The #1 Reason You Should Have a Qualified Retirement Plan – Episode 233

From the alphabet soup of retirement plans—IRA, 401(k), Roth IRA, SEP, Simple IRA—which one is right for you? 

On this episode of the Dentist Money™ Show, Reese and Ryan discuss the nuts and bolts of the most common qualified retirement plans. Because of the different levels of dental and specialist practices (and with the varying amounts of income they can generate), deciding which qualified retirement plan is the right one for you can be a challenge. 

Reese and Ryan take the mystery out of your retirement plan options. After listening, you’ll feel good about which plan you choose—and why it’s the right fit for you.

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Podcast Transcript

Ryan Isaac:
Today on the show, how to know where to put your savings, pretax or after tax? Which retirement plan should you have in your dental practice?

Announcer:
Consultant advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now, here’s your host Reese Harper.

Reese Harper:
Welcome to the Dentist Money Show where we help dentists make smart financial decisions. I’m your host Reese Harper here with my trusty old cohost, Sir Ryan Issac.

Ryan Isaac:
Yeah. Thank you for having me on the show again after all these years. We are, for anyone listening-

Reese Harper:
Beautiful spring day. It’s a beautiful summer day. Is it summer yet or not?

Ryan Isaac:
Oh, summer. Yeah. Summer starts really early in Phoenix. If anyone’s listening to this down the road, I think it’s May, 2020. The world is slowly starting to open back up through COVID. Dental offices have been shut down for about eight weeks at this point, and most of our clients, from what you’ve heard Reese, most of everybody end of May, 2020 are kind of back to work at this point?

Reese Harper:
Investing money again. I’m seeing savings drafts kick back on.

Ryan Isaac:
Savings drafts are kicking back on.

Reese Harper:
They’re like, hey, I want to start buying this market at a discount. Time to go.

Ryan Isaac:
It’s not as much of a discount as it was six weeks ago.

Reese Harper:
You kind of only had about two weeks worth of that discount.

Ryan Isaac:
Had five days of it. It’s funny you say that. As people are getting back to work, one of the things that did shut down that are starting to kick back on, and that’s the subject of today’s show, is qualified retirement plan funding. So we’re talking simple SEPs, 401Ks, profit sharing. People are starting to go, okay, I’m back on payroll-

Reese Harper:
403B qualified tax savings vehicles.

Ryan Isaac:
Yeah, the 3B.

Reese Harper:
457Rs.

Ryan Isaac:
Yeah, the 412Is. [crosstalk 00:02:02]

Reese Harper:
There’s some esoteric numbers, people, that you will get to know about one day. They’re less common, but-

Ryan Isaac:
We’ll get there.

Reese Harper:
Applicable to the several last generations of investors.

Ryan Isaac:
Yeah, we’ll-

Reese Harper:
401k, SEPs, SIMPLEs. We’re going to get on it.

Ryan Isaac:
Yeah. We’ll hit that list. So that’s kind of been one of the big questions on our audience’s mind over the last couple of months is, especially if they came off W2 payroll, “What do I do with my qualified plan this year? Do I put it off? Do I fund it?” So today we’re going to talk about the role of the qualified plan, especially it’ll be kind of a little different this year, post COVID and coming back and funding a qualified plan. But today we’re going to talk about three pieces of it. We’re going to talk about the role of qualified money. And qualified, by the way, we’re just talking about pre-tax savings money.

Ryan Isaac:
So something that goes into some investment account is deducted from your personal income on your tax return. So what’s the role of pretax money in your savings, in your whole net worth in general? Number two, how do you, your cash flow, your extra savings, your savings rate, as a gauge on what kind of plan is going to be the right plan for you at this point in your life? And then number three, we’ll kind of go through the list. You started rattling off a few of them. We’ll go through a list of the most common types of plans and dental practices, and which ones are usually most appropriate for who, at which stage in career in life. So, first of all, here’s the question-

Reese Harper:
Bing, bing.

Ryan Isaac:
Ding, ding. Oh, you don’t have your-

Reese Harper:
Sounds like a jam packed session.

Ryan Isaac:
It’s a jam packed episode.

Reese Harper:
You’re on your game.

Ryan Isaac:
I am on top of my game. I’m caffeinated. So you don’t have your little C for T anymore that the people demand, the listeners demand the bell-

Reese Harper:
I got Covided into quarantine.

Ryan Isaac:
Okay.

Reese Harper:
At my house.

Ryan Isaac:
Which means?

Reese Harper:
There is no-

Ryan Isaac:
There’s no c-phones. That’s okay.

Reese Harper:
Xylophones, chimes, but it’s at the office. Jason’s got it.

Ryan Isaac:
All right, we’ll get it back.

Reese Harper:
He’s gong to hook me up with it when we get back.

