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EPISODE 147: The IRS, 2023, and Retirement

New year. New updates to retirement accounts. Jarrod is joined by Sam Neff, Associate Financial Planner from Four Quadrants, to give updated numbers to the 401k, and IRAs, and help explain the differences between different kinds of plans.

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EPISODE 147 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.

Jarrod Bridgeman:
Hey, welcome to the Millionaire Dentist. I'm your host Jarrod Bridgeman. Casey is out today. He is on the road and speaking with dentists and presenting, which is pretty exciting to get over the holidays and all that and get back out on the road. Today we've got Sam Neff, who's an associate financial planner with Four Quadrants here. I do believe that you are studying to be a CFP, certified financial planner?

Sam Neff:
Yeah, just halfway there about.

Jarrod Bridgeman:
Yeah, how's that going?

Sam Neff:
Oh, it's exciting stuff.

Jarrod Bridgeman:
Yeah, pretty easy I hear to do that.

Sam Neff:
Yeah.

Jarrod Bridgeman:
Yeah.

Sam Neff:
Some of the stuff that we're going over is actually what we're going to talk about today and-

Jarrod Bridgeman:
Oh, really?

Sam Neff:
It's-

Jarrod Bridgeman:
Very appropriate then.

Sam Neff:
Yeah. Yeah, it is. I'm happy to be called to the big leagues.

Jarrod Bridgeman:
That's right. Let me ask you, in terms of getting your CFP, how much time is that of your day or your week or whatever?

Sam Neff:
Yeah, so at this point putting in about eight hours of study a week. There's final exam courses. You have to pass a certain amount of coursework and then sit for the CFP exam. So it's pretty intensive. It's nice-

Jarrod Bridgeman:
And I heard the test itself is an all-day thing too, right, or multiple days?

Sam Neff:
It can be. It's not multiple days, but it can take all day. The nice part about this is when I was starting in this field my wife was actually going through her boards for dentistry.

Jarrod Bridgeman:
I was going to say, your wife's a dentist.

Sam Neff:
Yeah, so what was exciting about this is that I got to learn a lot of her study habits and then I also get to use that as marriage capital I guess is what I was going to say. Yeah, so with all the time that I got to spend cooking her dinner and doing all that stuff, she's doing all that for me now.

Jarrod Bridgeman:
Nice. All right. Listen, I applaud you. I years ago tried taking an online course just for fun to see if I felt the need to go back to school and it was even a course I wanted to take. It was about the history of women in comic books. I got through two classes and I just didn't have the patience to sit down and do anything.

Sam Neff:
Yeah.

Jarrod Bridgeman:
It's tough.

Sam Neff:
I think even if you try to tell yourself that if I'm passionate about this subject it should come pretty easy to me. But there's some things that are exciting and there's some things that aren't exciting.

Jarrod Bridgeman:
They're not so much.

Sam Neff:
Just like today, we're going to get to talk about the IRS, which is what everyone's... We're always excited to hear the words IRS or the letters IRS right.

Jarrod Bridgeman:
Well, one of the things... The main thing we're going to talk about today is we usually touch upon this once a year, is the changes to 401(k), catch-up, matches, and things like that. Why don't you go ahead and take it away? What's the first one and the biggest one that you would find that people should know about?

Sam Neff:
Well, I guess before we go into kind of the first and the biggest, just to kind of set the stage here, so a lot of what people talked about in 2022 was inflation, right?

Jarrod Bridgeman:
Right.

Sam Neff:
Inflation's just kind of running rampant.

Jarrod Bridgeman:
Kind of out of control from what I hear, yeah.

Sam Neff:
Yeah. And so ultimately-

Jarrod Bridgeman:
Should we get into whether it was the Democrats or the Republicans? No, we'll skip that. Okay.

Sam Neff:
That would be a topic for another day. Ultimately, what I would tell you is inflation is something that happens every year in some capacity, deflation. We can get into all the different things that happen, but basically, the value of the dollar moves, the value of your money moves, and so the IRS tries to offset that by certain limits, whether it's tax brackets. If you have maybe a parent that's collecting social security, they may have seen that benefits changed a little bit this year. The big one that a lot of people think about is their 401(k), right?

