Feeling perplexed or uncertain about the ins and outs of a 401(k) and how it impacts you as the practice owner and your employees? Join Casey and Jarrod as they bring in Kal Owen, an associate financial planner from Four Quadrants, to dive into the world of 401(k)s and shed light on some of the recent changes that have taken place.
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 at The Millionaire Dentist Podcast in studio with co-host Jarrod Bridgeman.
Jarrod Bridgeman:
What? Hi. Hi, Casey. How are you?
Casey Hiers:
That's a great color. Is it turquoise?
Jarrod Bridgeman:
Yeah, maybe turquoise bluish green kind of thing.
Casey Hiers:
Like the jewelry from the Southwest.
Jarrod Bridgeman:
Yes.
Casey Hiers:
Like in New Mexico. Color looks great on you.
Jarrod Bridgeman:
Thank you.
Casey Hiers:
We also have an esteemed guest with us today, Mr. Kal Owen.
Kal Owen:
My shirt doesn't quite bring out my eyes like Jarrod's does, but I'm still better looking.
Jarrod Bridgeman:
I mean, at least you're wearing clothes today, so I appreciate that.
Casey Hiers:
Kal, tell us, you're part of the Four Quadrants Advisory team. This is your first podcast opportunity.
Kal Owen:
Yeah.
Casey Hiers:
Tell us your role here.
Kal Owen:
Yeah, thanks for having me guys. So, I work on the financial planning team here at Four Quadrants. So that encompasses both the business consulting aspects, getting our doctors practices up and running at top level, as well as, all of the success that we experienced there gets poured over into their personal financial plan. So, we're saving for retirement, we're accomplishing life goals, and we're helping the doctors navigate those waters as they go through it.
Casey Hiers:
See, Jarrod, he encompassed a hundred podcasts in one sentence. He helps get the practice profitable, and then once you have those successes, you have to then use it in the personal side and maximize it.
Jarrod Bridgeman:
Well, and that's why we don't really bring him on because I want to keep my job and keep the podcast going.
Casey Hiers:
Yeah, yeah. I was like-
Jarrod Bridgeman:
Thanks for an Owen time it's over. Duh.
Casey Hiers:
Dozens of podcasts. He just summed up right there, damn, genius.
Jarrod Bridgeman:
So, Kal, I wanted to bring you on today to talk about this is something that most people have at least heard of the term, kind of get the overall gist of it, but let's talk about retirement. Let's talk about 401(k)s and what the hell is that? What's a 401(k) plan?
Kal Owen:
A 401(k) plan is, it's a tax qualified retirement plan and there's a couple of different forms of that and really the benefit of the 401(k) compared to some other ones. Is that-
Casey Hiers:
Whoa, whoa, whoa. You already lost me. What? He's so smart. So I've been using the word 401(k) for decades, but I didn't know what it was, what the origin was. I like origin stories. Who's your favorite sports team, Kal?
Kal Owen:
Indianapolis Colts baby.
Casey Hiers:
Okay. Why?
Kal Owen:
Peyton Manning, grew up watching him. He was like my hero growing up. That man just knows how to work hard. You see him on the sidelines, always reading his playbook, always studying, always watching film. That guy was a great example growing up.
Jarrod Bridgeman:
And he loved 401(k)s.
Casey Hiers:
You watched him with family, right?
Kal Owen:
Yeah.
Casey Hiers:
So, there's your origin story. So 401k and your Colts fandom. That's your origin story. So, I looked it up. I'm only going to bore the audience for about 49 seconds, but why in the heck is it called that? That's been around for about 50 years. Oddly enough, it comes from the Revenue Act of 1978. It's the year I was born.
Jarrod Bridgeman:
Wow.
Casey Hiers:
Useless information.
Kal Owen:
You're that old?
Casey Hiers:
Yeah, I use great moisturizer.
Kal Owen:
I was about to say.