Ryan Isaac:
The people demand the xylophone. So, all right. Number one, I’m going to start with question for you is… And actually here’s going to be a fun exercise for the people following along. If you’re in front of a computer, go to dentistadvisors.com, hover over the services tab and go to Elements. Elements is our proprietary system that we built for doing financial planning, just for dentists. And you’ll go down halfway through the page, is a big bright table… Reese, you have the t-shirt on today. There’s a big bright table of 12 colorful boxes. And if you can just follow along in the bottom row of those boxes, that bottom row is all about your net worth. Things like real estate and practice and pre-tax money and liquidity and your total net worth. Today, we’re going to be talking about what’s the role of all this pre-tax qualified money in that bottom row, which is basically what’s the role of pretax money and your net worth. So let’s just start that as a general question, Reese, for you. How should someone think about the role of qualified money in their entire net worth picture?

Reese Harper:
I think of qualified money as my for sure retirement bucket. I’m not going to use it for anything else, but my basic living expenses during my retirement.

Ryan Isaac:
So you’re untouchable bucket?

Reese Harper:
And maybe if you don’t believe you’re a young millennial that doesn’t believe in the word retirement because you’re a fire generation, then we can let you… For those of you who don’t know where that anger, kind of banter, is coming from, there’s kind of like this annoying thread right now for me, a little snarky of like, “Let’s get financial independence retire early.” That’s what fire means. I don’t know why when things are trendy and popular, they’re just annoying to me. So anyway-

Ryan Isaac:
Yeah, see if they’re around in 20 years and then you’ll respect it.

Reese Harper:
Why is that something new? Financial independence, retire early. Isn’t that the whole point of all financial planning since the dawn of time? This bucket of money, qualified term, really is dedicated money that you can’t touch till you’re 59 and a half or later without a penalty. The government has given you some benefits on it. Meaning they’re going to let you, if you’re willing to put money into this thing and lock it up, then you can get a deduction today or you get to save money on your taxes.

Reese Harper:
In the case of most qualified plans, they are saving you taxes today, but you’re going to have to pay income taxes later. Some Roth or tax deferred options, like a Roth. You get to not get a deduction today, but you get a deferral. And then down the road, you also like in a Roth IRA or Roth 401ks case, you don’t have to pay taxes later. Most dentists won’t qualify for Roth IRAs, if they’re above the average income level of a dentist. And so-

Ryan Isaac:
Yeah.

Reese Harper:
You’re going to want to… Think of these as your… Definitely your bucket of retirement money.

Ryan Isaac:
Yeah. We’ll actually hit that as part of the-

Reese Harper:
And that’s how I think about it.

Ryan Isaac:
Yeah. So how about more specifically, do you have any opinions on the balance between the amount of someone’s net worth sitting in this pre-tax money that until you’re 60 it’s penalize, you can’t touch it. Most people do think about it as untouchable future money versus liquid money that you can get at and access. Any thoughts about the-

Reese Harper:
Yes.

Ryan Isaac:
Balance between the two things.

Reese Harper:
You know I got opinions about everything if you give me a minute.

Ryan Isaac:
Yeah. It’s kind of a funny question to ask you. Do you have any thoughts on this?

Reese Harper:
But you-

Ryan Isaac:
On this thing you’ve been thinking about for 15 years? Yeah.

Reese Harper:
Yeah. So here’s the way I would think about. The balance here for me is, I’m not a huge… If somebody said, if you had a choice and in one scenario, you’re 65 years old, you have $4 million that you’ve saved up. And one person has that. That’s a ton of money, by the way. I think anyone would be stoked. The average person listening here would be stoked if that were their reality. You got millions of dollars saved up. Let’s say it’s four and you have four. It’s either in after tax investments or it’s in pre-tax investments, okay? Pre-taxes are qualified bucket that we’re talking about today or you got after tax investments. That’s more of our liquid bucket that we’ve talked about before.

Ryan Isaac:
And by the way, if you’re looking at that bottom row of Elements on our website, that we’re talking about, the QT that’s qualified and then the LT, which is non-qualified liquid stuff.

Reese Harper:
And if you had the option of which one would I want to have $4 million in, you definitely want it in the liquid one, not the qualified one. Because the qualified, you’re still going to have to pay taxes on. But traditionally, what ends up happening is people who prioritize the qualified bucket in their life or the saving, they won’t. Both people won’t have 4 million. Usually what’ll happen, if you are the person that puts all your money into the qualified, you’ll have more. Seven versus four or 30% more, 40% more. Sometimes 45% more, even 50% more money in the qualified bucket because you got to save all of this taxes upfront.

