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Dentists, Puns, and Money is a podcast focused on two things: The financial topics relevant to dentists leaving clinical practice and the stories and lessons of dentists who have already done so.
1. The stories of dentists who have transitioned from full-time clinical dentistry.
2. The financial topics that are relevant for dentists making that transition.
If you’re a dentist thinking about your exit from clinical, and you’d like to learn from the experiences of other dentists who have made that transition, be sure to subscribe to your favorite podcast app.
Host Shawn Terrell also dives deep into the many financial components of exiting dentistry, including tax reduction strategies and how to live off your assets.
And, we try to keep it light by mixing in a bad joke… or two.
Please note: Dentists, Puns, and Money was previously known as The Practice Growth Podcast until March 2022.
Welcome to Dentists, Puns, and Money. I am your host Shawn Terrell. And in this episode, we continue our discussion about required minimum distributions for RMDs. If you missed our episode about RMDs last month, it was episode 70. And it might be helpful to go back and listen to that episode first, just because it has a lot of general information about required minimum distributions that might be helpful to understand as a baseline. First and foremost, because in this episode, we're gonna get deeper in strategy and talk about why it might be important to put together a game plan related to your RMDs. More specifically, we will look at the upside to having a strategy the downsides of not having a strategy and we'll end with the best time to implement these strategies related to your required minimum distributions. Just a reminder before we get started, our company dentist Exit Planning helps dentists leading clinical with the financial peace of that transition with things like figuring out RMDs and with other ways to reduce that massive lifetime tax bill and on how to optimize living off of your assets. If you're interested in guidance on your taxes. And income as you exit clinical, you can schedule an initial consultation with us on our website, which is dentists exit.com, again, no obligation for that initial consultation which can be scheduled at dentist exit.com. And with that introduction, let's dive into why it's critical to have a strategy for your required minimum distributions. The big reason why it's advantageous to have a strategy for your required minimum distributions because it gives you the best chance to pay the least amount of taxes over your lifetime. Our philosophy when it comes to tax planning, and it's probably good to start with this as a reminder, as it relates to taxes. We believe the objective should be to pay the smallest total amount of taxes over someone's lifetime even if that means someone pays more in taxes given year than they otherwise would have to. Let me try to give a real simple example for this. Let's say a retired dentist plans to withdrawal exactly $100,000 per year from his or her pre tax account each year for the first five years in retirement. Let's also assume that with this hypothetical dentist and withdrawal strategy that the tax due on that $100,000 each year is $20,000 or a 20% tax rate and I'm just using round numbers here for ease your mouth. So in this scenario at the end of that five years, this dentist would have withdrawn $500,000 total and the tax due in total on that withdrawal would be $100,000. Davis dentist also has a longtime buddy from dental school that is trying to accomplish the same thing but the buddy learns of a strategy that can take $100,000 total tax bill during the next five years and whittled it down a little bit by implementing an intentional strategy. This hypothetical intentional strategy would involve paying $25,000 in taxes each year for the next two years, but then only paying 15,000 in taxes per year for the following three years. So if you do the math on that second scenario that's $95,000 Total in taxes. over that five year period as opposed to $100,000 Total in taxes over the first five year period, or the the amount that was due in that first scenario. So a really basic high level example of using a strategy and being intentional with tax planning in a way that allows someone to pay less taxes over the long haul, even if it means that a little bit more in taxes in the short term than they otherwise would have had to do so. The biggest reason or the biggest upside to having a strategy for your required minimum distributions is that it gives you the best chance to pay the least amount of taxes total over your lifetime. So tried to make that straightforward. Hopefully it makes sense for the audience listening in. What's the downside to not having a strategy for required minimum distributions? What's the downside for being reactive and proactive? about impending RMDs? Well, there are several examples of how not having a plan for RMDs could increase even further the amount of taxes you have to pay in total over your lifetime. We mentioned in the previous podcasts about RMD is that the minimum percentage you are required to withdraw actually increases each year as you age. So things being equal, you have to take a little bit more out of these RMD accounts each year in the previous year. As you continue to age. And this is just the IRS his way of forcing money out of these accounts to make you pay taxes on them on the money to generate revenue for the US government. So over time in practice, someone's taxable income will increase each year all things being