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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.
Dentists, puns and Money – Tax Buckets Solo Podcast transcript
Keywords: dentists, tax, bucket, income, pay, capital gains, irs, taxes, atlas, money, gains, miami, tax rates, roth conversions, ordinary income, retirement, year, long term capital, ordinary income rates, option
Welcome to dentists, puns and money. I'm your host Shawn Terrell. In this episode, we will dive into the four ways your income will be taxed and what dentists might do about it once armed with that information, we'll dive into as I like to call them, the four tax buckets. What are the different tax rates on those buckets? And how might a dentist be intentional about putting money into and taking money out? Of the different buckets in order to lower their overall tax bill, plus a few real life examples to understand your options with the buckets? As a reminder, our affiliated firm dentist Exit Planning helps dentists near or in clinical retirement, reduce their lifetime tax bill and replace the practice income so they don't have to compromise on living the lifestyle they love. If you're a dentist interested in financial guidance on your exit from dentistry, you can schedule an initial consultation with us on our website, which is dentist exit.com that website again dentists exit.com And with that introduction, let's dive into the four tax buckets.
So a sidebar on a totally different topic to begin, Are you old enough to remember taking a long road trip and not having the benefit of a smartphone to navigate your way? Another way to ask that question? Do you know what an atlas is? And have you ever used? What am I do? And I have and all these questions are good analogies for dentists to think about when coming up with ways to lower the total amount of taxes they will pay for their lifetime. So let's start with a short story. It's December of 2002 and my beloved Iowa Hawkeyes had just been selected to play in the Orange Bowl in Miami, Florida, because it was a big game and Because Florida is much nicer than Iowa in the winter. There were 10s of 1000s of Iowans like me that wanted to go to this game. So all the flights quickly sold out or became crazy expensive with a bunch of different out of the way connections to get to Miami. So myself along with a few buddies decided that we would drive the 1500 miles from Iowa to Miami. And the first thing I did was buy an atlas. Just in case you don't know an atlas is a big collection of maps and the one that I bought included an individual map, all 50 states. And so that allowed us to plot recourse to drive from Iowa, Miami, and this was the best way to figure out how to navigate this trip in 2002. by our standards in 2022. It's probably not the most efficient way to make the same track analogy 20 years later has improved greatly. At first you might remember MapQuest, which was this website that allowed you to put in your starting location and then your destination and it would plot the best route for you to take. And then you could print out the step by step instructions of every turn to take that route. And a few years later, GPS devices like Garmins and tom toms hit the market would give someone step by step directions in their car while they were driving. So we no longer had to print the internet as the commercial goes. Then most recently, smartphones have made long road trips even more efficient and they'll broadcast the directions right through your speakers in your vehicle while you're driving. Better applications like Google Maps, will let you know ahead of time about accidents or road construction along the route. You can course correct to get to your destination as quickly and as efficiently as possible. So with us while we made it to Miami fine and we never got lost it took longer than it might have because road construction, tours and accidents. Also we ate at a couple of really crummy gas stations because the Atlas could not tell us that there was going to be a Chick fil A 20 miles ahead of us. So if we decided to drive from Iowa to Miami today, which doesn't sound as fun at 44 as it did at age 24. Navigating the best course for us would be easier know ahead of time where the road construction was located. know ahead of time that there was an accident five miles up ahead on the road. We know ahead of time that if we pass up a gas station that's at the next exit and the fast food options there that we could do. So knowing that 20 miles down the road there was a better option for gas and for food. And we'd have the option all along the way to redirect accordingly, thereby making our trip as efficient as possible. So what does this short story and technology history lesson have to do with the amount of taxes a dentist will pay in retirement a central piece of our mission at dentist Exit Planning is helping dentists pay the least amount of tax total tax for their lifetime. And if they pay more in tax in a given individual year. they otherwise could have just like a long road trip across the country. Thanks in part to technology. There is a way for dentists to take the most tax efficient path in their retirement. There is a way for dentists to transition to living off their assets and doing so in a way that will reduce the amount of total money paid to the IRS for their lifetime. All things being equal. That all starts with dentists using tax diversification to their advantage whenever possible. So what do I mean by tax diversification? Not all income created equally in the eyes of the IRS the Internal Revenue Service reality there are actually four separate ways your income can be taxed. I like to refer to these four separate ways as four tax buckets. I think it's easier for people to visualize this conceptually. When we think about income being in one out of a possible four buckets of money. So if you are motivated to pay the least amount of tax over your lifetime, you're motivated to be as tax efficient as possible. really starts with being intentional and how when you put money in and you take money out these four different tax buckets. That's how you come out ahead on taxes. And so let's lay out the four different tax buckets. And then I'll give a few examples of what it might look like for a dentist to be intentional about putting money in and taking money out of the different tax buckets so they can come out ahead taxes. It's bucket number one is the ordinary income bucket. This will include w two income if you're receiving or paying yourself a salary from a dental practice. And then the nine income for self employed or independent contractors also falls into this bucket. Schedule E income is taxed at ordinary income rates to that would be owner dentists profits from a dental practice as well as any profit if you own your practice real estate security taxed at ordinary income rates as well. least up to 85% of it and ordinary interest. Ordinary interest has not been much of a topic for many years because interest rates being so low there wasn't much ordinary interest to be had. But with interest rates rising dramatically here in 2022 the inverse effect of that is better rates of return on savings accounts. money market accounts and CDs worth paying attention that at least in the short term rates of return on some of those vehicles could be better and