Reese Harper:
It should result any higher amount of total money that you can save across both your liquid and your qualified buckets of savings. And so, the way you want to think about this is people that prioritize it generally save more money over their careers because they have more total cash in that year to save. Because when you put $10,000 into a 401k, you don’t have to pay between three and $4,000 in taxes-

Ryan Isaac:
Right.

Reese Harper:
… we’ll call it, based on your income level. And so you have three or $4,000 now of that 10,000 that you can put into your liquid bucket and grow it too. But if all you do is the 401k and all you do is the qualified bucket and the other person does the same amount of savings into after tax? I would rather have the after tax bucket. I’d rather have more money in after tax that I would in pretax, because it’s worth more if I had the same dollar. So if you’re going to commit to a qualified plan, which we think is generally a good idea, you should end up saving actually more dollars than the other person that doesn’t commit to this.

Ryan Isaac:
So here’s a question though, that you brought up earlier, what have you noticed about the behavior through this COVID thing? And I think this will apply in the future anytime there’s high levels of stress or market pressure or recessions, what have you noticed about the behavior of people’s qualified money or the way they invest it or the way they think about the risk they take in their qualified buckets versus the stuff that’s in brokerage accounts and mutual funds. That’s liquid accessible, not penalized.

Reese Harper:
Yeah. You’ve probably seen the same thing I’ve seen, but people don’t touch their qualified bucket money. They leave it there. They don’t borrow it out. In many cases, they continue to keep their payroll going to next fund their 401k, even during like a time where they have no cash. There’s, well kind-

Ryan Isaac:
Might as well.

Reese Harper:
… of a pain.

Ryan Isaac:
Yeah.

Reese Harper:
Might as well just keep going with it. I don’t even want to call my payroll person to have this conversation. I’ll see-

Ryan Isaac:
And change things back.

Reese Harper:
… How things go.

Ryan Isaac:
Yeah.

Reese Harper:
And so, a lot of people make the same kind of argument about automated savings. If you automate your savings, it’s going to be less likely for you to want to stop the drafts. But there’s just a difference in how people approach after tax liquid buckets of money, the liquid investments, versus their qualified plans. They just tend to leave them alone and… Or stay more consistent with them.

Reese Harper:
So if I had to say, what’s the number one reason you would recommend a qualified plan to people? In my experience, it’s the money that’s least likely to ever be touched for anything. It’s like sacred money. Like you-

Ryan Isaac:
Yeah.

Reese Harper:
… never think of touching your IRA or 401K to-

Ryan Isaac:
Unless it’s like-

Reese Harper:
… buy a cabin or a house-

Ryan Isaac:
Yeah.

Reese Harper:
… or a car, you’re going to just keep your money in that account.

Ryan Isaac:
Mm-hmm (affirmative).

Reese Harper:
But if in your other accounts, they’re always kind of like-

Ryan Isaac:
It’s up for grabs.

Reese Harper:
We call them liquid. Maybe we screwed it up. You and me, or we’re calling them liquid. We should have called them sort of liquid. But it’s a bad thing to take out of these two.

Ryan Isaac:
Yeah. Don’t touch it. It’s interesting too-

Reese Harper:
Anyway.

Ryan Isaac:
… the way that people think about risk too, because I’m sure you’ve had these situations during COVID where people think about their liquid buckets is, “Hey, should we back off our… Should we stop buying stocks? Should we sell some stocks? Should we wait?” But they don’t always ask that in a 401k. Cause the 401k again is, mentally, it’s this thing that’s 30, 40 years from now. I don’t even care.

Reese Harper:
Yeah.

Ryan Isaac:
There’s better investment behavior in these plans because there is that untouchable wall between the person and the money and they stay invested during these tougher market cycles. Wherein a brokerage account, they might be more tempted to sell out and go on the sidelines or wait or stop investing. Did you notice any of those conversations over the last couple of months? This year?

Reese Harper:
Yeah. I think it’s, you’re right. There’s a lot of people that are much more likely to think about their qualified plans is something they can’t touch until they’re 59. Like I was saying it’s dedicated retirement money so they don’t often touch-

Ryan Isaac:
Just don’t think about it.

Reese Harper:
Yeah. Or they stay more aggressive with it.

Ryan Isaac:
Exactly.

Reese Harper:
Stay more aggressive with it. And I think that’s kind of one of the biggest differences in terms of wealth accumulation between two people, whether you’re earning… Whatever you’re earning, you have a chance to be able to accumulate more if you can handle more volatility and more downside and more risk. And so if you’re willing to… My personal retirement account, it’s a hundred percent stock. But also my brokerage account is, my after tax savings is a hundred percent stock. And I have a lot of clients who invest that same way. Cause they’re a little bit younger, maybe they’re 10 years or more away from needing a withdrawal. But most people in their after-tax accounts, you tend to be more conservative there as well and how you want to invest the money. And-

Ryan Isaac:
Yeah.

