When to Switch From a Simple IRA to a 401(k) – Episode 268

Simple IRA or 401(k)? Which retirement plan is best for your dental practice?

On this episode of the Dentist Money™ Show, Ryan and Matt examine the pros and cons of Simple IRAs, which most offices start with, and 401(k)s, which many offices move to.

During your career, when should you use an IRA, Simple IRA, or 401(k)? And what’s the right time to shift from one to the next? Can you be too aggressive when moving up to a new plan? Knowing the answers could add hundreds of thousands of dollars to your net worth.

 

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Podcast Transcript

Ryan Isaac:
Hey everybody. Welcome to another episode of the Dentist Money Show. Today, Matt and I talk about when it’s time to switch from a simple IRA to a 401k, a pretty common question a lot of practices have, and what are some of the limitations, pros and cons of each type of plan and when it’s time. Thanks for joining us and thanks for tuning in. If you have any questions about any of this stuff, you want to chat with one of our very friendly dental specific advisors, go to dentistadvisors.com, click the book free consultation button and let’s schedule a chat. And as always, appreciate you for being here, enjoy the show.

Announcer:
Consultant an 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, Ryan Isaac.

Ryan Isaac:
Welcome to the Dentist Money Show where we help dentists make smart financial decisions. I am your bald and bearded host, humble servant, Ryan Isaac, here with another bearded host.

Matt Mulcock:
But not bald.

Ryan Isaac:
Not bald. I was going to say very hairy, but you’re Matt Mulcock, the Hollywood mountain. I don’t know if you’re very hairy or not, but you’ve got hair.

Matt Mulcock:
Hairy Hollywood mountain, here I am.

Ryan Isaac:
I mean, if we were going to just make this more succinct, we would just say, I’m Ryan, that’s Matt. We’re grateful to be here. Thanks for joining us.

Matt Mulcock:
Let’s just get to that point. Yeah, let’s get to that level.

Ryan Isaac:
All right.

Matt Mulcock:
Matt, Ryan, here we are.

Ryan Isaac:
Matt, Ryan here we are-

Matt Mulcock:
I’m Ryan, you’re Matt. Oh wait, no.

Ryan Isaac:
We’re whatever.

Matt Mulcock:
We’re people.

Ryan Isaac:
You’re here again with us on the illustrious Dentist Money Show. We thank you for joining us five years in the making. Hopefully, we’re adding some value to your life, your day, your week, something along those lines, making some smart financial decisions out there.

Matt Mulcock:
Maybe you get a breakaway from your kids to listen to us or something. If that’s it, that’s enough for us.

Ryan Isaac:
If that’s it, you might have a wild kid. If this is a break.

Matt Mulcock:
If this is a break for you.

Ryan Isaac:
We’ll keep it anonymous, but we actually got a text just five minutes ago from a listener who said that a recent episode helped change her perspective on holding too much cash, and that it was a benefit. And so, very cool. We like to hear that. If you’ve had a positive experience from a piece of advice or an episode you listened to, man, text us, DM us, email us, leave an iTunes review. Those would be really helpful.

Matt Mulcock:
Yeah. It honestly, not to sound like cheesy, but I’m going to, that honestly made my day getting that text. To know that we’re having that impact and she took the time to text and be like, hey, this literally changed the way I’m approaching this, it was awesome. She even said at the text, you’re changing lives. I’m like, man, we’re basically doctors.

Ryan Isaac:
We’re basically doctors. I’ve always wanted to be an ortho with two locations. This person works with dentists, is not a dentist. And it’s really cool, the reach. When we made this podcast years ago, there’s 200,000 dentists in the country, the goal of the podcast was to just, it was to teach. This is kind of our way to do marketing was to just give as much good free information as we can, and the people who agree with us and align with us and think the way that we do, they’ll hire us, they’ll reach out and that’s the way it’s gone.

Ryan Isaac:
But we also recognize that the vast majority of people out there, even if they listen to the podcast might not ever hire us. And we still want to be able to add something back to the dental community because if dentists as a whole are happier, more successful doing better then we’re all doing better. So, glad to hear it. Matt, today on the question, on the show, today on the question.

Matt Mulcock:
Today on the question, the show is.

