Retirement without a tax deferred account?

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  • Avatar DDSonFIRE 
    Status: Dentist
    Posts: 9
    Joined: 08/28/2019

    Thanks Tim. I haven’t given much thought on the specifics of selling my portion of the practice yet, but it would be smart to start researching that too. I do plan to work and keep profitability up for at least 5 years, then maybe a year or two while finding the right replacement (unless my partner wants to buy me out).

    #244581 Reply
    Avatar DDSonFIRE 
    Status: Dentist
    Posts: 9
    Joined: 08/28/2019

    Thanks again Hank. Those ideas for the 401k sound great, I’ll definitely plan to pay fees through the business too.

    Thanks JFox, I’ve been saving excess cash after SIMPLE into taxable accounts up to this point. I hope to at least set up 401k, with current 300k savings rate (avg last 4yrs) I’ll still be saving some in taxable accounts too.

    #244584 Reply
    Avatar Dont_know_mind 
    Status: Physician
    Posts: 944
    Joined: 11/21/2017

    I have also roth converted at the maximum MRT.

    I did this purposefully, as I thought:

    1. I am likely to remain at close to the maximum MRT in retirement

    2. The savings from LT CGT rate in roth will mitigate the upfront cost.

    It is a risk however, as you are assuming that your marginal tax rate will be significant in the future and your savings in LT CGT will mitigate the upfront cost.

    To some degree you more assured of a high retirement CGT rate if you already have unrealised CGT that you will have to realise at some stage.

    I did the numbers and it worked out for me.

    Say you have a ROTH investment that appreciates 500% over a 20 year period. Your LT CGT rate will be lower, but you have the cost of the roth conversions at maximum MRT to overcome first.

    I think it will also depend on what compounding rate you can generate. Above 10%pa and the earlier high tax rate roth conversions can be more appealing. But to get 10% pa, you enter the pirannha pit of active investing and gambling. The ideal would be something that returns 1000% in roth space and this is the holy grail for me.

    #245214 Reply
    Kon Litovsky Kon Litovsky 
    Status: Financial Advisor
    Posts: 920
    Joined: 01/09/2016
    Splash Refinancing Bonus

    For one thing, if you are making Roth conversions with a SIMPLE IRA in place, you probably are paying pro-rata taxes on those conversions, so I hope your CPA is on the same page. With such a large number of participants setting up a 401k can be costly, however, with a SIMPLE you have to include all HCEs, while a 401k can exclude HCEs from profit sharing. So I would compare % to owner for a 401k vs. a SIMPLE, as well as do side by side analysis similar to this:

    Also, adding a Cash Balance plan might improve your % to owner, but this would definitely require your partner to also contribute.  If they don’t, then you are most likely not going to get a high enough benefit vs. cost. Usually adding a CB plan to a 401k plan is much better than just setting up a 401k plan, and while a 401k plan by itself might not work out well, both 401k and CB might (but only if your partner also wants to make higher contributions). Adding spouses to payroll is a good idea, but it is unlikely to change the equation if only one partner wants to participate. That said, if all you have is after tax, so be it. Just make sure that if you are converting to Roth while you contribute to a SIMPLE IRA that you have to pay taxes, and there are specific rules for converting SIMPLE IRA assets to Roth that you have to follow (again, your CPA should know).

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #245675 Reply
    Liked by Tim

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