Casey Hiers:
Really good moisturizer. But yeah, 1978 Congress passed a law known as the Revenue Act of 1978, and I guess we'll call it a loophole, but ultimately there was something in there that there was a specific provision added that it was recognized by a gentleman by the name of Ted Benna, B-E-N-N-A, this segment known as Section 401(k) in this tax law, right? It's a section of a tax law in 1978 that employees were given away to the first stock option, a bonus compensation in a tax-free manner. So, Ted is who we have to thank for this 401(k) situation from the Revenue Act of 1978.
Kal Owen:
Wow. Bill and Ted.
Jarrod Bridgeman:
Applause.
Casey Hiers:
I thought that was big time, and I mean, Kal fell asleep there.
Jarrod Bridgeman:
I do love Bill and Ted.
Casey Hiers:
And then in 1981 the IRS updated 401(k) rules. Let's fast-forward to 2024.
Kal Owen:
Well, 2024, I mean, it's not uncommon, right? Say what you will about taxes, but the government typically uses them to influence our behavior and they want their cut of it as soon as possible. Here in 2024, they actually recently, a couple of years ago, released SECURE Act 1.0. Last year in 2023, they released SECURE Act 2.0. There's a lot of changes to retirement plans and just in general.
Casey Hiers:
So, 401(k) people can save money and not get taxed on it on the front end.
Kal Owen:
Yeah, that's the big thing. And they'll give you... They want to incentivize you to save, right? The government wants to incentivize you to save.
Casey Hiers:
I don't try to interpret what the government wants, and if I go down that rabbit hole, I probably won't be on any more podcasts. So, I'll just say, sure.
Kal Owen:
Sure. So, you are allowed to save that money and it is tax deferred. So not only-
Casey Hiers:
Not tax-free, you got to pay it just on the backend.
Kal Owen:
You got to pay it on the backend. That's exactly right. And the government caps you on how much money you can put in there every single year.
Casey Hiers:
I was going to say go from maybe 2019 to like-
Kal Owen:
They raise it every couple years. In 2024, it's $23,000.
Casey Hiers:
It's $22,500 last year, right?
Kal Owen:
Yup, yup. If you're older than age 50, they give you a bonus catch-up contribution, another 7.5k.
Casey Hiers:
Okay, so then if you're over 50 this year, you can save $30,500.
Kal Owen:
Nailed it.
Casey Hiers:
Look at me.
Jarrod Bridgeman:
Okay, so we've kind of roughly talked about what a 401(k) plan is. This was a question I was told to ask because I'm not even sure what the question is in itself, but what is a plan sponsor?
Kal Owen:
The plan sponsor is the business entity itself that sponsors the plan.
Jarrod Bridgeman:
Okay, so that'd be for us Four Quadrants.
Kal Owen:
Exactly. Or for the doctor of the dental practice that owner, they are the plan sponsor for their employees. So, not only does the 401(k) allow a person, an individual to save money for their retirement, but as a plan sponsor, you're enabling your employees to also save for retirement. And as a business owner, you're going to get some tax credits for that as well.
Casey Hiers:
Okay. Let's get specific into those. Number one, as a practice owner who doesn't have a 401(k) in their practice, should they, shouldn't they, what are some of the criteria generally speaking? And again, we're not giving anybody direct financial advice without knowing all of your situation. But generally speaking, what's that look like for a listener maybe that doesn't have one?
Kal Owen:
Well, depending on the state you live in, you may actually be forced into sponsoring some type of retirement plan, whether that's a 401(k), a simple IRA, et cetera. But for somebody-
Casey Hiers:
Who's doing the forcing?
Kal Owen:
It depends on the state, Illinois right next door to us. I know they're a big one. There's a couple others as well.
Jarrod Bridgeman:
And I'm assuming they know that whenever they form their LLC or whatever the case may be, or is it like two years down the road, all of a sudden the government's like, "Yo, where's your 401(k) stuff at?"
