Nate Reineke (00:12)
Hello, physician moms and dads. I'm Nate Rennecke, certified financial planner and primary advisor here at Physician Family Financial Advisors. Our team today is hard at work making sure physician families we serve can retire without regret. So for the next couple of weeks, it'll just be me on the podcast. Hope that is okay. And ⁓ I'm a little bit feeling pretty good today, a little amped up because yesterday,
I did an hour long webinar called, How Doctors with Kids Can Retire Without Regrets, a three step planning process. So I thought I would offer our listeners the chance to get a copy of that video. We should have it by the time this podcast is released. If you're interested, you can email us at podcast at physicianfamily.com and we will send it your way. So with that, I am going to jump into some questions.
We got questions from East to West Coast today. First one from the West Coast pediatrician in California. I inherited an IRA from my mom, plan to work for the next 10 years. The IRA is subject to the 10 year rule. I'm switching jobs to a higher paying job in 2026. Should I withdraw it now or wait? So it used to be the case
that instead of being forced ⁓ to drain the account within 10 years, you could stretch out your distributions. So you could stretch it out over your life expectancy with required minimum distributions. But the IRS doesn't let you do that anymore. They don't let you stretch out inherited IRAs unless you're a spouse, a minor child, there's a handful of exceptions. But for most adult children's,
⁓ That means the account must be liquidated by the end of year 10. Okay, so for this ⁓ pediatrician here, which I know very well and I think she listens to most episodes. I want to say sorry about your mom passing. I know we've talked about this, but I'll say it again here. ⁓ For this pediatrician, you know, let's say they were in the 24 % tax bracket.
And in 2026, when their income goes up, they're in the 32 % tax bracket. In that case, it probably would be best to just liquidate the account. But that's how you do this math. You essentially look at, will my taxes be this year? What might my taxes be next year? And you just make the best tax choice, assuming you don't need the money for anything. Because obviously, maybe if you need the money for something really important.
you just pay the extra taxes. But if your tax bracket's the same, let's say you're 32 % the whole way, you really need to just think about what is my income going to be like over the next 10 years? Maybe there's a year where you slow down at work for some reason, or there's a year where maybe that runs into retirement.
and you think, hey, in five years I'm retiring, my income will be way down. You just need to do some thinking about that and take it out in the best year possible. But it's not always planable and you just do your best with your tax brackets. ⁓ Another tip here, a lot of people take this money and for whatever reason, they just sort of look at it as extra money. They might spend it or do something else with it. ⁓ This is a
great way to boost your retirement. Assuming you don't need the money, you can reinvest it in a taxable brokerage account. And ⁓ if you're one of our clients, we probably included this inherited IRA in your plan. So you want to make sure that it stays in your plan, even if it changes accounts or account types.
Next question is actually from a business owner who is the spouse of a dermatologist in Virginia. They said, opened a group 401k plan with a non-spouse employee, but the employees never became eligible for it. I don't anticipate having an employee that is eligible. Can I open a solo 401k and transfer the funds into it from the group plan?
The answer is usually you can. ⁓ Here's how it works. You need to formally terminate the existing group 401k. That means filing your final form 5500. And ⁓ if you need to, you know, if applicable, ⁓ following your plan provider's termination procedures. So give your plan provider a call, figure out what you need to do to terminate. And once the plan is officially terminated,
You can then roll those assets into a new solo 401k that you set up yourself. ⁓ We set these up, solo 401ks up for families all the time as well. But if you're doing this on your own, you got to go set up that solo and roll it in there. Technically, you could roll them into an IRA first to fund the solo 401k. But and we see this a lot. We see people roll money out of 401ks into IRAs. But most physician families
like keeping the money inside the solo 401k to make sure they don't block their backdoor Roth IRA option. So the best bet would be go straight into the solo. The things to watch out for here, there are employee, you know, the employee eligibility rules. You should triple check that that non-spouse employee ⁓ truly never met eligibility, ⁓ meaning they didn't work. I think it's a thousand plus hours in a year.
and they don't qualify for the new long-term, ⁓ it's a part-time, long-term part-time, there's a eligibility rule and secure act that you need to be careful of. So make sure they never, were never eligible, terminate your old plan, open a solo 401k and roll it in there.