Ryan Isaac:
Today on the question folks, on the old show question, we have a question that we’re going to, it’s pretty common and we’re going to answer this question, but we’re going to give some more background around it because it’s kind of a helpful topic. It has to do with retirement plans and the type of retirement plans you have at your office. When we say retirement plans at the office, we’re talking about specifically plans that you set up at your company that you and employees participate in. There’s money you can put in, there’s matches, There’s rules.

Matt Mulcock:
Goes through payroll.

Ryan Isaac:
Goes through your payroll. So we’re talking about simple IRAs, SEP IRAs, 401k, profit sharing, cash balance, pensions.

Matt Mulcock:
All the good stuff.

Ryan Isaac:
All the fun ones. All the easy to understand retirement plans. The simple question where this is going to begin …

Matt Mulcock:
I see what you did there, the simple question, pun intended. Okay. All right. All right.

Ryan Isaac:
I actually didn’t even think about that. Yes, I did. The simple question folks is, when do I switch my office from a simple IRA to a 401k? Now, awesome question, first of all. And we’ve got to give a shout out to the dentist advisors discussion group on Facebook because I think this is where it came from. I don’t know, maybe not.

Matt Mulcock:
Yeah, I’m pretty sure.

Ryan Isaac:
This is where a lot of questions come from and they end up becoming either direct answers. We’ll answer on Facebook lives, we’ll do podcasts, or they just become general topics that more people want to hear about. So, when you ask a question, you’ll get an answer but you’re also helping other fellow dentists get answers to similar questions.

Ryan Isaac:
So, let’s start with a little bit of background though. Let’s start with why someone has a simple IRA in the first place. And let’s lay some assumptions as groundwork. Some of the assumptions would be, someone who has money to save. They are in charge of a business that they own. So they’re in charge of putting a plan in place, a retirement plan. And we’re assuming that was like the desire of someone in the first place. They’ve got money to save, they want to put money in a pre-tax retirement plan, helps lower their taxes, helps them save money. That’s the assumption we’re starting with. So, for someone who’s gone through those things and has a simple IRA, Matt, let’s start there, what is a simple IRA? What are some of the pros of a simple IRA? Why does someone do it? And bonus question, SIMPLE, S-I-M-P-L-E is actually an acronym for what?

Matt Mulcock:
I’m looking it up right now because I literally don’t remember it.

Ryan Isaac:
I don’t remember either. But we can start there though as you google that. You kick us off. Why do people have a SIMPLE IRA in their practice in the first place? What are some of the good things about a SIMPLE that makes someone do it?

Matt Mulcock:
I totally knew this. Savings, incentive match plan for employees. This is the dumb one, where the government decided to make PL in plan, the PL in the acronym, like, come on. I mean, it works I guess.

Ryan Isaac:
They cheated the acronym rules. As we all know the longstanding acronym rules of modern society, that without them, we would crumble. Every letter of an acronym has to stand for a separate word.

Matt Mulcock::
Everyone knows that. The only words that you can intermix there is like a and of. That’s pretty much of.

Ryan Isaac:
A, of and maybe some thes.

Matt Mulcock:
And the, okay, I’ll give you that.

Ryan Isaac:
Or an as.

Matt Mulcock:
You can’t take PL, you can’t make two letters in the word part of the acronym.

Ryan Isaac:
In the same word. They can’t share the word, guys.

Matt Mulcock:
I mean, do you expect anything less from the IRS?

Ryan Isaac:
First of all, we’ve got a big problem with this acronym.

Matt Mulcock:
Yes, That is our first thing.

Ryan Isaac:
We’re here to tell the truth and deliver only the truth to you as loyal Dentist Money Show listeners. And the truth is, that’s bad acronym.

Matt Mulcock:
It’s a bad acronym.

Ryan Isaac:
Bad acronym.

Matt Mulcock:
Bad acronym. Let’s get back, what was the question?

Ryan Isaac:
The question was, why does somebody have a simple IRA in their office in the first place? Why do they do it, what are the pros of it? What is it?

Matt Mulcock:
So, simple IRA. I kind of look at this and the way I explain it to people is, there’s different levels of these plans that you can have at the office again. This is the first, I’d say the first level of a retirement plan at the office, which is different than let’s say a traditional IRA that is a personal account outside of anything that you have through your business.

Matt Mulcock:
So, the main reason a business owner, a dentist would set this up, in our mind, in my opinion, would be to start saving money in a pre-tax fashion for themselves. That’s step number one, or that’s the kind of the first-

Ryan Isaac:
In a higher amount than a personal IRA.