Reese Harper:
It’s not always bad, but it does result in less growth over time.

Ryan Isaac:
Yeah. One thing you said, I just want to touch on, we’ll go to the next subject, was kind of like that forced habit. And there’s been times when I’ll see a client build up significant balances in 401Ks or simple areas, whatever they are, and a lot of money in brokerage accounts. But then, the cabin, the second home, the beach house, the “something comes up for grabs” and they’ll just go wipe out a brokerage account. Hundreds of thousands of dollars for a down payment or a big project or something. And then I’m always left thinking, I’m really glad we have that qualified, that retirement plan because this might be the-

Reese Harper:
It’s at least there.

Ryan Isaac:
… single thing. Yeah. This might-

Reese Harper:
That’s left.

Ryan Isaac:
Yeah. It might be the thing that’s left after years of work. Because if that behavior continues, which you wish you could prevent, sometimes. You can’t always. This might be the thing that on top of a practice sale is the saving grace for cashflow in retirement.

Reese Harper:
Yeah.

Ryan Isaac:
It’s got its place. All right. How about right here? Let’s take a little bit of a break and when we come back, we will talk about the role of cashflow and how to divvy up your monthly cashflow into qualified versus non-qualified.

Reese Harper:
We know there are listeners who want to know what Dentist Advisers can do for them, but they’re a little reluctant to reach out. Stop hesitating. Let’s just chat. Our consultations are completely free. You can just call 833-DDS PLAN or go to dentistadvisors.com and click book free consultation. We’ll see you soon.

Ryan Isaac:
Here’s point number two, let’s throw a few examples out for people listening cause these are the questions they’re wondering. How does somebody think about the role of their qualified plan in terms of the cashflow they have left over every month? I’ll give an example. Let’s say someone has 4,000 bucks a month to save on top of their expenses, their taxes. That’s what’s left over, that’s their savings rate is 4,000 a month. We’ve had some kind of general guidelines for where to begin with how much of that 4,000 should go, where, how much should go to build liquidity, how much you go to pre-tax plans. It’s not that simple because different phases of career will allow for different types of plans, which we’ll get into in a minute. And later down the road, someone might have more liquidity and can afford to put all their money pre-tax later in career. But do you want to just touch on some general guiding principles on how to think about your monthly cashflow and how to split it up between pre-tax, untouchable, can’t get at this and after tax liquid accounts savings?

Reese Harper:
Yeah. I think it’s very different if you’re an associate or… And if you’re employed versus if you’re an owner or… Because I think when you’re an owner, the logic for starting a qualified plan is different, I think, than if you’re a participant and you don’t have a choice. And so for talking about… Let’s talk about just briefly the associate’s choice I think is, you can probably allow the majority or a large amount of your savings to start being dedicated to qualified plans after you build your minimum amount of personal liquidity. So a minimum amount of personal liquidity would be what we call a 0.5 LT score. And that 0.5 is basically just like saying six months worth of personal living expenses. So once you’re at that stage, that minimum amount of liquidity, depending on… We always like to look at how much total discretionary money people can save.

Reese Harper:
If you can save only a thousand dollars a month, that’s going to be different than if you’re saving three or 10,000 or in cases where there’s a lot more than that, you’re going to be able to have a different, they’d be able to have a higher amount of money going to qualified plans. But you don’t want to have all of your… The principle, the general principle is you don’t want to have all of your money being accumulated inside of your qualified retirement plan-

Ryan Isaac:
Right.

Reese Harper:
… exclusively. I would say the exception to that is when you’re an associate and there really isn’t an alternative for you to accumulate more money and your qualified plan is-

Ryan Isaac:
That’s your main saving in.

Reese Harper:
… all your savings.

Ryan Isaac:
Yeah.

Reese Harper:
Then I would say, it’s okay to save all of your money inside of a 401k. That would work. But for most people, when you don’t have liquidity, when you don’t have after tax savings, that’s meaningful. I’m saying for most business owners, okay?

Ryan Isaac:
Mm-hmm (affirmative).

Reese Harper:
For practice owners, once you get to the point to where your… If your liquid assets becomes too low, you’re going to start making decisions that you wouldn’t make otherwise. You’re going to start feeling more stress. You’re going to start feeling more financial anxiety and you’re going to get to the point to where you might make business decisions that are poor because you don’t have enough liquidity. And so we like to see business owners not usually dedicate more than half of their monthly discretionary income to qualified plans. So-

Ryan Isaac:
Cool.

Reese Harper:
… you’ve got $3,000 a month, you would only want 1500 going to qualified and 1500 going to after-tax. If you’ve got only a thousand dollars a month, maybe you’re just doing an IRA and an after tax savings. But if, as a business owner, the reason you’re kind of wanting to not just match your retirement plan or put all the money towards qualified is because there’s going to be situations where you get in a rough patch with your practice or your personal life or COVID or COVID 20. We don’t know-

Ryan Isaac:
COVID 30.

