Speaker 1 (00:02.2)
Welcome to the Physician Family Financial Advisors Podcast, where physician moms and dads turn today's worries about taxes and investing into all the money you need for college and retirement. I'm Ben Utley.
And I'm Nate Rennecke. Ben, today, before we get started, I just wanted to say thank you to a few of our listeners. They reached out and they all requested a free copy of the Overtaxed Doctor's Guide to Retirement for 2022. And we got requests from Patty, Jason, Steve, Andrew, and Michael. I just wanted to say thank you for requesting that.
Yeah, thank you very much. What you do makes what we do matter.
Yes. Okay, so today we are talking about the three new tax mistakes doctors will make in 2023. new tax Right. I don't know if you know this, but things change, Ben, including the tax code. with code changes brings potential mistakes or potential opportunities.
New talk's mistake.
Speaker 1 (01:09.107)
Double-sided coin.
Yes. So we're going to go through three of those today. And we're going to start with one that gets a lot of people, which is the back door Roth or your IRAs. And basically what's going on is there was a limit increase. So the annual contribution limit to an IRA increased to 6,500 from $6,000 per year. And the
the catch-up limit, so if you're over 50, remained at 1,000. So Ben, can you maybe tell us how someone could screw this up?
Yeah, yeah, I can. So let's say that last year you diligently were putting in, if you put in $6,000 in one chunk last year, then you're not likely to make this mistake if you chunk it down every year. So this year you'd say, okay, I'm going to write a check for $6,500 or $7,500 if you're age 50 and older like I am. If you chunk it down on a monthly basis, it's really easy. $6,000 divided by 12 is $500 for last year.
This year the math is a little bit more complicated. And if you have the set on autopilot, which is we have the set on autopilot for all of our clients, then you need to make an adjustment for that first contribution that comes in in January. And we actually make that adjustment for our clients here. But if you're handling your own money or if you're one of our clients and you're managing your own accounts, you want to make sure to get in there and make that adjustment. Yeah, so mean, it's an extra $500, but every dollar counts.
Speaker 1 (02:46.702)
especially with the backdoor Roth because that $500 is going to grow tax free forever and we want all the tax free forever growth that we can get.
Yeah, I think it's important to note that part. It's not necessarily, you you don't actually get a break this year for this, but there's only so few dollars you get to stuff into this Roth. Yeah, it's such a small amount that and it's so powerful that that 500 bucks is you got to do.
As I like to say, a limited time only.
Yes. All right. So there's the first one. And the next one is kind of right in line with that, which is the the limits for the 401k. Pretty big increase this year, but the annual contribution limit for 401k increased to 22,500 up from 20,500. And the catch up contribution increased as well from 275 hundred from 6500.
And this is a little bit different in how you would catch this mistake or how people make this mistake, probably even more common than the Roth. So you talk about that.
Speaker 1 (03:55.734)
Yeah, that's like a delta of 3000 bucks that you can put in if you're eligible for the catch up. So there's a couple ways this mistake happens and it comes down to how the contributions are set up for 401ks. So the 401k contribution is known as an elective deferral. You elect to defer that money into another vehicle. When you make your elective deferral, typically you'll log into the website for your 401k provider and you tell them that you either want to
you want to contribute a certain percentage of your compensation or a certain dollar amount of your compensation. Sometimes it's expressed as a bimonthly contribution, it can be expressed as a monthly contribution, and some people get paid twice a month, some people get paid 26 times a year. So there are really easily four different ways that your contributions can be calculated. So that's a little bit confusing. There is no box that says, max out my 401k.
you can't check the box that's not not possible never see it
In no box that says, spread this contribution out evenly over 12 months.