Pretty unique question, but we actually see this quite a bit, kind of unraveling group plans, putting into solo 401ks or getting into the right plan for you and your business. Practice owners all the time. Okay, a cardiologist in Oregon. My wife has an inactive 401k that is changing custodians and is currently in a blackout period. What does that mean?
Okay. A blackout period is a, so essentially when a retirement plan changes bookkeepers or custodians, like let's say they move from Fidelity to Vanguard or from one third party administrator to another, there's usually essentially a transition time. And that transition time they call the blackout period. So during this time, you can't make trades, you can't request distributions or rollovers.
You essentially have no access to the account, hence the word blackout period. So it's frozen. But the bottom line is it's just an administrative freeze. And if you wait it out, eventually you'll have full access again. ⁓ for this question, if your wife thinks she'll want to roll over the 401k into an IRA or consolidate it elsewhere, just wait for the blackout period to be over and you'll have full control again. Nothing to worry about.
Okay, ⁓ next question is about cash balance plans.
from an addiction medication specialist in Oregon. Okay. So we're get a little deep into cash balance plans here. Here's the question. According to my plan, I'm on track for retirement and I may decrease my working hours soon. Should I open a cash balance plan account?
Well, let's start with defining cash balance plans. We've done that before many times, but they're a bit confusing to most. So a cash balance plan is a type of pension plan, but it kind of has some features that feel like a 401k. So here's some of the things about them. Your employer, and that might be you if you're a business owner or partner. Oftentimes it is, right?
Employers don't just roll out cash balance plans for nothing. But if you're your own employer, you make contributions on your own behalf to the cash balance plan or your employer does. ⁓ The plan promises a certain account balance. don't necessarily, you know, it doesn't promise a certain income. So most people think of when they think of pensions, but it promises a certain account balance that grows with
interest credits. And because it's a pension plan, the contribution limits can be much higher than a 401k. And I mean, I've seen it in the high, you know, six figures easily, depending on your age and income and the account balance that's being promised. So for high income physicians, ⁓ if you want to
shovel money into a pre-tax account, which is another way of saying deferring the taxes and not paying so much in taxes, you can consider a cash balance plan. ⁓ It usually makes sense when there's a few reasons why people do this. Let's say you're high income and you're behind on retirement ⁓ and you need to catch up really fast.
So you might have 10 years left and you want to shovel money into and defer money into an account as quickly as possible. Cash balance plan might make sense for you. ⁓ It could just be a tax tool. You just want to reduce taxable income during your peak earning years. The issue here is that there are some rules around the growth of the account. So, you know, if you're making a million dollars a year and you're 40, ⁓ you want to do some calculations on whether or not
those interest credits are going to slow down your growth ⁓ and you're kind of letting the taxes of this deal rule over the potential returns that you could get. ⁓ So alternatively, you could pay the taxes and put it in a taxable or brokerage account and the returns theoretically will be better.
And ⁓ Chelsea does this all the time. In fact, Chelsea came up with this. I talk to CPAs all the time who this doesn't even cross their mind. Doesn't cross their mind that you're going to get probably lower returns because you'll aim for lower returns. Because when you promise a rate of return, even though you're promising yourself, ⁓ regulatory bodies take that really seriously and you have to keep your promise. So you can't take a ton of risk in here without
running into a little bit of hot water. Therefore, ⁓ the credits you're giving yourself might be in the four or 5 % range. ⁓ And then you consider that against a taxable account where you can take more risk because you're 40 years old and you have 20 years left till you retire. Your returns in that account could be much better and outweigh the tax savings.
Another reason to do this would be you just expect to maintain high steady earnings for years to come, kind of the same as the taxable, know, reducing your high taxable income. But years to come is the key because when you set up these plans, they often require ongoing annual contributions. It's not just a one time thing and you can unravel them, but these are more complicated. I mean, there's
There's more people involved in the creation of the plan and managing the plan. They're a bit more expensive, quite a bit more expensive. So you just want to make sure it's really worth it. And in this question, a couple of things raise some red flags for me. This isn't a definitive answer because I don't know the situation in detail, but you said I'm on track for retirement and I may decrease my working hours soon. And that
combination of comments makes me cautious here because ⁓ cash balance plans are most valuable when you can commit to a annual contribution and you're lowering your hours. If your income drops and you can't consistently fund it, you might get yourself into some trouble there. And since you're already on track for retirement, that squash is the other piece of this, which is trying to catch up.