Reese Harper:
… what it looks like, right? So if you don’t have liquid assets that can cause you to sort of make decisions in your practice that you wouldn’t normally make and in your financial life, just generally. And so regardless of what’s the most optimal tax efficient contribution, because putting more money into qualified plans gets you the most tax savings, that’s not always the right answer. And you want to make sure that you’ve got some accountability to somebody in your life, like a financial advisor, a CPA that you trust who can kind of give you a little bit of guidance on the mix there.

Reese Harper:
And if you feel like they don’t have any experience answering this question, or they haven’t thought about it ever, it’s probably not the right person to ask the question to. Because people who have seen the side effects of this most wealth managers, who’ve worked with dentists for a while, they would have good insight into this. Yeah, there’s big consequences in the mixture-

Ryan Isaac:
Yeah.

Reese Harper:
… that you have. So I’d say as a general rule, don’t contribute more than half of your discretionary cashflow to qualified plans, but it might be less than that for some people.

Ryan Isaac:
Just depending.

Reese Harper:
And it might be more than that if you’re not a practice owner.

Ryan Isaac:
Yeah, thanks for that. So kind of on that topic, then. We’re in a unique year. Again, people are shut down for two months, cashflow dropped, income dropped. Would a year like this warrant someone who’s going to have now less savings this calendar year, probably. You’re like this in a situation, this warrant them, if you had to make a decision, I can max fund my profit sharing in my 401k, but it’s going to leave me with not very much after tax. But next year 2021 will probably be okay. I mean, situation like this probably makes it all right to break that rule a little bit, wouldn’t you say?

Reese Harper:
Yeah, I think in a year like this though, you might just opt for a much lower total savings amount. That’s a unique year.

Ryan Isaac:
Mm-hmm (affirmative).

Reese Harper:
Right? I think in a year like this though, you got to be particularly cautious about even making any qualified plan contributions if your liquidity is super low.

Ryan Isaac:
Maybe it’s the total other side. You just forego contributions this year to, to build up some liquidity. Maybe you drained a lot over the last couple of months. Maybe you’re worried about this happening and shutting down again within the next 12 months and you need to try to prepare.

Reese Harper:
[crosstalk 00:23:06] backup [crosstalk 00:23:06]

Reese Harper:
Like for me, in the fall, if I have another… Most people, if you look at surveys, there are about half the people say there’s going to be something happening in the fall. And half the people say that… If you survey dentists, right?

Ryan Isaac:
Yeah.

Reese Harper:
About how they feel, it’s not objective, like scientific research, I’m sharing. I’m just saying most dentists, about half of them are feeling like something might happen again, which causes them to lose production later on this year. That could cause you to want to be a little more conservative. You’re not missing out on anything if you just don’t make qualified plan contributions for-

Ryan Isaac:
Yeah.

Reese Harper:
… six to nine months while you’re figuring out your cashflow. I’m a huge liquidity advocate. In addition to that, making sure that your debts aren’t being paid off at too fast of a rate. If you have a choice right now between a seven year car loan and a four year car loan and the interest rate difference is 0.5, just go with the seven year, just protect yourself right now. Like in a normal environment? You’re like, “I’m not putting my car in a seven year loan.”

Ryan Isaac:
Right.

Reese Harper:
84 months for a Honda Civic.

Ryan Isaac:
But now, it’s like, “Well if that saves me an extra 200 bucks a month and I can build that up and have some protection and liquidity in case something else happens.”

Reese Harper:
Yeah.

Ryan Isaac:
That’s a difference maker.

Reese Harper:
Yeah and for some people, we have a lot of clients who… This is just not a factor for, as a wealth manager, most of our clientele ends up being pretty successful people with above average living and above average incomes. But we have a ton of people that are associates, an entry-level, a new career and really early on in their career. And the spectrum of choices-

Ryan Isaac:
Yeah.

Reese Harper:
… it’s different. But for a lot of you that are on the low end of liquidity, meaning you got less than one year’s worth of… Your LT score is less than one [crosstalk 00:24:58]

Ryan Isaac:
Maybe consider skipping it. Yeah.

Reese Harper:
Yeah. I consider even pausing right now just to make sure cause the worst case scenario, you’re going to have lower taxes this year anyway, because your income’s lower and you’re not going to make as much money in theory for those of you who’ve been shut down, which is, 99% of the listeners. And some people have been seeing “emergency patients” at a higher rate than their normal.

Ryan Isaac:
Than regular flow production schedule? So it might be a big task.

Reese Harper:
I’m not going to tell someone that that was the case, but-

Ryan Isaac:
Yeah.