Matt Mulcock:
Exactly. The higher amount.

Ryan Isaac:
As of right now, is it 13-5 for this year?

Matt Mulcock:
13-5 for SIMPLE IRA plus your match. And that’s for you. And if you have your spouse on staff as well, versus a traditional IRA, which is 6,000 for each. It’s double, it’s over double what you could put into a traditional IRA. So that’s the first thing is you want to be able to have a way to save money in a pre-tax to reduce your taxable income and save for retirement through the office and then outside of your normal means.

Ryan Isaac:
It’s a pretty good amount. Why is SIMPLE then? Because there’s a lot of plans allow people to do that. Why do people start with the SIMPLE usually?

Matt Mulcock:
I know we just kind of joked about it, but as it’s stated, as that incredibly horrible acronym states, it is simple. They are simple to set up. They’re generally low cost. So, you can go through different brokerage firms, different companies to get them set up. They’re pretty basic to get going. And again, lower costs than let’s say a 401k. And less complicated than a 401k, less regulations around them. They’re pretty cookie cutter. So I think when people have extra cashflow, when a business owner or a dentist has extra cashflow, wants to start saving for retirement, generally they look at that, that’s why I call it kind of level one when it comes to complexity and cost.

Ryan Isaac:
Yeah, it’s easy. So you can put away 13,500 bucks out of your paycheck. If you’re over 50, there’s a catch-up. So even more. Is that 3000 this year?

Matt Mulcock:
3000 for a SIMPLE.

Ryan Isaac:
So that’s 16-5 in a SIMPLE IRA if you’re over 50. And if you have a spouse on payroll, I mean, you’re talking almost $34,000. 33 in between the two of you just in deferrals. Then the company matches you, in a SIMPLE IRA, the typical common matches a 3% match. And keep in mind, when you set up these plans and there’s a match, the match is only when someone puts the money in and the match is like a ceiling. It’s 3% of your salary. So if you’re a doctor and you make, if you have a 100,000 W-2, and you put in at least that much, your company will match up to 3% of your salary, which would be three grand. And then it’s the same for all the employees too.

Ryan Isaac:
The beauty I guess for a lot of doctors or business owners, is many employees, it’s not good for them, but it’s for the owner in terms of expenses and costs. Most employees don’t put money into these plans. So the match expense I guess what I’m getting at is fairly low and it’s mostly just a benefit to the owner and the spouse if spouse is on payroll. So, yeah, that’s kind of how, that’s the basic nature of it.

Ryan Isaac:
Matt, what are the downsides to a SIMPLE IRA? Because I think this will lead us into the discussion of when is it time to move to a 401k. There’s a few pieces to why you would want to switch to one, and some of the downsides to a SIMPLE IRA, those are some of the reasons I think.

Matt Mulcock:
Yeah, I think for sure. So the downside, kind of the easiness, the simplicity.

Ryan Isaac:
It’s totally a word.

Matt Mulcock:
It’s totally a word, let’s make it up easy. The simplicity of a SIMPLE IRA is also in some ways what leads to some of the headaches with it as well. So meaning there’s no one, when you set up a SIMPLE IRA, because there’s no requirement for a third party administrator and they’re pretty cookie cutter plans.

Ryan Isaac:
And there’s no annual tax filings.

Matt Mulcock:
There’s no annual tax filings.

Ryan Isaac:
401k has its own tax return. You don’t have to file anything every year to anybody for SIMPLE IRA.

Matt Mulcock:
So with the simplicity comes no real requirement for oversight. What it comes down to is that’s really on the dock, really on the owner to make sure that payroll is being done correctly, the administrative side is done correctly, that you’re not over-funding, that you’re doing your match correct. All of these different things that go into it. Again, the idea of it, on paper, it’s pretty straight forward. But as you get busy and you’re doing things, no one’s looking at that, no one’s overseeing that from an administrative side, other than you as the doc. And so, that’s where it can create a lot of headaches. We see this all the time with SIMPLEs.

Ryan Isaac:
All the time. Every year without fail, I end up having to jump in and help somebody fix a SIMPLE IRA. What are the moving pieces we’re talking about? Well, first of all, you have the deferral from your paycheck, the money you’re going to save from your paycheck. So that’s a transaction between you and the payroll person having to record it correctly, and then getting the money to your simple IRA account. There’s a few steps. Then you have to have a match, that’s totally required. The match has to be calculated correctly based on your deferral amount, your eligibility obviously, and your salary. So that’s also another transaction between you, the employee and the owner and payroll, and then getting that money, that match money into your account, the proper account. Then you have to replicate this across all the participants in the plan.