Jarrod Bridgeman:
 Exactly. Yeah, yeah, yeah. I have one of those now.

Sam Neff:
Typically... Yeah. Nice.

Jarrod Bridgeman:
It's exciting.

Sam Neff:
Managed by Four Quadrants?

Jarrod Bridgeman:
Yes. Yes, it is.

Sam Neff:
So the 401(k) is the account that most folks are looking to as their retirement vehicle. There are a ton of other different group retirement plans. For our purposes and the general audience today, we're not going to go into each and every single one of those. We do talk to our clients about whatever account.

Jarrod Bridgeman:
I mean, that's one of the great things about being one of our clients. I mean, of course with this podcast and with our free assessment that we're offering to everybody, which by the way, you can go to fourquadrantsadvisory.com/assessment to look into that. Today we're going to talk more generals and things that apply to everybody, but our clients do have access to your brain and our team's brain for basically every little nuance that's out there for this kind of stuff

Sam Neff:
Yeah. I mean, every situation's a little different, and everything's customized. And so when you're working with financial planners, an accounting team, we're going to look into your situation and make sure whatever you have is in your best interest.
But in a general sense today, if we're looking at the 401(k) plan, which affects most Americans, the contribution limits have gone up. It's a pretty sizable jump for the maximum contribution limit for 2023. So last year you could put $20,500 into a 401(k) account. This year you can contribute $22,500.

Jarrod Bridgeman:
All right.

Sam Neff:
So again, same thing with inflation. If you're putting the exact same amount of money away, you're actually falling behind. So that's why the IRS-

Jarrod Bridgeman:
That's what like a 10% increase on that?

Sam Neff:
That math seems to check out.

Jarrod Bridgeman:
Marketing to the rescue.

Sam Neff:
Well, nine-point something, but [inaudible 00:05:52] rounding, yeah.

Jarrod Bridgeman:
Yeah. Sure.

Sam Neff:
For those folks over 50, there's always the ability to put in catch-up contributions. So if you put in catch-up contributions, that has gone up to $7,500 for 2023. So that's also $1,000 increase.

Jarrod Bridgeman:
Let me ask you about the whole catch-up thing. So you have to be over 50 for that to kind of kick into gear. Can you be over 50 and that not apply to you or is it anybody over 50 can do catch up?

Sam Neff:
Anybody over 50 can do the catch contribution.

Jarrod Bridgeman:
Okay.

Sam Neff:
And just to make that clear, it is the year you turned 50. So if you turned 50 on December 30th, no problem. You can do your catch-up contribution. You don't have to wait and find a way to squirrel all that money into there, right?

Jarrod Bridgeman:
Okay. That's good to know.

Sam Neff:
But yeah, so if you're over age 50, you now have the ability to put 30,000 into one of these accounts as an employee contribution. So kind of sizable jumps. And what's interesting with that is it's nice to see, but it's also something that you got to kind of plan for, right?

Jarrod Bridgeman:
Right.

Sam Neff:
I mean, just because inflation happened doesn't mean that everybody magically started making more money, right?

Jarrod Bridgeman:
Yeah.

Sam Neff:
Some, but...

Jarrod Bridgeman:
Yes. Yes.

Sam Neff:
So that's something that we think is an important thing for a lot of folks to know.

Jarrod Bridgeman:
And that's the money obviously taking out pre-tax from your check.

Sam Neff:
Correct.

Jarrod Bridgeman:
From your income.

Sam Neff:
Correct.

Jarrod Bridgeman:
So did anything change with... A lot of companies offer matching? Did those numbers change and from what to what?

Sam Neff:
They Sure did. So you are allowed based on IRS rules to get a match up to a certain dollar amount.

Jarrod Bridgeman:
Okay.

Sam Neff:
So let's just say you made a million dollars last year.

Jarrod Bridgeman:
Oh, yeah. Yeah, I did.