Kal Owen:
They are giving new business owners, if you incorporate this year, they'll give you a grace period typically. But yeah, once you cross that, I hope you're in the know.
Jarrod Bridgeman:
Let's get to... Casey, what was your question again? Besides the ones they're being forced to, what's that look like for a...
Casey Hiers:
Yeah, so again, for a practice owner, let's say they don't have a 401(k) in place yet, is there a reason why they would or wouldn't? What are the benefits? Just kind of line those out.
Kal Owen:
The benefits of the 401(k) would be it's going to allow you as the practice owner to save money for retirement, but it's also going to allow you to get a tax deduction on any match that you're paying yourself as well as a tax deduction on any match that you're providing for your employees.
Casey Hiers:
Okay, so it's a beautiful vehicle to save more yourself to offer this to your employees and to reduce your tax liability.
Kal Owen:
Absolutely.
Casey Hiers:
Got you. How do you decide what to match? Some people match at different percentages to their employees.
Kal Owen:
That's a pretty big question, and it really depends on each individual's situation. Some of it can come down to how much do you need to save, and supporting yourself in that regard, and selecting a higher match amount so that you can save more. Now, doing that, you're also going to have to be paid more out to any employees that are participating. So, it can be a balancing act there.
Casey Hiers:
Makes sense.
Jarrod Bridgeman:
You mentioned there's different kinds of, I guess, classifications for a 401(k). Now, I've heard of a Roth 401(k), but I'm not quite sure what that is. What is that?
Kal Owen:
So, Casey mentioned previously that with the traditional 401(k), you don't pay any taxes on the front end. All of that money grows over time. And then you do pay taxes on the backend. A Roth 401(k) similar to a Roth IRA, if you've heard of that, it kind of works in the opposite direction. You do pay taxes on the front end, the money grows, but when you take the money out, you don't pay any taxes then.
Jarrod Bridgeman:
So, would it be you're kind of banking on whether you think taxes or higher now are going to be higher later?
Kal Owen:
And that's the hard part because you don't know what the government's going to do. So, control-
Casey Hiers:
So, news flash they're going to take more money.
Kal Owen:
Yeah. So, control what you can control, right? And that's part of what we do with our clients here is we know whether or not... We can kind of project based on your current spending, current income, future needs and expenses down the road. Is it better to do traditional now or Roth now?
Jarrod Bridgeman:
Would you say the traditional... I mean, it's obviously we call it traditional because that tend to be the more standard. Or is it called traditional just because that's what kind of came first?
Kal Owen:
Yeah, I think it's just because it's what came first.
Jarrod Bridgeman:
Okay.
Casey Hiers:
Well, I think what I'm hearing is your 401(k) should be very custom. It should be custom to a lot of different factors, and there's not one lens to look through. There's not a one size fits all.
Kal Owen:
Absolutely. Okay. As is your entire personal financial plan.
Casey Hiers:
Yeah. And then we get ask all the time, "Oh, do you guys do a 401(k)?" Well, yes and no. The strategy and the percentages and things of that nature, but is it by law, or if you follow SEC guidelines, you have to have a third party administrator?
Kal Owen:
That's correct as well, Casey. So, if Four Quadrants, we help people set up and manage their 401(k)s, we do a lot of the investment advisory work.
Casey Hiers:
Get it nice and customed for them. Each person's situation.
Kal Owen:
Exactly. But there's also administration, rules and regulation, et cetera, that has to be followed, and the government mandates that there's a third party administrator that has to be involved in that process. They handle all of that administration, they handle all of that paperwork, they do things like send out quarterly statements, et cetera. But really, what they're there for is to make sure that the plan stays compliant with laws and regulations.
Casey Hiers:
There's probably a fee for that. Nice service, huh?
Kal Owen:
Yeah.
Jarrod Bridgeman:
When it comes to 401(k)s, is there a required minimum for distributions? If I'm asking that right?