Ryan Isaac:
Then once the money hits the investment accounts, then the investment advisor or the firm in charge of that, their only job in a SIMPLE IRA is to take the money that shows up in a bulk amount and invest it in each account. Some of the issues here are, for example, as an investment advisor, if a client sends in their $13,500 deferral out of their paycheck, and then, I don’t know, 5000, 6,000 bucks of match on top of that, let’s say they did it in one chunk, as an investment advisor, I only see the $19,500 total. My bank, my custodian, the people who hold the investment accounts, they’re not the tax advisers, they’re not the payroll company, they’re not splitting these out saying, hey, part of this is deferral, part of this is match. This is for the year 2019. Nobody’s doing that on the account plan.

Matt Mulcock:
The money just comes in.

Ryan Isaac:
It just comes in and the investment advisor has the fiduciary duty to invest it according to the investment policy, investment plan. So there’s all those three moving pieces. Along the way, what are some of the common mistakes? Well, you got over contributing, that happens all the time. You send in 13,700, like oops, I forgot.

Matt Mulcock:
Couple extra hundred bucks, no big deal.

Ryan Isaac:
Over-contributing. You have forgetting the match, you have doing everything right through payroll but forgetting to send the money in. You have, let’s see, sending it to the wrong accounts. So sometimes it’ll get, one employee’s match will get switched to the other-

Matt Mulcock:
Sounds like you’ve seen these things before. It sounds like you’re going off a list of experience it sounds like.

Ryan Isaac:
Every year. As everyone knows, lots of stuff can happen between you and your paycheck in payroll. Maybe they just don’t record the right amounts and the money gets sent in, but it’s never recorded, or it’s recorded incorrectly but different amounts get sent in. So all of these moving pieces, the full responsibility of making sure they have and correctly land on the owner of the business, which is the dentist. As if the dentist didn’t have a million other things to do. Suddenly this SIMPLE becomes, get ready for it, a lot less simple.

Matt Mulcock:
A lot less simple.

Ryan Isaac:
A lot less simple.

Matt Mulcock:
Which makes the acronym even worse.

Ryan Isaac:
It makes the acronym, bad acronym. That’s the theme of today’s show, bad acronym.

Matt Mulcock:
Now the acronym it doesn’t even make sense, it’s not simple.

Ryan Isaac:
It’s not simple anymore. So what started as a plan that was cheaper than a 401k and seemingly pretty easy, can become kind of a pain. Now, a lot of people do this just fine every year, it’s okay. But I’m telling you, I fix at least one SIMPLE IRA plan every single year. But it’s usually more, and it’s for one or more of all of those reasons that I listed. So, it gets tough. And so, the whole responsibility is just on the doctor, and that just becomes a problem overall.

Ryan Isaac:
Anything else you can think of that’s a downside of a SIMPLE, or maybe a limitation? It doesn’t even have to be like a con or a downside, but a limitation maybe?

Matt Mulcock:
Yeah. I think you hit the main things there. That’s the kind of the core of it. I was just thinking, as you were saying, it’s cheaper and I think a lot of times docs will go, their first thought will be SIMPLE because of the low cost. But they’re not thinking of all these other costs that may come with it outside of the financial cost, the headache and the issues that may come up. I think the issue for us as advisors when we’re working with people with SIMPLEs is, a lot of times, their expectation is that we are the ones that are the administers on it, right?

Ryan Isaac:
We’re watching payroll and making sure the match is done correctly.

Matt Mulcock:
Yeah. So making sure that they understand, when we’re having these conversations with the client, helping them understand the expectations that are there, the role that we play in it. And not just us, any advisor you have that’s “managing the SIMPLE,” it would be they’re managing the assets that are in it, the investments that are in it, but not necessarily the administrative side of it. I think you pretty much hit the big things, the one other limitation that I’d say just to be aware of is this limitation of once the plan is shut down, let’s say you have it for a year, and then you decide, okay, I’m going to “upgrade” to a 401k now I’m ready, and we’re going to hit the reasons why that may be, and you’ve had it only for a year, you can’t do anything with that SIMPLE for a full other year. You have to leave the money there for two years in order to roll that, what we’d say a roll over anywhere else.