generate ordinary interest for tax purposes with the ordinary income tax bucket tax rate will vary between zero and 37%. That's a huge variance a big difference. That's what happens to all of your money that it's taxed at ordinary income rates, without any plan in place. That's bucket number two is the tax deferred bucket. This bucket includes income that is earned in the current year. The tax due on that earned income is deferred or delayed until some point in the future some other tax year later down the road. Then at that point in the future that the deferred income is realized or accessed at income then becomes ordinary income is taxed at ordinary income rates just mentioned in 2022 are anywhere between zero and 37%. So the deferred bucket is often made up of 401 K and profit sharing plans cash balance plans, and then traditional deductible IRAs. So the third bucket can be a great tool, but there's risk associated with it based on what tax rates might be in the future. So the brief example if you defer income that would have been taxed at 35% to access that money later when it's taxed at 25%. That's a great move. However, if you do the opposite and defer money when it could have been taxed at 25% and access it later when it's taxed at 35%. That's such a great move. So you can start to see how being intentional about how and when you put money into tax buckets. Later, take it out, make a huge difference on what you pay the IRS over the long haul. My experience without intervention the vast majority of people figuring out a way to pay the least amount of taxes in the current year. work that we do with Dennis we are solving for paying the least amount of tax with the long haul over someone's lifetime, even if it means paying more in taxes in the current year might have been required. The third tax bucket is the capital gains bucket for special types. of income including qualified dividends and long term capital gains. IRS has set up preferred tax rates, the range of this rate, the long term capital gains rate varies between 0% and 20% Depending on how much ordinary income you have as well, in a given year. Tom an example of an account that's taxed using long term capital gains is a taxable investment account. So as an example here, if you needed income for living expenses in retirement, you have the option of taking an out of an account that's going to be taxed at ordinary income rates could be again as high as 37%. And you have the option of taking long term capital gains income that cannot be any higher than 20% might consider taking income from the source or an account that will be taxed as long term capital gains because as we just said in 2022 highest rate possible for taxes on those long term cap gains is 20%. is worth mentioning that currently in 2022. There is no tax due on long term capital gains. If total taxable income for the year below a certain threshold of memory. I think it's around 85,000 per year. of taxable income if you are married and you're filing joint tax returns. So another great example of being intentional about what buckets you put money into oh and when you pull money out 0% tax due on capital gains sounds great on the surface, but you might not want to burn so to speak that capital gains income and have it taxed at 0%. If you have a large amount of money in buckets that will be taxed at ordinary income later, because as we've already discussed, ordinary income rates are currently as high as 37%. So might be better. To hold off on to some money in capital gains buckets. You have a source of income later that can be taxed at 20% instead 37%. Again, really a little technical here and a lot of numbers but hopefully you follow the drift of things. The fourth and final tax bucket is the tax free bucket, save the best for last. The tax free bucket you pay taxes on the money that goes into it in the year that money goes into that bucket. Then the upside is all the money that goes there and even better the growth on all that money can be accessed tax. Free on the road. Now there are a couple strings attached to it being tax free later that you must be mindful of but by and large, having or moving at least some money to the tax free bucket gives you more options and help increase the likelihood of paying the least amount of tax over the course of your lifetime. Tax Free bucket is often made up of 401 ks and Roth IRAs. And so a popular strategy right now in 2022 that we've talked about recently in other podcasts is executing Roth conversions for dentists to build more money in this tax free bucket. Want a deeper dive into Roth conversions and why they might make sense for you. You can check out the podcast we did on that topic recently in the last month or two. The basic strategy behind Roth conversions is to pay more taxes in the current year than you would have otherwise had to do order to pay less tax over your lifetime over the long haul. So there you have it the four income tax buckets. Again, they are ordinary income tax deferred capital gains, and tax free, all about coming up with a strategy for your individual situation using the rules of the game that have been created by the IRS and Congress and will continue to change and coming up with the best game plan to pay the least amount of taxes over your lifetime. beauty of this is just like my road trip to Florida 20 years ago.
Thank you for indulging me on that story. It's easier to figure out the most efficient path the most efficient route than it used to be like that drive technology makes this tax job much easier than it used to be. can't even imagine how the average person would go about finding out the basic details on tax laws and tax rates on their own 20 or 30 years ago. Now that information is pretty easy to find on the internet. And 20 or 30 years ago even if you were armed with the right tax information, you'd have to do a ton of long hand math figured out the best strategy for yourself. Now, thanks to technology, the math is much simpler to do you know what buttons to push and when to push them. So the conversation today has probably been a little more technical than I hoped a little more numbers than I hope to get into keep working on making everything a little simpler. Hopefully you've taken to heart the main message, figuring out a way to not get killed on taxes. You need more than you have to use education and technology to help accomplish that. Just like my road trip to Florida, there's a more efficient way to get there. There used to be ready then that is all I have for now. I hope you have found this tax information useful and we will talk to you 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 to learn more about ways to reduce your taxes and generate income from your assets in retirement? Our affiliated firm dentist Exit Planning might be able to help you with those two things. Schedule an initial consultation with us on our website. Our web address is dentists exit.com There's no obligation for your initial consultation, again scheduled that initial consultation at dentist exit.com. As for our disclosure, Dentist Exit Planning and Terrell advisors 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 dentists Exit Planning or Terrell advisors. This podcast conveys the views and opinions of Shawn Terrell and his guests in 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.