Kal Owen:
Yeah. So, we mentioned earlier, the government wants their money now, right? But they want you to save for retirement. So what they say is as soon as you get to a certain age, you have to take what are called required minimum distributions. You have to pull some money out, you have to pay some taxes on it.
Jarrod Bridgeman:
That's stupid. Cut that out.
Kal Owen:
I'm not disagreeing with you.
Jarrod Bridgeman:
Okay, so the government requires you to take out minimum distributions of certain ages.
Casey Hiers:
At what age?
Jarrod Bridgeman:
What age is that?
Kal Owen:
It used to be age 72. I mentioned earlier, SECURE Act 2.0 rolled around recently and changed some of those things. So as of 1/1/2023, the RMD age was increased to 73.
Jarrod Bridgeman:
Okay. And is that just because our age of retirement keeps raising?
Kal Owen:
Yeah, people are living longer.
Casey Hiers:
Are they?
Kal Owen:
People are working longer.
Casey Hiers:
Are they?
Jarrod Bridgeman:
Well, not in America, but.
Casey Hiers:
Life expectancy has gone down recently for the first time or two in a long time and inflation goes up, so therefore we have to work more. The mafia wants their cut, damn it. Where's my money?
Kal Owen:
Yeah. Well, that's another one too. I mean, you talk about the mafia wanting their cut. They did increase the RMD age, but they changed how people who inherit money from a 401(k), from an estate, whatever.
Casey Hiers:
So, you got $5 million in a 401(k), you're 83 and you leave it to said person.
Kal Owen:
Said person, you used to be able to spend... used to be able to inherit that money and spend it over the rest of your life. Government changed that. You got to spend all of that qualified 401(k), IRA money, et cetera, in 10 years.
Jarrod Bridgeman:
What if you want to spend that less time? I'm sure I can spend $5 million in a year.
Kal Owen:
By all means.
Jarrod Bridgeman:
That's fine. Okay. Just checking. I got some places to buy.
Casey Hiers:
Yeah, I didn't know that. That's interesting. What other, I guess-
Jarrod Bridgeman:
[inaudible 00:13:24].
Casey Hiers:
... thinking about our listeners who practice owners on that side of things, what else about 401(k)s did you want to touch on?
Kal Owen:
A lot of the new changes. If you already have a 401(k) just being aware of the new changes that are coming down the pipeline is the big thing to be aware of. We talked about the RMD age increasing already. We talked about the new 10-year spend-down rule for people inheriting IRAs. There's a lot more new stuff coming as well, such as automatic enrollment is a big one.
Casey Hiers:
Do tell.
Kal Owen:
So, currently there's usually some eligibility criteria for entering a 401(k) plan. You have to be X years old, you have to be employed for X amount of time a year, et cetera. A lot of plans say you have to be a full-time employee. And then once they cross that threshold and they're eligible for the plan, they're allowed to opt in and participate. Starting next year that changes. They cross that threshold. You have to auto enroll your employees now. Government says not enough people are saving for retirement and social security is not going to be enough for a lot of people. So, you have to auto enroll them into these plans. Now, that doesn't mean they have to participate. It's not mandatory. They can choose to opt out opposite of before where they had to opt in. But it is very important for plan sponsors, business owners to be aware of when those eligibility dates are for people so they can make sure that they get enrolled.
Jarrod Bridgeman:
And you said that's next year?
Kal Owen:
Correct.
Jarrod Bridgeman:
Okay. Is there a minimum amount... So, they're automatically opted in now, is there a minimum percentage that they're going to do unless they opt out?
Kal Owen:
They start them at 3% of their compensation.
Jarrod Bridgeman:
Okay.
Kal Owen:
Every year I believe they increase it by 1% up to 10% unless that employee elects to stop at a certain threshold, et cetera.
Casey Hiers:
Any common mistakes or I guess let's call them bugaboos 401(k)s? The practice owners, sometimes we see maybe it was structured in a way that wasn't advantageous or I mean, are these sort of plug and play for the most part? I mean, you've got to customize some very important details, match percentages, what you're putting in, how you're structuring some things. But are there any other sort of nuance to share about 401(k)s?