Sam Neff:
Of course, right? We're all walking around doing that. Only 305,000 in 2022 could be matched. Okay. So in 2023, that has also jumped as well. That is up to 330,000.

Jarrod Bridgeman:
Is there any case... Because I'm obviously not super familiar with matching and what the rules and stuff like that are. I know for example, our company matches a particular percentage. Is there any maxes on that? Is there the government says you can only match 10% or just monetary based in general?

Sam Neff:
To keep things less complicated for folks, you can do some sort of matching up to that 350,000.

Jarrod Bridgeman:
Okay. Yeah.

Sam Neff:
Ultimately, there are other ways that you can find money getting into these accounts via profit sharing and all of that. But ultimately for matching purposes, to keep it kind of simple, you can have every dollar matched via a matching program up to $330,000.

Jarrod Bridgeman:
So that went up what 25,000 from last year to this year?

Sam Neff:
Correct. Yeah.

Jarrod Bridgeman:
Wow.

Sam Neff:
So if you're thinking about how do I want to position my W-2 income, that's something that, again, from a matching standpoint, it's a benefit. It is something that is a sizable jump.

Jarrod Bridgeman:
Wow. Now, is there any changes to... What else we have left? There's a IRA. That's a thing, right?

Sam Neff:
Yeah. Yeah. So for some folks that don't have retirement accounts, IRAs can be the only retirement vehicle that they have. Our clients will tend to utilize the 401(k) and the IRA. The IRA has a smaller contribution amount allowed to it, but for 2022 the contribution to that was $6,000. That's actually increased to 6,500 for 2023.

Jarrod Bridgeman:
Okay.

Sam Neff:
So not the largest of jumps. The catch up contribution for that has stayed the same. So if you are over age 50, you will be able to put $7,500 into an IRA account.

Jarrod Bridgeman:
Let me ask you for... I know we have some younger listeners. We have children listening to us. For maybe students still in dental school or maybe have just started as an associate. What really is an IRA compared to a 401(k). IRA? Is that where it's money... It's taxed before you put it in?

Sam Neff:
So this is a great question. It's actually one my wife and I had to go into last night.

Jarrod Bridgeman:
Okay.

Sam Neff:
We recently had a 401(k) set up for her practice and she saw the first chunk come out. We had to discuss exactly what that money was doing. So think of IRA the... Well, it's short for individual retirement accounts. So this has nothing to do with a group plan.

Jarrod Bridgeman:
Okay.

Sam Neff:
401(k) is... If you work in like a hospital, you might have a 403(b) or a 447. Those are group retirement plans. There's a lot of other nuance that's just not worth getting into. If you want to do that-

Jarrod Bridgeman:
Sure.

Sam Neff:
... go ahead and study for your CFP. For a lot of folks, it'll put you right to sleep. But ultimately, there are different ways that the IRA, 401(k) retirement vehicle can be taxed. So there's the traditional method which is, "I'm going to defer my taxes today." I'm going to let the money grow tax deferred. And then when I distribute it in retirement, I'm going to pay those taxes.

Jarrod Bridgeman:
And whatever the tax rate is at that year.

Sam Neff:
Exactly.

Jarrod Bridgeman:
Okay.

Sam Neff:
Yep. So the theory behind traditional, if that's the side that you lean towards, is I know that I'm making a lot of money today. I want to defer high tax brackets. I believe in retirement. I will be distributing this in a lower tax bracket.

Jarrod Bridgeman:
Okay.

Sam Neff:
We don't have a crystal ball to know exactly what that is. Ultimately, if you are a practice owner making the kind of money that a lot of the folks we work with make, it tends to be a favorable route for a lot of those folks.

Jarrod Bridgeman:
Okay.

Sam Neff:
There is the other side of that, which is the Roth version of it.

Jarrod Bridgeman:
And that's the IRA? Roth?

Sam Neff:
No.

Jarrod Bridgeman:
Oh those are still two different things. Okay.

Sam Neff:
So the beauty of it is you can have a Roth 401(k). You can have a Roth IRA.

