THE MILLIONAIRE DENTIST PODCAST

EPISODE 50 TRANSCRIPTION

Announcer:
Hello, everyone. Welcome to the Millionaire Dentist podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry, finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.

Casey Hiers:
Hello and welcome. This is Casey Hiers back in studio. Today we have more of a public service announcement for our listeners. I brought in Stacy Phillips. He's a financial planner and analyst here at Four Quadrants. And we just wanted to go over the 2021 IRS contribution limits for retirement plans. This is something that tends to change or be updated on an annual basis, and we just want to supply that information to our listener. Hopefully, your accountant, financial planner, business advisor, are already telling you these things. But unfortunately, we see a lot of folks that they don't get this information, so that's what we're here for today. Stacy, thanks for joining us.

Stacy Phillips:
Appreciate you have me on, Casey.

Casey Hiers:
Well, let's jump in for our listeners. Regarding the 2021 IRS contribution limits for retirement plans and those being updated or changing, why would our listener care about this? Why's this important?

Stacy Phillips:
That is a great question. And at a really basic level, two main goals that people have are saving more money and paying less taxes.

Casey Hiers:
No argument there. No argument there. A lot of phone calls I get, I'm tired of paying taxes. Well, you've got to pay taxes, but let's pay the least amount possible.

Stacy Phillips:
So getting into that a little more detailed, one of the most important things you can do as a business owner is make sure that you maximize your pretax savings, so anything you can save pretax is tax deferred until you retire and start drawing those funds out. In addition, it lowers your taxable income for that year, so you're going to pay less taxes.

Casey Hiers:
Well, I think you've got the listeners' attention with paying less taxes. So when should a practice owner look into this or really understand this on a micro level, not just a macro level?

Stacy Phillips:
The best time to start thinking about this is actually prior to the next coming year, and that's when the IRS sends out these guidelines for any changes in the contribution limits. So by looking at this ahead of time, it allows you to get ahead of it and make plans to take advantage of any changes that have happened that they provided.

Casey Hiers:
Proper planning prevents problems, the four Ps right there. All right, so that's why it's important. So let's just jump in. What are the limits to be aware of, the ones that have changed or not changed, the big ones that people need to know?

Stacy Phillips:
Absolutely. So there's a few of these that are obviously more common than the others. The main one that most people are aware of or familiar with is the annual elective deferral limit. And historically, that's gone up by about $500 each year.

Casey Hiers:
So it's going to be $20,000 this year?

Stacy Phillips:
Well, that's what one would think. However, if you look at the guidelines for summaries in this year, that has not changed, so it's going to remain at $19,500 for 2021. Another component of that is if you're age 50 or older, there is a catch up provision that would allow you to defer an additional $6,500, and again, that is not changed from the prior year, so that is the same as it was in 2020.

Casey Hiers:
Well, if the decision to not bump up that number to $20,000, if that decision happened in 2020, I guess none of us should be surprised that it's just staying the same. Right? Wah, wah.

Stacy Phillips:
Another important number that people might be interested in is the overall contribution limit at $58,000 per year. That did increase by $1000 over 2020. A lot of people don't know what this is.

Casey Hiers:
Yeah. What goes into that overall contribution cap to get somebody to be saving $58,000 a year?

Stacy Phillips:
So that $58,000 would include the employee elected deferrals, which is the $19,500, potentially the catch up contribution if you're age 50 or older, which is $6,500. It would also include any employer match. And in addition, it would also include any profit sharing. So those three components make up that total of the $58,000.

Casey Hiers:
Okay.

Stacy Phillips:
And speaking of the employer match, which I just mentioned, there is a maximum considered compensation limit. That has increased by $5,000 for 2021, so it will be at $290,000. This can be somewhat confusing for people. What it really means is that for someone that is making more than $290,000 a year, only the first $290,000 will be considered for the employer match portion.

Casey Hiers:
So what does that mean? I don't know the right question to ask here. What's the right question for me to ask? I guess, break that down. Would that be ...

Stacy Phillips:
Many dentists make more than $290,000 a year, so that is where this limit comes into play to where you have to realize that only the first $290,000 will count for your employer match portion.

Casey Hiers:
Okay. So let's say that all that rolls into the $58,000 a year. How about if a practice owner wants to save more than that? Obviously, here a lot of our clients are saving well over $80,000 to $100,000. How does someone do that? Because if you're saving $58,000 as a dentist, you are doing better than most, statistically speaking. However, as we know here, that's not enough to have a really good retirement, which most practice owners want after all their blood sweat and tears they've poured into schooling and building up their practice. So Stacy, walk us through saving more than $58,000. What has to occur?

Stacy Phillips:
That is a great point to bring up because as you just mentioned, you might be saving $58,000 per year, but that is likely not going to get you to where you need to be at retirement. So that leads us to your specific question. How do we save more than that? Well, we're maxing out the pretax side of things at $58,000. So we now have to look at the post tax. And how do you do that? Well, typically that's done through a brokerage account. And there, it's basically unlimited. So we're going to maximize our pretax at $58,000, and then we're going to focus the after tax, which is your take home dollars that you have in your checking account at home, your paychecks. And we're going to save a portion of that on top of the pretax savings to get us up to where we need to be in total.

Casey Hiers:
Okay. Well, that's helpful. I know I get asked that from time to time. People saving $19,500, or people saving $58,000 or $53,000, depending on their age. And they feel like they're maxing out a lot of their retirement vehicles of savings. And they want to know how to do more. And it's, I don't want to say as simple as that, but that's what you have to do to be the dentist that's saving $100,000, $150,000, $180,000 a year. Is there anything else around social security, or anything else that's changed?

Stacy Phillips:
Yes, there is. There's actually one other item that comes into play for a lot of practice owners, and that is the social security taxable wage base. So that has been increased to $142,800 for 2021. And so for somebody that makes more than that in a given year, after you hit $142,800, the social security taxes will no longer be taken out of your paycheck the remainder of the year, so that takes some planning ahead of time to know that this is going to occur.

Casey Hiers:
Is that per household or per individual?

Stacy Phillips:
That is per individual. So by planning ahead, you would have a pretty good idea when you're going to hit that point throughout the year. And then once those taxes drop off, obviously there are some additional money available that you could take home as a pay raise.

Casey Hiers:
Okay. Where can someone find this information? Obviously, our listener can hear this and it can pique interest, and they need to go dive a little bit deeper. Where can they go?

Stacy Phillips:
Another great question because this isn't very helpful if you can't find the information you need.

Casey Hiers:
Right.

Stacy Phillips:
So we have tried to make this easy by posting the link on this podcast to the information on the IRS website.

Casey Hiers:
Oh, perfect. Well, thank you. It really comes down to awareness and no surprises. And again, Stacy, I want to thank you for just going over some of these changes, or some of these items that typically change but aren't this year. Hopefully, our listeners are aware of this, and planning accordingly. Stacy, thanks again.

Stacy Phillips:
Thank you.

Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year, they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.