Yeah. And thanks for bringing that up. So, one of the mistakes that we, we see people make is to bunch up all their contributions to the beginning of the year. And they think, Hey, I want to get this all in right now. I want as much time as I can for growth. In some cases, that's a good thing, but some plans calculate their match based throughout the year. So if you bunch up and you get all your contributions in by the end of April,
Speaker 1 (05:27.918)
then you'll get the match that goes through April, but you might not get the match that goes with May through December. And so it's very difficult to suss out which plans match on a per paycheck period and which ones match just a dollar amount. So you want to try to spread this out over the year until you can figure out, you know, which kind of plan do I have? And you could probably ask your HR department, but it's so deeply buried. The best way to figure this out is to simply observe.
how the matches work. So with that said, the way that the problem happens is that let's say that you set your let's say you set your contributions for 1 24th of 20,500 last year. Okay, so that would put you right on track to contribute exactly 20,500. If you forget to change that this year, you'll be under contributing. Another thing that happens is percentage. So I adjusted my 401k recently.
And because my comp changed and the dollar amounts changed. And so if you have set and forget percentage, that's kind of dangerous. So with set and forget percentages, one of the things that you can do is calculate what percentage of your comp we're talking about. So let's say that the contribution is $22,500 and you make $225,000. Then that's an easy 10%. Right? So that would spread it throughout the course of the year. But if you want to be sure.
you don't miss it. You can set it to something that's a little bit higher like maybe 12 percent so that as you contribute when you hit that maximum amount the computer will turn off your contributions. Your plan will not allow you to over contribute, right? So that way if you happen to miss the increase next year then you're not going to be way out in the weeds.
That's right. And there I came up with an example too, Ben, that how you can kind of screw this up. If you make $350,000 a year and last year you did that math that you just described or the first year that you started working, you did that math, you would come up to, this is last year, you would have needed to contribute about 6 % of your paycheck. Right. And this year that would make you, I think it's about $1,500 short.
Speaker 2 (07:46.25)
So these change and if you want to do it exactly spread out, you have to pay attention. Even if you go slightly above like you're talking about over the years, you still need to pay attention because after a few increases in the tax code, you're back.
Exactly. Exactly. And I thought of another way. the age 50 plus catch up this year is $7,500. So many people say, I have to be 50 to be able to do that. That's not the case. You can make those contributions in the year in which you turn 50. So if you're turning 50 on December 15th of next year, you have the ability to make that catch up contribution starting in January of next year.
You don't have to wait until 2024 to bump it up. Another way people screw this up is if they get a pay cut. So a classic example would be a parent who wants to spend more time at home with their children and they're taking a voluntary pay cut. They're reducing the number days they work from five to four. And so they're reducing their comp hopefully by only 20%. And in doing that, you're setting your contributions as a percentage of your comp, you won't max out.
I think we've probably covered all the different ways that you can screw up the 401k. You think this would be super easy. You just go in and check the box, but I've never seen that. I'm still waiting for it, but probably will never come.
Okay, and that one by the way is a big one. That's right off the top of your income. So that is a tax break this year and the easiest one to get. The number three, the last one, it's one of our favorites is underfunding your HSA. So you see a theme here. All these limits have increased and the HSA has increased to $7,750.
Speaker 1 (09:26.68)
Yes,
Speaker 2 (09:41.44)
from $7,300.
That's for family, for the family plan. Yeah, so that's that's one one insured plus one child or one insured plus one spouse or more.
Right, that's the family.
Speaker 2 (09:55.616)
Mm-hmm. That's right. Ketchup remains the same and the ketchup is 55 plus. So it's still a thousand dollars.
You have to be age 55 this coming year to be able to avail yourself of that extra.
And it's the same story, but probably a different portal, right? You have to do all these, all these limits get taken care of, or I guess adjusted in a different place usually at work. And you need to adjust this contribution as well. Probably even less helpful buttons for the HSA, but what is that? 450 bucks? Ish, yeah. So,
ish.
Speaker 2 (10:43.384)
There's another one.
