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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.
Six Reasons Why Dentist Should Consider Roth IRA Conversions
Welcome to dentists puns and money I'm your host Shawn Terrell. in this episode we will dive into Ross conversions and 6 reasons why it might make sense for a dentist to convert at least parts of their traditional IRA or 401 K. profit sharing account into a Roth IRA what are the tax implications of doing that both short term and long term how might that affect the taxation of social security and how might a Roth conversion affect Medicare premiums that you pay in the future those are just some of the considerations will discuss in this episode as a reminder our affiliated firm dentist exit planning helps dentists nearing clinical retirements reduce their lifetime tax bill and replace their practice income so they don't have to compromise on the lifestyle they long if you are interested in financial guidance on your exit from dentistry schedule an initial consultation with us on our website which is dentist exit.com and with that introduction let's dive into Roth conversions. So before diving into the 6 reasons why it might make sense for a dentist to consider making a Roth conversion it's probably helpful to start with some background about IRA's in general so everyone has some contacts to get started so there are tax implications with Emory investment account at a dentist can use which is why we incorporate tax planning into the work that we do it only makes sense to talk about investments in conjunction with the tax implications of said investments after all we want to use strategy and planning techniques for you the Dennis to pay the least amount of tax possible over your lifetime even if that means you pay a little bit more in tax in any given year for the purposes of our conversation here we are talking about taking a traditional IRA or a traditional 401 K. or any tax deferred account that is pre tax money meaning that it has not yet been taxed and then converting a portion of that account to a Roth IRA so that portion is then taxed at ordinary income tax rates in the year that the conversion occurs in following the conversion to a Roth IRA the converted amount will not be taxed ever again and what's more the gross on that converted amount should not ever be subject to taxation ever again the second point that's worth mentioning while there are restrictions about someone's income that have to be taken into consideration when contributing to a Roth IRA and there are restrictions on how much can be contributed to a Roth IRA each year no matter someone's income there are virtually no restrictions about who can do a Roth conversion and when someone can do a Roth conversion so just to be clear big difference between Roth contributions and Roth conversions with the Roth conversion anyone can do 1 at any time for. For any amount provided the person completing the conversion has the money to pay the tax that will become due by virtue of that conversion so as an example if you convert $100000 of your traditional IRA or 401 K. to a Roth IRA in any given year you are a fact of Lee increasing your taxable income by $100000 or that same year so whatever taxes owed by virtue of that $100000 conversion you must be able to pay that tax either by withdrawing additional money out of the account to recover the tax due or to cover the tax due in the netting it down to $100000 or by paying the tax due out of a taxable investment account a separate account or a separate taxable savings account the latter 2 options there taxable investment account or taxable savings account are preferred as the use of the source to pay the tax that will be due on that conversion to a Roth IRA so with that information out of the way reason number 1 a dentist should consider a Roth conversion and this is a little bit heavy on numbers but bear with me the first reason to consider a Roth conversion is that taxes are going to be higher in the future than they are right now we know taxes will be higher starting in 2026 and they will be in 2020 to 20232024 and 2025 at the end of 2025 the tax cuts and jobs act is scheduled to sunset or expire and with that what is now the 12 percent tax bracket will become the 15 percent tax bracket what is now the 22 percent tax bracket will become the 25 percent tax bracket and what is now the 24. A percent tax bracket will become the 28 percent tax bracket so if you do the math on that while we don't yet know the exact income levels that will make up those 1525 to 28 percent tax brackets we do know that if you use 2022 tax brackets it's an $11000 tax difference between what someone would pay at the top of the 24 percent tax bracket in total taxes today versus what they would pay in 2026 when that bracket gets taxed at 28 percent again a little bit of a moving target but we know enough to know that converting pretax accounts to Roth accounts now verses delaying the tax on those accounts until later will result in significant tax savings. Reason number 2 to consider a Roth conversion is to lower your required minimum distributions for later the benefit of contributing to a tax deferred account like an IRA or a 401 K. profit sharing plan is that you don't have to pay the taxes on that income that you referred or will differ into that account you don't have to pay the income tax during the year