Matt Mulcock:
So, there’s a limitation there. Again, it’s not like a deal breaker, but it is another issue if you’re using it as kind of like a stepping stone to a 401k.

Ryan Isaac:
Yeah. I was going to add on top of that too, a limitation, this isn’t a downside, but a limitation of a SIMPLE IRA is obviously there’s not anything bigger you can add in addition to it. So if you’re a practice where there’s a lot more cashflow, you have a lot more personal savings and it kind of makes sense in the numbers with your employees and your census to do profit-sharing contributions or a cash balance or a pension, that’s not something that can be worked in addition to a SIMPLE IRA. They just kind of just stop where they are.

Matt Mulcock:
It’s a do it yourself plan, that’s really what it is.

Ryan Isaac:
It’s kind of do it yourself. It’s do it yourself. It’s archaic. A lot of the stuff still has to get mailed in by physical checks and printing things out and mailing with your techs. There’s a couple companies out there. Honestly, I think, unless you know of other ones, I think American Funds might be one of the only ones that has kind of a pretty dedicated system to SIMPLE IRAs. Downside, of course, is that American Funds might not be the fund family you want to invest your entire pretax retirement plan in. You can only use their funds, it’s actively managed. That might not be your philosophy. You might not want to pay the cost that they charge. But they have kind of a managed system that’s a little bit more advanced than other places. And so, that’s kind of just the way the industry works and that’s part of the problem.

Matt Mulcock:
SIMPLEs are very much like a transition type plan. It’s like a stepping stone. Very rarely do I see a dental office set up a SIMPLE and have it for 15 years.

Ryan Isaac:
It’s like the training wheels of retirement plans.

Matt Mulcock:
Yeah. When we have these conversations in the docs like, hey, I’m saving more money, I have some good cashflow, I want to start saving some money on taxes and saving for retirement, what about a SIMPLE? My first thought is, well, are you going to be ready for a, maybe you’re not ready for a 401k right now in this year, but is there a high likelihood you’ll be ready for a 401k next year with your cashflow, with your growth rate of your business? Probably. And so, why go through the hassle of setting up a SIMPLE? You’re probably better off throwing some money into an IRA for each of you, you and your spouse, waiting another year and setting up a 401k.

Ryan Isaac:
Yeah, I think that’s smart. It’s kind of like, for all the parents out there that have trained kids to ride bikes, it’s like the Strider bikes of retirement plan.

Matt Mulcock:
Which are killer by the way.

Ryan Isaac:
To me, it’s the best way to teach kids to ride bikes.

Matt Mulcock:
They’ve accelerated the age of learning, I see three year olds out there riding bikes better than me.

Ryan Isaac:
It took me till our fourth kid to realize that a Strider bike was the only way to teach a kid to ride a bike, because previous to that, I’ve got nine year olds that I’m holding on one handle running down the sidewalk and being like letting go and then they crash into bushes and fences. And I’m just like, this is the dumbest system ever. This is so broken. Someone’s got to figure something out. Shout out to Strider bikes. When we come back, we’ll talk more about why you should switch to a 401k when the time is right. Be right back.

Ryan Isaac:
Matt, it’s time.

Matt Mulcock:
Time for what, Ryan?

Ryan Isaac:
It’s time to book a free consultation at dentistadvisors.com. Just click on the big book free consultation button on the homepage and talk to one of our friendly advisors today.

Ryan Isaac:
Matt, let’s go to now the question, why should I switch from a SIMPLE to a 401k? Hopefully the point was not to disparage SIMPLEs. And by the way, I always like to bring this up, we are a fee only fiduciary financial advisor. The fee only part means that we don’t get paid differently if you set up a simple or a 401k with us. I like to bring that up just to make sure it’s very, very clear. We don’t have a dog in this hunt other than making your life easy and keeping extra work off your plate so that you can just do better and more dentistry and enjoy your life.

Ryan Isaac:
Let’s talk about some of the reasons then why moving to a 401k will be helpful in some people’s cases. And we might have, I mean, we kind of really set the stage for some of the, maybe the shortcomings or the limitations, or even some of the cons of a SIMPLE IRA. But where do you want to begin? What would you tell a client, Matt, am I ready for a 401k? What are the some of the first questions you’ll start asking or first place you’ll start?