Kal Owen:
We try to at least here at our firm, curb that on the front end, things that people can get themselves into trouble with are like loan provisions. Some 401(k) plans allow you to take loans from your own balance before the-
Jarrod Bridgeman:
Before they pay taxes on.
Kal Owen:
Before it's pay taxes on them.
Jarrod Bridgeman:
So, this is different than me just straight up taking money out of my 401(k)? Because I know you get hit with some pretty [inaudible 00:16:09]-
Casey Hiers:
So, this example would be if you have a nine-month stretch of poor cashflow, something happens, you need some money, you don't want to put it on a credit card, you borrow from your 401(k) and hopefully pay it back very soon. What did you get hit with negatively?
Kal Owen:
Well, they're going to charge you some interest.
Casey Hiers:
What?
Kal Owen:
They're going to charge you interest to borrow your own-
Jarrod Bridgeman:
Why do they do that?
Kal Owen:
... To borrow your own money. Not to mention it's messy. It's complicated. Then you got to pay that money back, which means you're probably not saving as much money and really it just gets people in trouble with themselves. Now, if you're really in a bind and you've exhausted all other avenues, sure you can go that route, but it can be trouble. And-
Jarrod Bridgeman:
It's more of a last line of defense.
Kal Owen:
It's a last line of defense.
Casey Hiers:
Short of going to Vegas to get paid to play Russian roulette in front of degenerate gamblers, you shouldn't do it. But if your next option is that borrow from your 401(k).
Jarrod Bridgeman:
I see you've been following my Instagram.
Kal Owen:
So, you can set the 401(k) up to not allow the loans though to just skew the problem altogether.
Casey Hiers:
Interesting.
Jarrod Bridgeman:
So, whoever sets up the program is the one that gets to decide that?
Kal Owen:
Yup. There are several things that they get to decide the eligibility ages and there's some IRS mandated minimums and maximums, what's the match percentage, et cetera. And that's one of those options available.
Jarrod Bridgeman:
Okay. Okay.
Casey Hiers:
So, if a couple are over 50, they can save $61,000. Both of them maxing it and taking the over 50 catch-up.
Kal Owen:
And that's just their own elective deferrals. They're going to have the match on top of that. And then one of the other benefits of the 401(k) plan in particular is that on top of your elective deferral and your employer match, employer can also do profit sharing.
Casey Hiers:
Oh, let's get into that.
Kal Owen:
Profit sharing is discretionary. If you're having a good year and you want to save some more for retirement for yourself and you want to benefit your employees as part of that, instead of paying yourself more to save it elsewhere and paying the government taxes, pay into that profit share plan. If you're having a good year and if you're not having a bad year, maybe you don't have the option to do that, but that's kind of the beauty-
Casey Hiers:
Can you decide year to year if you do it or not?
Kal Owen:
Yeah. That's kind of the beauty of the profit share plan within the 401(k).
Casey Hiers:
You can push pause.
Kal Owen:
It's not mandatory every single year. It's completely discretionary.
Casey Hiers:
So, if somebody's crushing it and pretty profitable, and that's when you look to that?
Kal Owen:
Absolutely.
Casey Hiers:
Like somebody that's struggling to get patients and maybe not... has terrible cashflow. Profit share is probably not going to be their go-to.
Kal Owen:
Yup. Absolutely.
Casey Hiers:
This is more for somebody who's... They're hitting a level of success and they're looking for some strategy.
Kal Owen:
Absolutely. That's a great way to save more for retirement and benefit your employees.
Casey Hiers:
How much more can they save?
Kal Owen:
Between per person, between your elective deferral, your employee, your employer match and profit share, $69,000 a year per person.
Casey Hiers:
Nice.
Jarrod Bridgeman:
With Roth 401(k) starting this year, there's no minimum distribution?