that you make that contribution the catch is that the IRS will not let you kick the can on paying that tax forever the IRS has a provision called required minimum distributions often abbreviated to R. and D. and that forces people to start taking money out of those tax deferred accounts and must pay taxes on those accounts and currently the latest that someone can wait to start taking required minimum distributions or are M. D. is is the year that they turned 72 years old now there's been proposed legislation about pushing that age back to 74 or 75 so the R. M. D. age may get raised at some point but the point is arm dis are likely never going away and the penalty for not taking a required minimum distribution is 50 percent of whatever the R. M. D. was supposed to be so if your required minimum distribution was supposed to be $100000 in any given year and you fail to take at least that amount out as an account distribution you owe the IRS $50000 as a penalty that's pretty steep and so it pays to have a game plan or our M. dis well before you reach the age that you have to take them the issue is that required minimum distributions will likely increase as you age so that means you are required to withdrawal more and more money from your pre tax deferred tax accounts each year in retirement that might not be the worst thing in the world but over time it. Gives you less and less control over your ability to control your taxable income each and every year in retirement and that's important because your taxable income in retirement from pre tax accounts will affect the taxation or cost of other areas of your life in retirement such as social security and Medicare part B. so let's dive into that so reason number 3 to consider a Roth conversion to reduce the amount of social security that is taxable and this is probably a topic that could be it's own standalone podcast how much income you have while drawing social security will impact how much of your social security and how much that benefit you received is taxable it is possible that your entire social security benefit could be tax free to you it is also possible that 85 percent of your social security benefit will be taxable to you to clarify not taxed at 85 percent but 85 percent of the social security benefit you receive could be subject to taxation what determines if your social security benefit is taxable and to what level is your taxable income from other sources in retirement so with the income you were generating in retirement was from a tax free stores like a Roth IRA then it's possible some or all of your social security benefit could be completely tax free reason number 4 very similar to reason number 3 the amount of premium you will pay for Medicare part B. is based on your taxable income in retirement so you can position yourself where at least a good chunk of your retirement income is coming from a tax free source like a Roth IRA in the amount you pay monthly for Medicare part B. has the potential to be as low as possible and that leads us to reason number 5. Hi it to consider a Roth conversion and we sort of alluded to this already but it needs to be driven home it's really beneficial to have tax diversification for your income sources in retirement in other words you're setting yourself up for failure if all or most of your income sources in retirement are subject to ordinary income taxes because chances are throughout its 30 year retirement you're going to need a large chunk of money at some point beyond your normal living expenses hopefully that chunk of money that you need is for something fun like an RV or a down payment on a lake house but it could also be for something not as fun like a long term care facility not going to pay for but it might be necessary so if you need a chunk of money and don't have any choice but to get that chunk of money from a taxable source you could be forced into a situation where your Medicare premiums are now much higher or social security benefits become taxable or more taxable than they needed to be so having a big bucket full of tax free money into retirement and converting into Ross along the way to get there that's seldom going to be a bad thing Dan reason number 6 to consider a Roth conversion would be for the benefit of your errors this might not matter to some people but if you leave an irate to a beneficiary other than your spouse that beneficiary must distribute or take out all of that money. With out of the account within a 10 year period of your death that goes for or traditional IRA or a Roth IRA that's inherited by someone other than your spouse the difference is that with a traditional IRA all of that money will be treated as taxable income to your beneficiary so if it's your kids and they're still in their working years earning good money all of the proceeds from that traditional IRA that they inherit will be taxed in the highest tax bracket for them because it's going to be stacked on top of their income however if your kids receive the proceeds and it's from a Roth IRA while they still must liquidate that account within a 10 year period all of that additional income will be tax free to them in most cases now maybe you're thinking my kids get what they get even if it's taxable to them it's still better than a kick in the shorts yeah that's true but if you really want to leave something behind you want to maximize the value of what you