Jarrod Bridgeman:
Got it.

Sam Neff:
So there is a traditional 401(k), there's a traditional IRA.

Jarrod Bridgeman:
Okay.

Sam Neff:
So think of those as the vehicle that the investments go into. And then you're deciding is it going to be taxed today or is it going to be taxed later? So with the Roth account, you pay the taxes now, but that money will grow tax free and distributes tax free in retirement. It sounds like a really good deal. For a lot of folks, it's also a really good deal. But ultimately it's just about figuring out and kind of estimating what's our effective tax bracket going to be when we make that decision as to which one's better.

Jarrod Bridgeman:
Okay. Good.

Sam Neff:
To your point, if I'm a young dentist just getting started, and when my wife was in dental school and I was the breadwinner for that short period of time in my life, we opened up a Roth IRA for her and we tried to get money into it. She had enough earned income that we could do that. You have to have income. You can't just do it. And we weren't married at the time, so she had a little part-time job and whatever she made I made sure that-

Jarrod Bridgeman:
And you guys were living in sin.

Sam Neff:
Yeah.

Jarrod Bridgeman:
Got it.

Sam Neff:
But ultimately for those folks, you're just at the beginning of your career. You're not making the kind of money you're going to be making. We can make a reasonable bet that that's going to be some of the lowest tax brackets you're ever going to be in. Let's max out that Roth account as much as we can until we can't do it anymore. There's ways to get around that.

Jarrod Bridgeman:
Okay.

Sam Neff:
We won't go into that either. But ultimately then you start the transition of, "oh, I'm starting to make real money. Maybe we need to start looking at the traditional route."

Jarrod Bridgeman:
Okay, thanks. That actually helped a ton.

Sam Neff:
Did it?

Jarrod Bridgeman:
Hopefully, it helped the listeners. But for me, I'm like, "Okay, now I'm starting to get it."

Sam Neff:
That's great.

Jarrod Bridgeman:
You're smarter than you look. I'll give you that.

Sam Neff:
Thank you.

Jarrod Bridgeman:
Yes.

Sam Neff:
And fortunately, no one has to see me today. But ultimately, I think my wife and I will have this conversation probably every two months or so.

Jarrod Bridgeman:
Yeah.

Sam Neff:
So I'm glad to hear that someone got it in a short period of time.

Jarrod Bridgeman:
Someone got some use out of it. You also wrote down, there's been some changes to the HSA and that's the health savings account stuff, right?

Sam Neff:
Yep.

Jarrod Bridgeman:
Okay.

Sam Neff:
So health savings accounts, they're actually very unique and they're pretty cool accounts. I mean, I don't know if they're Fonzi cool, but they're cool accounts, right? So the HSA contribution for a family this year is going up to $7,750. So that's going to increase by 450 bucks.

Jarrod Bridgeman:
Okay.

Sam Neff:
What's really neat with HSAs is I think a lot of folks, A, not enough people utilize them. B, the ones that do, they're not getting the maximum benefit they could out of them.

Jarrod Bridgeman:
Right.

Sam Neff:
Ultimately, it's always better if you can get money into that account somehow because you get to deduct it from your taxes.

Jarrod Bridgeman:
Oh.

Sam Neff:
But HSAs are unique in that they offer features of the traditional type accounts that we are talking about and they offer Roth type features.

Jarrod Bridgeman:
Got it. Okay.

Sam Neff:
So in HSA, you can put money in and deduct it. It can grow tax deferred and, if you use it for medical expenses, it's tax free.

Jarrod Bridgeman:
Hey. Okay.

Sam Neff:
So a lot of folks we see will start to throw money into the HSA account, take their debit card. I got a skin appointment, whatever that's called.

Jarrod Bridgeman:
Dermatology.

Sam Neff:
I almost said gynecologist. Oh my goodness, I have not done one of those.

Jarrod Bridgeman:
Not in a while.

Sam Neff:
I have a dermatologist appointment. I'm going to go ahead and use the card for something like that.

Jarrod Bridgeman:
Okay.

