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Retirement without a tax deferred account?

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  • Avatar DDSonFIRE 
    Participant
    Status: Dentist
    Posts: 9
    Joined: 08/28/2019
    Earnest refinancing bonus

    I’m newer to WCI and I am very glad to have learned so much from everyone here in the last couple months. My question is, besides paying taxes up front and at a high tax bracket, what are the disadvantages once you are retired and all liquid assets are in Roth, taxable accounts, and cash?

    I’ve read some great blogs recently (many from WCI) about converting tax deferred accounts to Roth accounts in retirement while carefully watching which tax bracket one is in, but what if the only tax advantaged accounts are already in a Roth?

    I’m asking because this is the situation I currently am in. I plan to retire in about 5-7 years. I made a large conversion when the option first became available to high income earners as I was afraid that option would disappear. I have since converted my and my wife’s Simple IRA’s and Traditional IRA’s to Roths each subsequent year (Simple is the only plan available at my office). I’ve been taking the up front tax hit. I may change this strategy now, but wanted to know if a Roth only (and taxable accounts) retirement had disadvantages besides costing more in taxes up front.

    Sorry for the long post.

    #244316 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4405
    Joined: 01/08/2016

    I mean if that’s all you got, then that’s your plan.
    What marginal rate are you converting at?

    #244318 Reply
    Hank Hank 
    Moderator
    Status: Attorney
    Posts: 1395
    Joined: 03/27/2017

    Are you the sole owner at your practice?

    With a 5-7 year timeline to retirement, I’d look hard at setting up a cash balance plan.  At minimum I would ditch the SIMPLE IRA for a 401(k) with profit sharing.  Preferably set up both the 401(k) and the cash balance plan.

    #244322 Reply
    Liked by DavidGlennCPA
    Avatar DDSonFIRE 
    Participant
    Status: Dentist
    Posts: 9
    Joined: 08/28/2019

    I’m in the highest tax bracket. (Facepalm)

    I’m in a 50/50 Partnership. We have 16 staff members and only 3 of them are younger than both of us doctors. We looked into other retirement plans in the past but the age demographics were a problem, though we are planning to meet with an advisor to revisit that in a few weeks

    #244323 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4405
    Joined: 01/08/2016

    Wow definitely stop.

    #244324 Reply
    Hank Hank 
    Moderator
    Status: Attorney
    Posts: 1395
    Joined: 03/27/2017

    Two partners but 16 other employees?  That seems like a pretty high headcount.  If you have several productive hygienists, I could see it.  Likewise, if you have lots of assistants in an ortho practice, I could see have a fair number of back office staff.  That said, a good insurance coordinator, a good scheduler, and especially someone who is good at case presentation can absolutely be worth every penny of compensation (and more!).

    The practice demographics may not favor a defined benefit plan, given how many employees you have who are older than you.  That said, I still would swap the SIMPLE for a 401(k).  It’ll cost you a bit in fees each year, plus 3 or 4% of full time employee salaries.  At your marginal tax rate, the cost savings will more than make up for these minor expenses.

    I don’t know if your partner is younger or older than you, closer to retirement or further away, but he or she needs the extra qualified funds space and tax savings too.  $13K ($16K over age 50) into a SIMPLE just isn’t enough savings for retirement.  You need the $19K ($25K over 50) plus profit share and employer match.

    #244328 Reply
    Avatar DDSonFIRE 
    Participant
    Status: Dentist
    Posts: 9
    Joined: 08/28/2019

    Yeah, it’s a very busy and productive practice. The Doc’s are 40 and 46 (I’m the younger). If I’m being honest, it is the feeling of becomming more burnt out and the stresses associated with the business/insurance side that have lead me to start looking at the idea of an early retirement.

    Both Doctors put 12.5k into simple plus another 12.5k match (25k total), then our wife’s (employees) on payroll for another 12.5k each plus small match (3%)… I’m hopeful there is another plan that can save more (minus costs) that will work given our staff situation, that we can put into place.

    Thank you Hank for taking the time, and Peds for the bluntness.

    It sounds like the big problem with a “Roth only” retirement is the cost in taxes.

    #244334 Reply
    Hank Hank 
    Moderator
    Status: Attorney
    Posts: 1395
    Joined: 03/27/2017
    If I’m being honest, it is the feeling of becomming more burnt out and the stresses associated with the business/insurance side that have lead me to start looking at the idea of an early retirement.

    Click to expand…

    Rather than retire early, review your insurance companies.  Drop the three crappiest companies that have the worst fees, most difficult “customer service” reps, worst denials of valid claims for bogus reasons, etc.

    Look at gross revenue and profitability by insurance company.  Look at which plans have patients who are willing to pay their co-pay or pay out of pocket when they exceed their annual maximum benefit.  Then look at the plans that are on the opposite side of the spectrum.

