The Tax Triangle for Doctors [Podcast]

Doctors, when it comes down to it, retirement is likely going to be the most expensive purchase of your lives. As a business that deals directly with doctors’ personal financial concerns, we are often asked questions such as: “Will I have enough money to retire?” and “When will I run out?” But one question we don’t get very often, that should be asked is: “Is my money positioned in the right type of accounts?” Today we will discuss the different types of retirement accounts, their tax consequences, and how to get the most out of them when it really matters.

Doctors, when it comes down to it, retirement is likely going to be the most expensive purchase of your lives. As a business that deals directly with doctors’ personal financial concerns, we are often asked questions such as: “Will I have enough money to retire?” and “When will I run out?” But one question we don’t get very often, that should be asked is: “Is my money positioned in the right type of accounts?” Today we will discuss the different types of retirement accounts, their tax consequences, and how to get the most out of them when it really matters.

Why do we think that this question about account types should be asked by doctors investing in their retirement? Because taxes have a BIGGER impact than any market swings on your retirement funds. The old school of thought concerning the amount of taxes you owe in retirement was “push them into the future.” This theory does NOT work anymore! Now, we want to diversify our income into multiple areas to make sure we’re set up for success with taxes now AND in the future. To demonstrate, let’s go over the tax-control triangle, or what we refer to as the different "tax buckets".

There are three separate tax buckets:

Tax-Now Bucket (Taxable):

Account types - Brokerage, non-qualified, real-estate, savings, CDs, money markets, and more

Taxed on capital gains of profits (usually long-term capital gains)

Pro

These “tax-now” funds are more liquid, no withdrawal penalties (except for Real Estate)

Con

Tax burden reduces the rate of return

Essential for emergency funds

Tax-Later Bucket (Tax Deferred):

Typically called “retirement accounts”

Account types - 401ks, 403bs, 457s, IRAs, SIMPLE IRAs, SEP IRAs, and more

Pro

Reduces taxable income now

Con

Taxed as income later, which could be a higher tax bracket than it is today

High penalties for taking money out early, on top of being taxed at your current income rate

Tax-Free Bucket:

Although the money going into the accounts is taxed, all of the gains are not taxed

Account types - 529 College Savings Plan, Roths IRAs, Roth 401k, Roth 403b, Municipal Bonds, certain Investment Grade Life Insurance policies

Health Savings Account - A great additional way to get tax free funds for later

Pro

Tax free money in retirement

Con

High penalties for early withdrawal

Ways to get money into this bucket:

Work Roth accounts

Utilizing the Backdoor Roth strategy—works for some

Indy/Solo Roth 401k, if you have side income in the form of a 1099 income

Convert IRA money to a Roth IRA

“Don't get fixated 100% on saving taxes this year, take the long-term view into consideration."

Where to start:

Tax-now: For liquidity

Tax-deferred: At least up to the % matched by your employer

Tax-free: There are a few ways to get money into this bucket. If you are unsure how to do this, feel free to reach out to us by emailing [email protected].

Having money in each bucket leads to flexibility in retirement. Every year the amount that should be put into each bucket should be reassessed. With these three tax buckets working in unison, we’ve seen doctors save millions in taxes. If you have an existing IRA or old work plan, reach out to us to see if converting those funds to Roth would make sense to you.

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Katherine Vessenes, JD, CFP®, is the founder and CEO of MD Financial Advisors who serve 500 doctors from Hawaii to Cape Cod. An award-winning Financial Advisor, Attorney, Certified Financial Planner®, author and speaker, she is devoted to bringing ethical advice to physicians and dentists. She can be reached at [email protected].

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