Reese Harper:
They’re like, “Yeah, I have emergency patients, it’s been a little bit of an increase over regular.” I’m like, “So you-

Ryan Isaac:
Yeah.

Reese Harper:
… stayed open the whole time and just saw everybody under a “emergency”.”

Ryan Isaac:
It’s emergency, your discretion. Okay, I’ll say two things to that one.

Reese Harper:
I don’t know what to say, it’s not my place, man. It’s not my place.

Ryan Isaac:
Know your lane. Stay in it, man. You’re good. [crosstalk 00:25:59]. So two things real quick, episode number 53 of the Dentist Money show, which you can find at dentistadvisors.com, it’s titled, Everything You Need to Know About Retirement Plans. It touches on the math behind what Reese was talking about of looking at your monthly discretionary leftover savings money, and then saying, “All right, if the general rule to start with is half of this can be liquid and half can go pre-tax. Then based on the half that’s pretax, I can kind of pick what retirement plan is going to be most appropriate this year.” So that’s episode 53, we spent an hour kind of going through the math of it. And then another thing you mentioned is some owners just have more income than can even fit in a qualified plan. So for some people they build liquidity anyway, because they max out a retirement plan and they’re still just tons of money left over and it can’t fit inside of the most appropriate plan for them at the time. So again, I think you’re advocating-

Reese Harper:
Yeah.

Ryan Isaac:
… though, for someone in your life, who’s got a bigger, more comprehensive view than just your 401k to say, “Yes, this is right.” Or, “Yes, you have enough liquidity.” “No you don’t.” So anyway, let’s take a quick break. We’re going to come back. And the last thing we’re going to touch on is the list of possible retirement plans and which ones are typically most appropriate at different phases in your life and career.

Ryan Isaac:
Hey everybody, here’s a few reasons why you should listen to our next webinar. First of all, the webinar format allows us to teach financial principles in a more interactive way. You get to see live graphics on your screen. Sometimes I draw pretty pictures and we have a live discussion that helps explain financial concepts in more detail. You can even send in questions, live during the webinar and get an answer. And then we always do a Q and A after. So join us next time, go to dentistadvisers.com/events and sign up for the next webinar.

Ryan Isaac:
Let’s just cover the last section here really quick. We promised our awesome listeners that we would go through kind of a quick list of the types of plans that are available to everyone.

Reese Harper:
Yeah.

Ryan Isaac:
And who they most apply to. We won’t go too deep in each one. This is definitely a conversation to call and have with one of our advisors and you can do so at dentistadviser.com and schedule a free chat anytime you want. But let’s kind of hit a quick list of what’s out there, what’s available, and who do they typically apply to? Let’s start at the low, easy, simple, basic end of regular in Roth IRAs.

Reese Harper:
Well, I know what you’re thinking. You’re thinking that maybe the simple little Roth IRA and traditional IRA, it’s just a starter plan. Not you maybe, Ry? But our listeners, they’re like, “You got to get to the big boy stuff.”

Ryan Isaac:
Yeah. Talk to me about the pensions.

Reese Harper:
To really spice it up.

Ryan Isaac:
Or 12Is.

Reese Harper:
It’s not Cajun spice. The thing to remember is for most of you who make less than or very close to the average dentists nationally, which is always a fun debate, but you’re in the high 100s, low 200s.

Ryan Isaac:
Okay.

Reese Harper:
It would be surprising if the average dentist was in the mid two hundreds, but that would be your kind of general range. In my opinion, anyone at the mid-200s or lower, I would probably just say, stick with a traditional IRA or a Roth IRA. You can only qualify for a Roth IRA if your income is below 196 to 205 in 2020, something really close to that. You’ll have to Google it. But you’re probably better off with a Roth or a traditional IRA. And the reason I think that is just, it’s a lot simpler. It’s very inexpensive. You don’t have to have employee matches or payroll or time spent or annual filings or worry about compliance or get in trouble with-

Ryan Isaac:
Yeah.

Reese Harper:
… some kind of employee loans. And a lot of people adopt the 401k too early. In my view, the priority is after tax assets and high savings rate, getting your… Even for some of you, the priority might be getting a portion or a large chunk of a student loan paid off, as a good way to get a nice return. Because you’ve got enough liquidity now, but your student loans is still at 7% and it’s not tax deductible.

Reese Harper:
I mean, there’s still like a lot of things to do before I would say, “Lets start a 401k plan.” Because when you go to 401k plan in my mind, you’ve got to go big. You don’t go small. You really got to be able to put all of your money into this deferral. You want to get 19,000 plus away.

Ryan Isaac:
Yeah.

Reese Harper:
And you don’t want to just be put-

Ryan Isaac:
Preferably a spouse too.

Reese Harper:
And a spouse.

Ryan Isaac:
If possible.