    I bet your insurance coordinator can name the three to five companies she most dreads dealing with.  If some of those same companies only make a small contributions to practice profitability, consider dropping them.  If you find an insurance company where you’re losing money most times you seat a patient, then drop it like a bad habit.  Depending on your practice, HMOs or Medicaid could be excellent candidates to drop.  (Then again, some folks make plenty of money with a carefully tailored HMO or Medicaid practice.)

    Don’t quit dentistry because some company has crappy reimbursement and treats you and your staff like crud.  You guys deserve better.

    #244335 Reply
    Avatar DDSonFIRE 
    Participant
    Status: Dentist
    Posts: 9
    Joined: 08/28/2019

    I agree with this as it is great practice management advice.

    My office manager/insurance coordinator would have no problem identifying our 3 “crappiest” insurance companies since we only participate with 3; all traditional plans, no PPO, HMO, or Medicaid. My frustration with insurance stems from a recently ended 3 year “under review” from Delta (approximately 43% of our patients). I fought every rejection no matter how small out of my own stubbornness. After thousands of procedures, re-submissions, explanation letters, and pier reviews the 3 yr review ended having to only writing off 8 procedures. The process has left me somewhat disheartened with my own profession. Especially since at some point a dentist employed by the INS Co approved every rejection.

    On the plus side the experience lead me to learn about FIRE, WCI, PhysicianonFire, and other online bloggers and references. I’m under far less stress now that I know I’ve already reach FI (if my math is right). Good income, Low spending rate, high savings rate. But I’ve made some financial mistakes, the biggest might be paying too much taxes trying maximize my Roth accounts.

    #244348 Reply
    Liked by Hank
    Avatar Larry Ragman 
    Participant
    Status: Other Professional
    Posts: 614
    Joined: 08/30/2018

    The prior taxes paid on Roth conversions are sunk costs. Forget about them, but going forward it does not make sense to do Roth conversions while in a high if not the highest tax bracket. If you do set up a 401k, take the time to include options for after tax contributions and in service conversions. That combination allows for a mega backdoor Roth, which let’s each of you and your wife to invest $56k a year in tax deferred or an after tax Roth.

    #244351 Reply
    Liked by MPMD
    MPMD MPMD 
    Participant
    Status: Physician
    Posts: 2483
    Joined: 05/01/2017

    The prior taxes paid on Roth conversions are sunk costs. Forget about them.

    Click to expand…

    that is golden advice.

    it probably wasn’t the spreadsheet way to do it but now you are tax-free…

    #244352 Reply
    Avatar DDSonFIRE 
    Participant
    Status: Dentist
    Posts: 9
    Joined: 08/28/2019

    Thank you Larry (and Hank), I’ll be discussing 401k options with my partner this week.

    #244424 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3030
    Joined: 09/18/2018

    Congratulations! One point is to nail down the exit strategy for you and your partner in a tax efficient way.
    Are you eventually going to hire “employed” or simply sell the practice? Having a DCP and 401k will allow you to manage taxable income with the gains on the eventual sale. You want to keep the Roth growing tax free as long as you desire. No reason to pay taxes sooner than needed at the higher rates. You have opportunity not a problem. Well done, regardless how you arrived.
    The value of the business will be higher if you keep the profitability up rather than scale down. Let someone else put in the “sweat equity” for the privilege of paying a tidy sum when to leave.

    #244434 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8113
    Joined: 01/09/2016

    If you have managed to pay taxes on Roth conversions to date and all your retirement consists of Roth IRAs, you will have hit the jackpot in retirement. You sure won’t have to worry about tax planning with RMDs. Your heirs will inherit your retirement accounts tax-free and you can withdraw as much or as little from your Roth for anything you want with no tax concerns.

    As a 50:50 owner, you have a lot of control. Either set up a 401k for the practice or stick with current regime and put excess cash accumulation in taxable accounts after max SIMPLE contributions. Planning would probably be beneficial.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #244457 Reply
    Hank Hank 
    Moderator
    Status: Attorney
    Posts: 1395
    Joined: 03/27/2017

    Sounds like you’re fighting the good fight with Delta Dental.  Don’t let them wear you down.

    Congrats on moving forward with your 401(k).  I’d recommend going with the 4% elective match instead of the 3% automatic contribution.  (Typically 1-for-1 match on the first three percent of salary, then 50 cents on the dollar for 4 and 5%.)  You, you partner, and your spouses will max out the 401(k).  For those employees who elect to put 5% of salary into the 401(k), it’ll cost you an extra percent, but you might be surprised how many employees fail to sign up and contribute even 5% to the 401(k).

    You also have the option to have fees assessed against assets in the retirement plan vs. paying them as a business expense.  Recommend keeping fees low, but having the business pay them vs. reducing the amount in your retirement accounts.

    #244469 Reply

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