So unless you'll be making a lot more than you can spend even after cutting back your hours, I would just focus on the fact that you're on track and you can scale back. You know, that's really the reward for being on track is that you don't have to save a ton more for retirement or play catch up. ⁓ Cash balance plans really make sense when you're behind.
You're in your peak earning years, you have a stable practice and you plan to for a long time. So it's a powerful tool for the right problem, but don't be seeking out complexity here to solve a problem you don't have.
Okay.
And for the last question here, I have a really good one. ⁓ It's straightforward and a lot of you may know about it, but for the ones who don't, doctors with kids, young kids, my goodness, if you're not doing this, you're missing out on some really easy tax breaks. So this is a plastic surgeon in Missouri. We welcomed our new daughter.
into the world recently and want to know if the daycare FSA is worth it. So this is a dependent care FSA. They call it the daycare FSA. First off, congrats on your new daughter, Mr. or Mrs. Plastic Surgeon in Missouri. It's really exciting. I'm sorry for the daycare bills. I am almost out of the woods on that myself.
I'm wondering when I started not being watched at home. I feel like it was a lot earlier than nowadays, but today it's like nannies stick around forever and we take really good care of our kids. I don't know what that says about my parents, but I feel like at about nine years old, 10 years old maybe, no one was watching me. So the Dependent Care FSA, this is how it works. You can set aside $5,000 per year.
per household, not per child in this account. The money goes in pre-tax, meaning you don't pay any federal income tax, social security tax, or Medicare tax on it, which is fantastic. And can use it to reimburse yourself for qualified childcare expenses. So think of it this way, you're paying for your childcare anyway, you might as well pay with pre-tax dollars. ⁓ This is a...
No brainer, right? ⁓ Successful plastic surgeon, you might be paying close to 40 % in marginal tax rate with federal, state and payroll. My goodness, you're going to save almost half the money. So is it worth it? Yes. And the way I do this, I do this every year. I put the money in and I don't really look at it because a lot of people don't want to do this. They don't want to put the money in.
and then take it out every month. You don't have to do that. You just wait till the end of the year, collect your receipts from the daycare, and then you submit them all at once and you get $5,000 back. You didn't pay any taxes on it. So putting $5,000 in dependent care, to say, mean, it's at least two grand a year you're going to save in taxes. So ⁓ yes, it is absolutely worth it. It's worth your time to set up.
⁓ Important to know it is use it or lose it. So you need to be on top of this at the end of the year. Once you get all your your bills or at least enough bills to ⁓ you know, you can collect enough bills to show the $5,000 that you spent. ⁓ You just reimburse yourself. ⁓ But if you don't do that, you will lose the money. So that's the one kind of caveat. People don't like dealing with this paperwork at the end of the year. They're already filing their taxes.
But it's worth it to me, two grand for 30 minutes of paperwork. I also said this, it's household wide. I've seen a lot of times lately with dual income households, the dependent care efficacy is becoming a really common benefit that's being offered by employers. So don't put in 10,000, you get five for the whole house. Also note,
⁓ You can't use the FSA expenses twice on your taxes. You can't double dip. ⁓ So anything you use or pay for out of the FSA, it might take away some tax credits, which ⁓ I don't recall the limits, but a lot of those tax credits probably aren't available to you anyways for high income doctors. ⁓ And then it's payroll based. So you got to set it up through payroll, which ⁓ is easy.
and actually makes this a lot easier. ⁓ So when you ask the question, is it worth it? It's like, yeah, sign up for it. Click a couple of buttons when you're signing up for your benefits and the $5,000 going in, you just have to remember to take it out. ⁓ Last thing here is be careful with your child care bills. I hear physicians all the time paying their nannies under the table, which I do not. ⁓
Recommend for positions, but ⁓ if you're doing that you can't submit ⁓ Those expenses to get reimbursed from a dependent care at the say there needs to be a tax ID number has to be a legit child care expense or a dependent for the dependent care So ⁓ bottom line here is I I don't really see a situation where it's not worth it
Take advantage while you can. You're already getting hit over the head with big childcare bills early on. And why not get $2,000 back in taxes?
Okay, so that is it for me today. ⁓ I didn't have Chelsea, Ben, or Kyle to banter back and forth with, so it might be a little bit quick, but thank you for listening. I will be back on my own next week, and ⁓ I hope it's a, it might be a really focused episode on one topic, still deciding over here, but it should be good.
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