1) XYZ Orthopedic Clinic contracts with FC to sell $100,000 of A/R in exchange for an installment note that will be payable starting in 21 years and will pay in a lump sum when Dr. Smith is 61 years old.
2) The FC takes a 5% factoring fee and invests $95,000 (typically the money is invested in indexed annuities with a minimum guarantee and growth pegged to the S&P 500 index).
3) If that $95,000 grew at 8% for 21 years there would be $371,000 at the end of the 21 year period. That $371,000 would come back to the medical practice via the installment note in lump sum at the end of the 21st year (when Dr. Smith is age 61).
4) The Clinic can use the money for any business purpose and can choose to disperse it out to Dr. Smith as income.
One of the most advantageous aspects of the ABC Plan is that there is NO requirement to fund the plan each year. A physician can decided each year if he/she wants to implement the plan and for what dollar amount.
If I changed the above example to a ten year fund where Dr. Smith took money out starting from age 61-80, the money coming back from the installment note would equal $240,000 a year for 20 years.
ABC Plan vs. Post Tax Investing
In the lump sum example above, Dr. Smith would have done 38% better then taxing his $100,000 home an investing it in the stock market at 8% (net). In the ten year fund with a twenty year payout, Dr. Smith would have done 45% better than post tax investing.
If you are looking for a simple income tax deferral solution that your CPA will approve, has variable funding each year and does not require a contribution for the staff, then you should consider the ABC Plan.