Reese Harper:
And you want to be in an opportunity where your spouse is doing work for your practice and getting compensated for that. And consequently, why wouldn’t she just put money in the 401k? But most people with an income in the mid-2s to low-2s, to high 100s, I just don’t see the trade off being worth it. It’s a lot of work.

Ryan Isaac:
Okay.

Reese Harper:
And to me it’s like… For most people you should just stick with the traditional IRA and Roth IRA. Those are nice.

Ryan Isaac:
Yes.

Reese Harper:
The Roth IRA, you pay taxes now and you’ll never, you pay taxes on the money today and you never pay taxes again on it, which is nice. In the traditional, you get a deduction, it’ll save you some money. If your income is much into the 2s, low to mid 2s, I definitely… Even high 100s. Okay? High 100s. I’d still probably go traditional. Cause I don’t want to have one year where I can do a Roth and then I ended up with this random Roth account. That’s like the-

Ryan Isaac:
Everyone’s got the random Roth.

Reese Harper:
… the orphan Roth. It’s like, “Yeah, he got a Roth.”

Ryan Isaac:
Yeah.

Reese Harper:
We all thought it was going to be like… And then it’s like you can’t qualify for it and so you stop funding it. I would just rather have all my money in the account. I’m going to continue to fund. So if you think your income is going to kind of stay at that low 2s, high 1s, mid 2s-

Ryan Isaac:
Do an IRA.

Reese Harper:
Call it an IRA, spouse it, call it good.

Ryan Isaac:
Spouse it. Call it good. In the IRA family, you do have the SEP IRA, which is an exception for great opportunity for associates on 1099 with their own S corporate LLCs, new practice owners whose employees will not qualify for the SEP. They’re easy to set up.

Reese Harper:
Man, that’s a gold mine.

Ryan Isaac:
Big limits.

Reese Harper:
Love the set.

Ryan Isaac:
They’re awesome. Yeah. There’s, there’s some nuance to it. So call your CPA and your financial advisor, [crosstalk 00:32:29] if you want to chat about it.

Reese Harper:
Yeah, you can’t just set up a SEP and think that you’re fine. There are some things here, you can run awry.

Ryan Isaac:
Don’t mess it up. Okay.

Reese Harper:
Don’t run awry. Your next level is the old SIMPLE IRA.

Ryan Isaac:
Now we’re into the world where you’re involving payroll and employees and matches and a good chunk of laws from the government making you stick to certain things. And so now we’re in that world that it’s at the practice levels. Yeah. So you have the SIMPLE IRA, which is easier. Listen to… It’s in the name.

Reese Harper:
There’s some decent platforms out there that can administer a SIMPLE IRA and it’s not the hardest thing in the world. I mean-

Ryan Isaac:
They are easier than a 401k. Yes.

Reese Harper:
Yes. There’s still a little bit of a pain, still some matching. You’re not getting like, “When would I do SIMPLE?” I’m starting to consider a SIMPLE in that mid-200 range. I’m probably not-

Ryan Isaac:
Yeah.

Reese Harper:
… considering it in my low 2s or high 100s. Are you?

Ryan Isaac:
I don’t know, man. The only exception to that would be, definitely don’t qualify for Roths, spouse is on payroll and can also contribute to the SIMPLE-

Reese Harper:
Your living expenses are super low and-

Ryan Isaac:
You’re liquid enough.

Reese Harper:
… and you got a lot of liquidity and you can save, your income’s in the low to mid 2s, but you’re saving 5,000 a month or more.

Ryan Isaac:
Yeah, we’re talking about this magic sweet spot. I mean, back to section two, what we talked about today, you don’t want all of your free cashflow going to the SIMPLE IRA between, so you’d have to have low expenses and high savings rate to pull that off. But then you’ve got the move from the simple to the 401k. Are you going to say something else there?

Reese Harper:
No, that’s great. You’re moving up a market.

Ryan Isaac:
Okay.

Reese Harper:
The 401.

Ryan Isaac:
We’re moving up, moving up in life. We’ve talked about this on other episodes when people are considering this, at the point where spouses on payroll also doing a 401k and for me, it’s a no brainer when profit sharing is near. When profit sharing is near, which you have to have 401k in place into your profit sharing, then a 401k over a simple IRA is a no brainer. If the profit sharing makes sense.

Reese Harper:
For those of you who don’t know, real briefly, a 401k allows you to deduct a certain percentage of your income or a certain dollar amount of your income. This year-

Ryan Isaac:
It’s your paycheck.

Reese Harper:
… it’s up to 19,000.

Ryan Isaac:
I think it’s 19,500 or maybe that’s 2021. I’d have to look-

Reese Harper:
Look it up so people don’t get upset with you.