equal as they age as a direct result of the strategy that can have sort of a snowball effect on the amount of taxes you pay on other things in retirement. Two examples are your Medicare Part B premium, and then also your social security. So your Medicare Part D premium in retirement is based on your other taxable income. So if your taxable income increases each year as a result of your increasing required minimum distributions as you age, it's possible or it's possible to sort of backdoor your way into so to speak paying more in taxes for Medicare Part B than you otherwise would have had to do. Same thing with how much of your Social Security benefit is taxable. Not a tax that you have to pay on your Social Security benefit and retirement is based on your other taxable income from other sources. Some people receive Social Security and oh no tax on the benefit that they get. Other people have to pay taxes on up to 85% of their Social Security benefit. To drive this point home and clarify they're not in an 85% tax bracket but rather 85% of the Social Security benefit that someone receives at a maximum can be taxable. Now, to be fair, the income threshold for Social Security hitting that 85% threshold and making 85% of a taxable is pretty low. You can make the argument that someone living an average Dennis lifestyle would easily surpass that income threshold, and it's sort of just a moot point that all that Social Security income is going to be taxable. Anyway, so what's the point but there are ways with intentional proactive planning to generate a significant level of income off of investments in retirement and still pay no taxes on Social Security. It just takes a little bit more on the front end a little bit more work a little bit more planning. Again, not overwhelmingly likely for someone living an average dentist lifestyle in retirement, but still very much possible. And then the other big downside to not having an RMD strategy in place is that it may increase the amount of taxes that your beneficiaries have to pay on set accounts after you pass away. Now if you ask someone if they would rather receive an inheritance that had taxes do instead of not receiving any inheritance at all, they're gonna take they're gonna take the money they're gonna take the gift but if you are looking to maximize the impact of a gift that you leave behind to others, other people or other things someday, then having a strategy in place for required minimum distributions while you're still here. That's a good way to do that. Right. Are you ready for some good news? At least I think it's good news. The best news about required minimum distributions and deferred taxes in general for retirement is that you actually have a pretty big window to plan for and create a strategy around all of these cases. If you think about it. If you're still practicing dentistry, and you have several good income years in a row, there are some things that you can do to offset your tax bill while you're actively working, like maxing out profit sharing plans or even creating a cash balance plan if you're high six figures or pushing seven figures in annual income, but at the end of the day, there's really only so much you can do on an annual basis to control your tax bill from earned income. Besides consciously deciding to work less and earn less, but with your deferred income accounts and retirement now you have a huge time window to figure out how and when to best take that money out as income in retirement. So the age that most people can access money in deferred accounts without penalty is currently age 59 and a half. There are a few exceptions about how to get the money out sooner without penalty, but we're gonna keep it simple for today and just use 59 and a half. At the other end of the spectrum, the age at which you are required to start taking minimum distributions was just increased actually at age 73. If you were born in 1951, or later, and it's actually 875 If you were born in 1960 or later so if you're listening to this and you have not yet started taking required minimum distributions from your tax deferred accounts, you may have as long as 13 years to implement a strategy and figure out some of these things and the best ways for you to pay the least amount of taxes over your lifetime is not to eliminate all of your tax deferred accounts or take the money out of your tax deferred accounts before you even get to your RMD age. I think really this is more about making sure that RMDs are under control or they're manageable before you hit 73. That way, you're not hit with some runaway train and an unexpectedly high tax bill kind of hits you in the face. So you can get really creative with how and when to implement a plan to start taking money out of these accounts over that 13 year window that we talked about. At one end of the spectrum, you could withdraw all the money in your tax deferred accounts in a single day and take all that deferred income as taxable income in a single year. Most cases, this is gonna be the best way to pay the highest amount of taxes on all that deferred money as you possibly can. So I don't recommend it I just mentioned that is an extreme example at one end of the spectrum, the other end of spectrum is not doing anything and just have to take the RMD that you have to take with whatever the account balances are once you hit your RMD age but the way I like to think about it, the best way to do this would be to have a strategy and be really creative and intentional about how and when you take the out of your tax deferred accounts, all based on your specific circumstances and