Matt Mulcock:
Yeah, the first thing I’m going to look at is cashflow. So, I’m going to look at their cashflow statement. I’m going to look at how much free cashflow they have, meaning after their taxes are paid, their living expenses are paid, their regular debt payments are paid, how much is leftover to save. So, that’s the first thing I’m going to look at. So, to give an example, if they have let’s say $1000 a month, $12,000 a year in free cash flow-

Ryan Isaac:
Left over for savings.

Matt Mulcock:
For savings. We’re not going to be advocating for a 401k at that point.

Ryan Isaac:
Or a SIMPLE IRA.

Matt Mulcock:
Or a SIMPLE IRA, because every dime you have would be going into that pre-tax bucket that you can’t touch, that we would not, and there’s nothing left over. It’s kind of like this whole idea of being house poor, it’d be like you’re retirement plan poor. We don’t want that to be the case.

Ryan Isaac:
That’s a really good point, being retirement plan poor. You’ve probably met a lot of people. I mean, it’s noble, they built up a lot of money in a 401k or a pension, but they feel it though. This isn’t just a knock on them, they feel it. It’s all sitting there, locked up, I’m going to pay tax on this money, I got no liquidity after tax, and they feel it.

Matt Mulcock:
We obviously advocate for pretax plans and being able to proactively reduce your taxable income as much as you possibly can through legal means. And a retirement plans is one of the best ways to do that. But if you’re putting every dime you have into a retirement plan and you’ve got no cashflow leftover to put anywhere else and to have that, you reduce your flexibility. So, that’s the first thing I’m looking at is cashflow.

Ryan Isaac:
Yeah, really good point. So cashflow, and if someone just has more cash flow than the higher, what you’re getting at is the higher limits of the 401k would just end up saving people more. Now, the first thing someone will say though, is what about the expenses of a 401k. Let’s go there first because there’s also limitations and downsides and cons to a 401k. Let’s talk about the expenses, like what’s normal, what does it pay for?

Matt Mulcock:
Yeah. So kind of what we were highlighting when it comes to the simple IRA, the fact that there’s no third party administrator that’s making sure that everything’s being done correctly. With the 401k, there is. So you’re going to have a third-party administrator, you’re going to have a record keeper that’s involved in the setup and administration of that plan. Well, that’s where the cost really comes in. When you talk about the differences in cost between a SIMPLE IRA and a 401k, that’s really what it comes down to. So the administration of the plan is making, oh, sorry, go ahead.

Ryan Isaac:
Oh, no, no, no, I was going to say, what you’re saying, I just cut you off. Yeah, it’s the administration of making sure everything runs smooth. But the caveat to that in a 401k is that you’re forced, you have to report that you did everything okay every year. That’s very different than a SIMPLE IRA. So not only is someone babysitting it basically, but it’s someone babysitting it because you have to report as an actual tax return gets filed on behalf of your 401k called the 5,500. And someone has to fill that thing out and report that everything’s done compliantly and legally. Not only is there someone watching it, but you have to show that you did it right.

Matt Mulcock:
There’s more regulations. And I think it’s what you were saying earlier, Ryan, and it comes to the size of the 401k balances out, just the market of 401ks. And the amount of money in 401ks is so much larger. There’s more regulations and restrictions and rules around them. And when it comes to the design of the plan, we don’t need to go into like all the details, but there’s different ways you can design it between safe harbor or traditional, and the different matching within those plans that you have. And do you have highly compensated employees versus not? How is that even dealt with distributions and matching?

Ryan Isaac:
It didn’t exclude anybody.

Matt Mulcock:
Exclusions.

Ryan Isaac:
You’re going to exclude people, you’re going to make your ability to qualify, to participate in it. Man, you bring up such a good point we didn’t really highlight with a SIMPLE IRA. SIMPLE IRAs are like, basically everyone qualifies for a SIMPLE IRA. If you breathe and you show up to work, you probably qualify for the company’s [inaudible 00:26:10]

Matt Mulcock:
You fog a mirror, you’re in.

Ryan Isaac:
Do you have breath? Cool. You qualify, you can put money in. So, a 401k, you can implement all kinds of restrictions and exclusions. And because of that, I mean, the more options you have, the more compliance you’re going to have to follow and then you have to report it and someone’s got to make sure it’s okay. We’ll start to label these. You said the first one. One reason to change from a SIMPLE to a 401k is cashflow. You’re increasing your cashflow, you have more money than can even fit inside a SIMPLE IRA. You have liquidity, you’re still building liquidity outside of that plan, and you still have money, which would mean your income is probably high and you could use the tax deductions. That’d be number one.