Ryan Isaac:
Yeah, I Googled it. So you go up to 19,500 and then on top of that, you can do a match of some kind from your business bank account.

Reese Harper:
Mm-hmm (affirmative).

Ryan Isaac:
I mean, it’s 19,500. [crosstalk 00:35:08].

Reese Harper:
And that match ranges anywhere from 3 to… You can go over 6% or more, depending on how you want to design your 401k.

Ryan Isaac:
Yeah.

Reese Harper:
You can also add what’s called profit sharing to a 401k, which means that you can do a discretionary contribution that lets you put up to the full profit sharing maximum away. Right now, you’re going to be looking depending on which year you’re looking at doing, you’re going to be in the high 50s, mid 50s.

Ryan Isaac:
Mm-hmm (affirmative).

Reese Harper:
Right?

Ryan Isaac:
Yup.

Reese Harper:
And that’ll allow you to put away a big chunk of money. And then you’re going to have to give away quite a bit to your team though, when you do that. Not a ton, but sometimes it might be like, you got to give away 5%, 6%, four and a half percent.

Ryan Isaac:
Yeah.

Reese Harper:
So the way you got to know, if this is good for you is you got to look at the total contribution that you’re making to the plan and see how much of that is going to you versus your team. And then decide if that’s maybe worth it? It could still be worth it. Even if your team is getting a lot of the money because they really value it. And you want to build the type of culture that has low turnover and creates a really stable, nice employment package and benefits package for your team.

Reese Harper:
And I’ve seen a lot of specialists who are like, “Look, man, my positioning in the market is I’m an orthodontist with low turnover and I do not want people leaving and they’ve really value having health insurance and a retirement plan.” And so in that case, the math isn’t like as, we’ll call it one side, that you’re not just looking at how much you’re getting away and then saying, “Is this worth it?” But in the most cases, Ryan and I would look at a lot of qualified plans and kind of… We like to look at what percentage is going towards the owner’s family and household versus team, and then decide if that makes sense. Because some teams just don’t value that. They would rather have a smaller cash bonus. They’d rather have gift cards at the end of every month to Applebee’s.

Ryan Isaac:
Yeah. Shout out to Applebee’s.

Reese Harper:
Shout out to Applebee’s.

Ryan Isaac:
Jeez. I mean, I could have said Chili’s.

Reese Harper:
Yeah.

Ryan Isaac:
For everyone listening, you’re just saying like, and this is a multiple hour per year job when you start analyzing profit sharing. Above that, that integrates with the profit sharing and 401k is you’re talking about pensions, cash balance plans. Those are for high income, lots of savings rate, but they have to make sense so you don’t spend too much on them on… Don’t give away too much of that money and that is multiple hours that a good financial advisor or CPA will deal with. Here’s the bottom line is, we’re talking about, we’ll wrap all this stuff up. If you go to dentistadvisors.com and click on the Elements page, halfway down, you’ll see this color colorful table, colorful table of these squares. This month, we focus on one of these subjects, one personal finance subject per month.

Ryan Isaac:
The month of May coming up, is the QT month. It’s qualified term. How much of your net worth is in qualified money? This is the month where we tackle these questions. Should you have an IRA? Should you upgrade to the SIMPLE? Should you upgrade from the SIMPLE to the 401k? Is a time for profit sharing? Is it time for cash balance plan? That’s our job. And so if you’re wondering, “Oh, this seems like a lot. Can someone just do this for me?” Yes. This is part of our job that we do. And this the month that we spend hours analyzing this stuff and making sure it’s done right. And what you set in motion for a qualified plan for one year does not necessarily mean it’s the right one for next year and the year after that. These things do change as you progress throughout the phases of your career.

Reese Harper:
Yeah. [inaudible 00:38:42]

Ryan Isaac:
Just because you started with the old 401 doesn’t mean you’re going to stay with it-

Reese Harper:
No.

Ryan Isaac:
… your whole career.

Reese Harper:
And shout out to the real 401. Our dentist friends up in Rhode Island, all 400 of you in that area code, shout out to the 401.

Ryan Isaac:
To the actual 401.

Reese Harper:
Yeah. Good friends.

Ryan Isaac:
All right, well, thanks everyone for tuning in today. We really appreciate it. We’re hope everyone again, we’re end of May, 2020, coming out of the shutdown. I hope everyone’s doing okay. If you have questions and you want to talk through a lot of the nuances and complications and things that maybe you’re encountering now from all the changes have happened, just go to dentistadvisors.com, click on the book, free consultation button, have a chat with one of our advisors or go to our Facebook page. Post a question in our Facebook group. It’s dentistadvisors.com/group. We’ll go in there and answer it. And thanks for tuning in. Thanks for the support. Thanks for all the love. We appreciate it. And we’ll catch you next.

Reese Harper:
Carry on.

Retirement Plans