Sam Neff:
But what you could do is put that money in. Let it grow years and years and years and years and years of compounding tax free.

Jarrod Bridgeman:
Sure.

Sam Neff:
And then later in life you can use it age 60 something and take that benefit tax free as well.

Jarrod Bridgeman:
Okay.

Sam Neff:
So I'd really like to-

Jarrod Bridgeman:
Save it up for when your body starts to wear out on you.

Sam Neff:
Yeah. Well, you can use that for long-term care type benefits too. So a lot of things that folks start to think about at the end, you can find a way to basically. I mean, you're not going to find a lot of triple tax advantaged accounts. And that's why I say the HSA is a cool account for folks. It's also one that if you get to age 65 and you don't have use for that, you can actually penalty free... You'll pay the taxes, but you can spend the money as though it was a traditional IRA account. So tax deferred.

Jarrod Bridgeman:
Now with an HSA is there a catch up thing with that as well?

Sam Neff:
Yeah, actually. And I'm glad you called me out on that one. I missed that. There is a $1,000 catch up contribution for-

Jarrod Bridgeman:
Now is that you still have to be over 50?

Sam Neff:
Over 50, yep.

Jarrod Bridgeman:
Okay.

Sam Neff:
And that is again for the family style plan. So that's gets you up to 8,750.

Jarrod Bridgeman:
Now, did that change at all from the year before?

Sam Neff:
The catch up contribution did not, no. No.

Jarrod Bridgeman:
Wow.

Sam Neff:
Yeah.

Jarrod Bridgeman:
Wow.

Sam Neff:
But that's definitely an account that you would want to take a look at.
So look ultimately with everything with inflation, all this is doing is trying to keep pace with it. Not like you have an advantage over somebody that was putting money into these accounts in the 90s-

Jarrod Bridgeman:
Right.

Sam Neff:
... but it is the way that a lot of folks will say, "Hey, all this stuff is happening and everything's bad." Well, there are measures that are being put in place to try to offset those things. And back to, is it a Democrat or Republican problem? This is something that they've been doing for years. Every administration's going to do it. So it's not a, "Oh, we wrote voted for the right guy and he did a great job," or "We voted for the wrong guy and he didn't do enough."
But yeah, so a pretty dry subject, right? Probably-

Jarrod Bridgeman:
Hey, you made it very lively. [inaudible 00:18:00].

Sam Neff:
Thank you. Thank you. We try our best to. Ultimately, the goal with this is just to give you a little bit of knowledge. And we're early in 2023, so just make sure you're planning to try to maximize these benefits because they can do wonders towards getting you to your financial goals.

Jarrod Bridgeman:
Right. And if you're out there and your CPA or your financial planner or your personal one hasn't informed you of this information, you might want to start asking yourself why. Why Are my people that I'm paying for not proactive like Four Quadrants? Right?

Sam Neff:
Yeah, absolutely. And again, We're really talking to a general audience here. There is a lot more nuance. There is many more accounts we could talk about. There's a lot of other rules, but ultimately-

Jarrod Bridgeman:
But I have to go home at some point.

Sam Neff:
Yeah.

Jarrod Bridgeman:
Yeah.

Sam Neff:
Well, it's just basically making sure that we paint the broadest brush. But then, yeah, I mean, ultimately the best thing to do is sit down and talk to somebody. Preferably us.

Jarrod Bridgeman:
Yep, yep.

Sam Neff:
And we'd be happy to give more detail as to the route to go and provide recommendations as to which account is best for you.

Jarrod Bridgeman:
Awesome. Well, thank you, Sam, for helping me out with that subject.
Listen, folks, we're going to be on the road continuing for probably the rest of the year. We're going to be in Atlanta and Nashville in February at Top Golf events. Please visit FourQuadrantsAdvisory.com/events. If you're in that area, feel free to register. It is a free event and we are offering a CE course along with the food, the golf, and the drinks, and all that stuff. So check us out.
Thanks, Sam.

Sam Neff:
Thanks, Jarrod.

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.