Ryan Isaac:
Number two reason that you’re highlighting is there is just someone that takes it off your plate. So, if there is a problem, payroll gets messed up, the match gets calculated wrong. Someone else is in charge of that. The big caveat to this point though is that not every 401k company is created equal. I believe we did a podcast on that recently or it was a Facebook live, one of the two, or both.

Matt Mulcock:
We’ve hit this I think a few times.

Ryan Isaac:
There is a systematic way you should go about choosing the 401k company that runs your 401k. And it is not based purely on cost. And if you have a super cheap 401k, there are liabilities that would fall on your shoulders if there was anything big, wrong with the plan. Not a common occurrence, but if it ever got sued or if there was a big problem and you have a cheap 401k provider, that’s coming back to you, the doctor, the owner, to take care of and deal with. We don’t want that for our clients.

Matt Mulcock:
Or maybe there’s just service lacking. If you’re not paying a certain amount of money, again, you’re going to be paying that cost somewhere else. Whether that be with service or lack of liability protection, it’s going to be made up somewhere else. And in some ways, it’s very much worth paying an extra 500 bucks a year, a thousand bucks a year, to make sure that those things are taken off your plate. It doesn’t come back to bite you later on.

Ryan Isaac:
And they’re tax deductible expenses through the business anyway. So, number two is pick the right 401k provider. If you have any questions about that, we’ve got content but you can just ask us. Go to the Facebook discussion group, Dentist Advisors Discussion Group on Facebook and search 401k in that group, and we’ve got a 20 minute video on how to pick the right 401k provider. We might’ve done an episode on it after a while [inaudible 00:28:32] but I think we have.

Matt Mulcock:
It’s somewhere.

Ryan Isaac:
It’s somewhere in there. If not, just ask and we’ll tell you about it.

Matt Mulcock:
The archives.

Ryan Isaac:
Some people choose to move to 401k simply for the fact that someone else is in charge of that thing and babysitting, I would say number three reason is, it has to do with the first one, which is cashflow. Someone’s got more money than can fit in a SIMPLE IRA, and more money than can even fit in a 401k. And they have good liquidity. They might be a good candidate for what’s called profit sharing or a cash balance or some kind of pension plan, which all that means is in addition to the 19,500 you can put into a 401k, in addition to the match on that, you can put in more money in profit sharing or in a pension or cash balance plan. Sometimes upwards of multiple six figures in some really big plans.

Ryan Isaac:
So, that’s another reason someone would want to switch is because they have the cashflow for it and it makes sense for them to put away more money and bring the tax bill down even lower. So there’s three, cashflow, babysitting the plan and just a bigger tax deduction. Which even at the basic level of 401k, will let you put in six grand more a year than the SIMPLE IRA.

Matt Mulcock:
Yeah, each.

Ryan Isaac:
Each.

Matt Mulcock:
For you and your spouse.

Ryan Isaac:
Yeah. The match on a safe harbor 401k, which is the most common thing for most dental offices, the match is 4% versus 3% in a SIMPLE IRA. Usually, that’s not going to be a big difference. Again, most employees don’t participate in this stuff. And even if they do, it’s not that much. So, the match to me is kind of like a non-issue, it doesn’t really matter. And net of the cost that you’re going to pay for someone to watch over this plan, the tax savings likely will be there, and it will be worth it. You don’t have to deal with it.

Matt Mulcock:
Just to give you an idea, give the listeners, our people, an idea-

Ryan Isaac:
Our people.

Matt Mulcock:
Our people, of cost, when we talk about cost, because I think this is, this is a really I think misunderstood thing out there when it comes to retirement plans is the expense that’s required for 401k. I think I say this because I see things on message boards or I talk to people, just to give you an idea, we’re saying an administrative kind of fee per year, there’s a spectrum here. Anywhere from 1500 probably on the low end. I mean, thousand maybe, but I mean, then you’re going to start looking at what I’m actually getting for this. Upwards of like 2,500. In that range, that ballpark is pretty normal. That’s what you’re going to pay.

Ryan Isaac:
And an admin fee, write a single check once a year for the admin fee.

Matt Mulcock:
Once a year, quarterly, whatever.