Kal Owen:
Yeah, so the Roth 401(k)s similar to the Roth IRA, right? The money... You pay taxes on the front end, the money grows. You don't pay any taxes when you take the money out. Now, with Roth IRAs, they differed from Roth 401(k)s where there were no required minimum distributions in Roth accounts and a Roth IRA account. And a Roth 401(k), however, there used to be required minimum distributions.
Jarrod Bridgeman:
Just like in traditional 401(k). Okay.
Kal Owen:
Exactly.
Jarrod Bridgeman:
And now that's been taken away as of this year? Or stopped I should say.
Kal Owen:
Yeah, with SECURE Act 2.0, they changed that. Roth 401(k)s now operates similarly to Roth IRAs where there are no RMD requirements.
Jarrod Bridgeman:
Is there any other option, let's say someone needed to... We talked about the loans. We talked about getting dinged if you just take money straight out of your 401(k). Is there any other option for a quick fix on cash?
Kal Owen:
Yeah, that was another provision of the SECURE Act 2.0. Starting in 2024, there's an annual $1,000 emergency expense distribution that's allowed from your 401(k) account without being charged that 10% penalty.
Casey Hiers:
There used to be pensions and then pensions must've been too good a deal for we the people. So then they went away and then 401(k)s kind of replaced them. I was just curious like that trend.
Kal Owen:
401(k)s give you more flexibility as an employer. A lot of pension plans, those contributions can be mandatory.
Casey Hiers:
How about from the ones 20 years ago?
Kal Owen:
It depends on the setup, but a lot of them, they're mandatory and they're expensive for the employer to operate. So, as a small business owner, especially depending on what phase of your business life you're in.
Casey Hiers:
Probably lucky there's not a pension. Yeah.
Kal Owen:
Yeah, yeah. That 401(k)-
Casey Hiers:
As a business owner.
Kal Owen:
Exactly, as a business owner, that 401(k) allows you to save a lot while still retaining a lot of flexibility.
Casey Hiers:
Nice. Pop quiz. What's the origin of the 401(k)?
Kal Owen:
It's 1978 Casey's birth year tax act.
Casey Hiers:
Yes. Yes. Good, good.
Jarrod Bridgeman:
Kal, anything else you think you'd need to remind our listeners out there? Anybody who's already a plan sponsor at this time?
Kal Owen:
Yeah, with a lot of these new changes coming and SECURE Act 2.0, as a plan sponsor, you need to be aware of them so that way you remain in compliance. That third-party administrator should be there to be used as a resource for questions with that, to make sure to help you stay within compliance. But unfortunately having them doesn't release the plan sponsor from liability or the responsibilities of staying compliant with SECURE Act 2.0 guidelines.
Jarrod Bridgeman:
And if people have questions about their particular 401(k) plans, who should they talk to? Talk to the maybe the third party administrator?
Kal Owen:
Yeah, the third-party administrator can answer a lot of questions, but if you have savvy investment advisors like us, truly, we always are free to vet questions from our clients.
Jarrod Bridgeman:
Yeah. And if you want to call Kal personally, I'll give you a cell phone number right after this.
Casey Hiers:
Well, Kal, thanks for coming on and talking about this topic. I know the number changes every year and there's a little devil in the details. There's little tweaks and things of that nature. But just wanted to give our listeners a broad overview of 401(k) a minute of rich history and get into it a little bit. So thank you for joining us.
Kal Owen:
Thanks for having me.
Jarrod Bridgeman:
Folks, don't forget, we are going to be in Nashville and in Colorado coming up in the next two months. If you're interested in joining one of our events and hear Casey speak, go to fourquadrantsadvisory.com/events and register. If you would love to give us a review and rate us on Spotify or Apple Podcast wherever you listen to us, that'd be wonderful. Make sure to share it with all your friends and family and get your kids listening too they'll love this. Thanks a lot, guys.
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.
