• Incorporating insurance as a cornerstone of a robust investment portfolio while also providing protection.
• How planning today aligns investments with your desired and flexible post-practice lifestyle.
• Uncovering investment opportunities other doctors overlook.

At Taxevity, we’re passionate about finding creative, tax-optimized solutions to give you greater financial control. Our family team approach ensures your unique goals get the undivided attention they deserve.

Invest in your financial future confidently – book your private consultation today. We’ll partner with your wealth advisor, or connect you with one, to build a comprehensive investment strategy unlocking your full potential and securing the future you’ve worked tirelessly to create.

Promod Sharma (FSA, FCIA) and Jeevan Sharma (CFP) YOUR FAMILY TEAM

At Taxevity Insurance, we’re passionate about bringing clarity to complex financial decisions. Let us empower you with personalized strategies to achieve your goals. We focus on life and health insurance solutions to protect your business, your family, and your legacy.