Ryan Isaac:
401ks do have fees inside of accounts, usually flat dollar amounts or percentages or both. That’s how they make their money, that’s how they run their businesses.

Matt Mulcock:
That’s where they’ll get you. That’s what you really want to look at is, are there fees outside of that administrative fee? Is it, I’m paying 2000 bucks a year but I’m also paying 2% of the assets, whatever it is. Those are the things you want to look at. I wanted to clear that up when we talk about fees. People might be wondering, what are we talking? If a SIMPLE IRA is 500 bucks or whatever, what’s a 401k? You’re talking probably like $2,000.

Ryan Isaac:
Totally, man. I’m really glad you brought that up because some 401k companies market, like their whole marketing niche, their entire message, which is a fine message, is that 401ks rip you off. But there’s a little bit of misunderstanding with where the rip off happens historically in 401ks. Historically, and we’re talking like corporate 401ks, probably long before dentists were really utilizing them heavily, 401ks are notorious for loading, like the only investments you can choose in a 401k plan are just really expensive, crappy mutual funds that are like 2% mutual funds and they’re terrible.

Matt Mulcock:
And that company’s getting kickbacks, they’re sharing revenue.

Ryan Isaac:
They’re getting kickbacks. The company who holds your 401k and charges all the fees and employees all the people happens to make those mutual funds and manages them. So it’s just like an incestuous fee pool, if I may.

Matt Mulcock:
Sounds [inaudible 00:32:35]

Ryan Isaac:
That’s actually where most of the 401k historically have come from is employees later, they realize, man, I kind of got hosed on this. You only gave me seven options to choose from and they were terrible, expensive mutual funds. So historically, when people kind of rail on 401ks as being expensive ripoffs and hiding fees from people, that’s a bulk of the problem, which I will just say that in today’s world, it’s not hard to find a 401k provider that just has an open, cheap investment platform with a bunch of cheap mutual funds and ETFs. It’s not that tough to find that.

Ryan Isaac:
So that’s not really a battle as much anymore. And then outside of that, Matt, you covered, it’s like, you’ll pay a couple thousand bucks in an admin fee. And then 401ks do have other fees, they’re smaller inside of everyone’s accounts because that’s how they run their business, that’s just where they get revenue from. I’m glad you brought that up because there’s some strong online social marketing messages from some 401k companies that are like, they sound scary, man. They’re like, the 401k industry is lying to you and they’re hiding everything from you. And I’m like, yes and no.

Matt Mulcock:
Oh, I thought you were talking about all those “advisors” that are giving advice on TikTok about 401ks.

Ryan Isaac:
I just don’t even watch that. I can’t even …

Matt Mulcock:
Can we just say as a fundamental number one rule is do not get your financial advice off of TikTok. I’m surprised I even have to say that.

Ryan Isaac:
Anyway, guys, that’s a good recap of SIMPLE IRAs and just a quick recap, 401ks, most reason people change are cashflow is increasing, they want someone else to oversee it, and they want to add another component on top of it to save even more like profit sharing or a pension of some kind.

Ryan Isaac:
So, if you have any questions, all right, about your current retirement plan strategy, maybe you’re going through the same thing, or you’re trying to just figure out all the other pieces, because look, the reality is, in addition to all the stuff we just talked about today, dentists will also have multiple other types of investment accounts. And that’s in addition to the practice you own, the real estate you might own, your little sliver of Bitcoin here, a little bit of Tesla over there. Little equity piece of your brother-in-law’s new start-up.

Matt Mulcock:
Your real estate empire.

Ryan Isaac:
Your empire.

Matt Mulcock:
Your options strategy.

Ryan Isaac:
Yeah, man, you guys got a lot of stuff going on. So if you have questions about it, go to dentistadvisors.com, click on the book free consultation button. Maybe you’ll chat with Matt, which would be a real treat. You might chat with me.

Matt Mulcock:
If you hit my [inaudible 00:34:58],

Ryan Isaac:
Jake or Will or Cody, we’ve got options folks. There’s some nice people. They’re manning the phones.

Matt Mulcock:
We’re just sitting waiting. I stare at my phone all day.

Ryan Isaac:
You guys, thanks for joining us. You can also ask a question in the Dentist Advisors Discussion Group on Facebook. But thanks for being here, thanks for joining us. Thanks Matt, appreciate it, and we’ll catch you next time guys. Bye bye.

 

Retirement Plans