the life events that you have post clinical on what tax rates are now and also based on what we know tax rates are going to be in the future as well as any other factors that are out there that make sense to consider. So just as an example of this is an example of figuring out a strategy for taking RMDs during that 13 year time horizon between when you can take the money out or when you have to take the money out. So the analogy I've been thinking about lately related to this is all a little bit similar to draining water out of an aboveground swimming pool. So let's say someone has an aboveground swimming pool and it's got 10 or 15,000 gallons of water and it needs to be drained sometime in the next 13 days. Maybe there's a draconian homeowners association rule associated with swimming pools and pools gotta go to the water has to come out soon. So instead of 13 years taking the money out of the tax deferred accounts, we have 13 days to take the money or excuse me to take the water out of this hypothetical swimming pool. So just like my extreme example, a second ago about taking all the money out of your RMD accounts. Once do the same thing with a swimming pool, you could chop, chop a hole in the side and let the 10,000 gallons of water spill everywhere and see what happens. But that's probably not an ideal strategy. If you don't want your one to be completely swamped in look terrible after you're done. Conversely, you could get strategic about taking a little water out of the pool at different points during that 13 day period. Whatever makes sense for your set of circumstances. Let's say at the beginning of this hypothetical 13 day period, it hasn't rained for a few weeks and your lawn is already looking pretty brown. You can be a little more aggressive with how much water you take out early on to bring your lawn back to life without creating a swamp and releasing all the water at once. And then let's say a few days later, it actually does rain and so rather than create a bunch of mud you decide not to take any water out of the pool. On the days that it rains from the sky. And then a few days after that you're having a barbecue at your house and you don't want to mess in the yard for the barbecue so you don't take any water out then and then maybe it gets hot and dry again and some of the water in the pool actually evaporates. Thanks to Mother Nature. I don't know anything about evaporation rates of standing water but you sort of get the idea maybe because of good circumstances. You don't have to drain 10,000 gallons you'll have to drain 9000 gallons because of the evaporation rate anyway so don't get too carried away with the analogy but hopefully you kind of understand and get the idea that I'm that I'm going for here that you have a good time horizon and the little bit proactive. You can figure out how to best take money out of these tax deferred accounts in a way that you don't get killed in taxes because you unintentionally create massive required minimum distributions for yourself down the road. So for you it really gets down to just figuring out a strategy that works best for you and your situation based on when you want to leave clinical what you want your lifestyle to look like after clinical and how much you want to help other people out down the road and how generous you want to be long term. So with that, let's let's wrap things up. We've covered why it's important to have a strategy for RMDs we've covered the downsides of not having a strategy for it required minimum distributions. And we've covered how to think about the timing and how to think about creating and implementing an r&d strategy that works best for someone in their individual set of circumstances. Thanks for paying attention and following along thus far that will do it for this episode of deficits, ponds and money. I
hope you found this information useful and helpful and we will talk to you all again very very soon. Thanks for listening and following along. Are you a dentist nearing your retirement from clinical or have you already hung up your handpiece? Would you like a treatment plan for the financial components of your exit from clinical? Our company that does exit planning helps dentists like you reduce taxes in retirement and optimize how to best live off your assets including the ideal time for you to start taking Social Security. If you'd like guidance on those critical pieces, or just a second opinion, schedule an initial consultation with us on our website. Our web address is dentists exit.com And there's no obligation for your initial consultation, that website again dentists exit.com. As a reminder that says Exit Planning and peril advisors LLC is a registered investment advisor. The information presented should not be interpreted or construed as investment, legal tax, financial planning or wealth management advice. It does not substitute for personalized investment or financial planning from that just exit planning or taro advisors LLC. Please consult with your accountant and attorney for tax and legal advice. This podcast conveys the views and opinions of Shawn Terrell and his guests and the information herein should not be considered a solicitation to engage in a particular investment tax planning or financial planning strategy. information presented is for educational purposes only and past performance is not indicative of future results.
Keywords: required minimum distributions, strategy, taxes, money, dentist, tax deferred accounts, retirement, water, rmd, pay, age, create, tax bill, income, clinical, taxable, social security benefit, planning, tax, swimming pool