leave behind by leaving the full amount tax free in a Roth conversion with some strategy behind that will often reduce the amount of money that the IRS is going to get out that gift and keep it as a gift for itself so what's the best time to execute cross conversions for Dennis great question as a general rule of thumb you want to execute Roth conversions when you believe or even know your tax rate will be the same or higher in the future then it would be or will be at the time you do the Ross conversion so to reiterate if you think taxes are going to be the same for you or lower in the future not a good time to do a conversion if you think taxes will be the same or higher for you in the future might be worth considering a Ross conversion so in a lot of instances it's not going to make sense for a Dennis to execute Roth conversions while you're still practicing and why. L. you still own your practice those years are likely to be high income years were probably makes sense to keep deferring as much income as you possibly can into an IRA or into your profit sharing plan associated with the practice and if you own your practice and you're trying to get maximum value from the sale of that practice sometime in the near future it likely would not make sense just the coast to the finish line and intensely help lower income from your practice just to do Roth conversions the net effect of that approach would likely be negative because you're going to reduce the amount of dentistry you do so you can execute a tax saving strategy but that could also reduce the overall value of your practice at sales so the Jews probably not worth the squeeze they're so N. ideal dentist client that I work with is 1 that owns their own practice and is going hard to the finish line to maximize the sale value of that practice in doing that they're in a high or the highest tax bracket at the end of the career and they might be deferring as much money as possible as a result of that into a 401 K. profit sharing plan or cash balance plan with the practice while they're still practicing hopefully they've also been saving money in the back door Roth I. R. A.'s HSA isn't taxable accounts along the way so they have other sources of income besides the 401 K.. Robert sharing plan cash balance plan whatever it is and maybe some IRA's then in the years immediately after this hypothetical Dennis sells their practice and hopefully before tax rates increase in 2026 they are converting good chunks of pre tax money into the Roth IRA they're delaying social security as long as possible to maximize the long term benefits and giving themselves the best chance to lower the taxation on that if possible they might be living off their savings account for living expenses for a few years after selling the practice and what's being distributed from pre tax accountant showing up on the tax return as income is actually being converted into a Roth IRA is for income later if possible you could supplement with taxable investment accounts to cover the cost of living but just be careful there are not to generate a bunch of long term capital gains in a 0 percent tax bracket then this hypothetical Dennis gets to the age of 70 turns on social security then to Max out the lifetime benefit of that and has got a huge pile of tax free money to generate income because they've converted a bunch of it in a Roth IRA rates that will keep the taxes on social security as low as possible and keep Medicare premiums as low as possible as well you still might have some money subject to required minimum distributions down the road but that number's gonna be much smaller than it would have been and if you really want to get fancy you could stuff more of that are on the pre tax money into a queue lack and nobody to push the are on the clock out all the way to age 85 and while you're still gonna have to pay taxes on the money it's these type of strategies that go a long way in making sure you pay as little to the IRS as you are obligated to pay remember you want to pay the IRS what you will you are not required to leave them a tip make your lifetime tax bill in total as low as possible through strategy and planning even if you have to pay. More in taxes in any given year so there you have it 6 reasons why dentists should consider Roth conversions as part of their retirement income and tax planning strategy I hope you found all of this information helpful thank you for listening to dentists ponds and money and we will talk to you very soon thanks for listening to dentists ponds in money for more information about my day job which is guiding dentists to their financial off ramp from active practice you can visit dentist exit.com and there you can find more information about us sign up for our email newsletter or schedule a discovery call with Sean that's me if you've enjoyed this episode please leave us a review and rating on apple podcasts and also please share the podcast with your friends and colleagues as for the boring legal stuff dentist exit planning and Terrel advisors LLC is a registered investment adviser 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 dentist exit planning or Terrel advisors LLC this podcast conveys the views and opinions of Sean Terrel and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy information presented is for educational purposes only and past performance is not indicative of future results.