You know the mistake for these where the mistake comes in is your employer is making your contribution, right? So let's say your employer was maxing out the contribution last year. It's possible that that employer has chosen not to max out this year. In fact, they may have adjusted the amount that they give. They may have turned off the amount they give. So if you have your own health savings account and you're saving the difference in that health savings account and the employer has made the adjustment,
then there's a chance that you could over-contribute or that you could under-contribute to your health savings account. guys, you gotta hear me on this. The health savings account is one of the best tax breaks that you're ever going to see because you get a tax break for contributions, you get tax-free growth, and then there's no taxes paid on the withdrawal in most states. For you California listeners, your HSA works entirely different than all the other 49 states. But for everybody else, this is tax-free growth forever.
which you can use on your largest expense in retirement, which is going to be healthcare. I also want to state one more thing here. So a lot of confusion around HSA versus FSA. F is for failure. So if you fail to use all of your FSA money before the end of the year, you lose it. H is for happy. If you have a health savings account, you will be happy to know that you can roll that money over from year to year. So keep that in mind.
Yeah. So those are the three mistakes. And the thing I wanted to point out was while these seem small, literally it is about a thousand dollars in your pocket this year if you make these adjustments. And that does not account for the tax free growth and the Roth and the HSA. Right. So these small things matter and they they kind of build on on each other over time.
Speaker 2 (12:42.794)
And not that any of our listeners would ever do this, but if you don't make these adjustments as you go along, you're really, it's one of the main things that could hurt you in getting to just a reasonable retirement. mean, this is a necessity for physicians to make these small adjustments.
Nate, I spoke to a prospective client the other day who admitted to me that for more than a decade, they had not contributed to an IRA, a 401k, or a health savings count.
my goodness.
Yeah, it's it still happens folks. It still happens So when you meet that person in the break room and they're like, probably should get started You know, just think like they're throwing away like the payments on a really nice car every year, right? They're probably throwing away ten thousand dollars in tax savings and That won't buy you any kind of car except the used car that we drive
But you could make payments on a nice car like that. That's enough money that you could send a kid to college with that kind of savings. So it's real. And I guess a take-home message here that I want everybody to get. The thousand bucks that you could save if you do this right next year, that's not going to make or break somebody. But when you become financially secure, when you move toward that target of having all the money that you're going to need no matter what happens, when you're doing that, you're not
Speaker 1 (14:08.632)
carving off big chunks. You're not making these bold strokes moves that you're going to be able to talk about in the hot tub. What you're doing is you're chipping away. You're grinding away at one little thing at a time. You're reducing this interest rate there. You're tucking in this extra amount of savings here. You're making a little extra payment on your mortgage. You're just reducing your costs over here and there and just making small smart moves that ultimately will snowball to the big smart move that you make. And ultimately that gives you the freedom
and the flexibility to spend your time the way that you want to spend it with your family.
So Nate, before I wrap up here, I'm gonna put in a plug again for the Overtax Doctor's Guide to Retirement 2022. The reason we're pushing this so hard is because we're gonna charge for this next year. The 2023 version of this is gonna have a price tag. It'll be available for purchase on our website. So some of the stuff that's in there will not change. Some of the other stuff will change. So if you want a shot at this, go ahead and contact us.
The best way to do it is just to write us. So you can write podcast at physicianfamily.com and say, hey, you know, your show is great and I want to get the Overtaxed Doctor's Guide to Retirement. You don't even have to say the show is great. Just say, give me the guide and we'll send it to you. Okay. So the other way to get involved with this is to get our newsletter because newsletter has some content that you're not going to get on the podcast. It has some neat things that are available to you. And in the future, we're going to tuck away some, some neat offers in there. So.
In order to get the newsletter, can go to PhysicianFamily.com, scroll all the way to the bottom, and you'll see there's a box for you to put your email address in there. We promise we will not spam you. Click submit, and then you'll get all the goodness that we can send your way on a monthly basis. That's all for now, folks. Thanks so much for listening to the Physician Family Financial Advisors podcast.
Speaker 2 (15:57.902)
Thank you for listening to the Physician Family Financial Advisors Podcast. Is there a question you would like answered on our next show? Go to PhysicianFamily.com to record your question. While you're there, sign up for our newsletter and gain access to tools you can use to turn worries about taxes, investing, and extra money into a lifelong feeling of financial security. That's PhysicianFamily.com.
