In today’s episode, I am joined by my friend and retirement plan consultant, Rickie Taylor. Rickie is an expert in the area of retirement plans and benefits for small to mid-sized businesses of all types. In today’s episode, we will be focusing on physician practices. Rickie is here to discuss how retirement plans can be used to significantly reduce the tax burden of physicians and employees.
This week, I’m talking to my friend and retirement plan expert, Rickie Taylor, Rickie, and I work together to provide retirement plan and investment services to anesthesiology and pain practices. As part of the ASA Alliance program, the Alliance program is a resource that’s been put together by the American society of anesthesiologists. So that practice managers and practice owning positions can find vetted professional service providers to make sure that all aspects of their practices are functioning. Optimally, my financial planning practice APM wealth is part of this Alliance program as are a handful of other companies, some of whom we’ll spotlight in future episodes of this podcast to discuss other facets of intelligent practice management and be a resource for our listeners. Today’s content is mostly geared towards practice decision-makers as always thanks for tuning in
Hello and welcome to episode 52 of the anesthesia success podcast. I’m very pleased to be joining you today with my friend, Rickie Taylor. Rickie is an expert in the area of retirement plans and benefits for small to midsized businesses of all types. In this case, we’re talking about physician practices, or this is the equivalent of me calling a consult today with a retirement plan expert. So I’m really glad to be having Rickie here to frame a discussion for us around retirement plans and how they can be used in the context of a practice to be able to significantly reduce the tax burden of physicians and employees and how it’s it really matters how you set these things up. It’s a somewhat technical topic. Today’s content is framed and directed towards physician practice owners, equity partners of either a solo practice or small to midsized pain or anesthesia practice and practice managers.
So if that doesn’t describe you, unless you’re interested just as a hobby and learning about retirement plans, you might want to, you might want to keep it moving. So, Rickie, thanks for joining us today.
Rickie Taylor (02:21):
Awesome, Justin, thank you so much for having me, man. I’m really excited to to be here. So one of the things that I love about my job as a financial planner, and I know you’ve shared about your job is that although the mechanism by which we help people is somewhat technical, financial doing stuff with money at the end of the day, it’s the human element it’s making people’s lives better. It’s the improvement of a businesses or a person’s situation that really gets me out of bed in the morning. And I know the same is true for you. So to start us off, just tell us a little bit about the human element of your job. Why do you love what you do and maybe give a brief?
Rickie Taylor (03:00):
Yeah, that’s great. Thanks Justin. So for me, you know, I’ve been in this for 20 years and it feels odd to say that because I’m only 45. Okay. and, and it’s, it’s so funny, but when I got started, I mean, I was selling insurances and just trying to interact with people. And then when I fell into retirement plan, it was just like, wow, this is really cool. I mean, I get to talk a little bit about money because I don’t want to be a financial advisor, but at the same time, I am talking about money and helping people. So for me, I mean a Monday is a great day. Okay. Most people hate Mondays, but I’m looking forward to it because I’m like, alright, what does my schedule have in store for me today? Who can I help today? Okay. You asked about an example and I’ll tell you one of many examples, because you know, in 20 years I’ve done a lot.
Rickie Taylor (03:51):
Okay. And I’ve helped a lot, but I think one that’s pretty relevant to what we’re discussing now is it’s an actual medical facility facility that had 60 employees. And there were 21 who were considered partners are highly compensated. What they had set up was a basic cookie cutter profit sharing plan. Now everybody’s getting the same percentage. So when the advisor brought me in, you know, I looked at all the information, had discussion with plan sponsor, asking things of like, what don’t you like? How can we improve this? And as it turns out one, I was able to redesign the plan and essentially get most of those highly compensated. It’s maxed out too. You know what the IRS says is the limit. Not only that I showed them in a diff plan design, how I could save the money. And as it turns out, I saved the company over $56,000 and expenses. So right there, that’s amazing. But I, I think if you add the human element to it, what I’m really excited about is the HR manager. Okay. I was able to help her ease her burden of the planet administration. She now absolutely loves me because I’ve made her job a lot easier. So when you factor in all of those things, I mean, that was like the perfect storm of a plan design, if you will.
Yeah. That’s awesome. And one of the things that I like, what you mentioned here, that I want to kind of zoom in on, is it it’s necessary for your retirement plan advisor to get to know you and your practice and your goals and your priorities more than you might expect in order to put a plan in place that’s going to be a good fit for you? I would imagine there’s a lot of people out there that would think, okay, I just need a, I need a retirement plan for myself or for my partners and my employees. Maybe we’ll just, you know, we’ll just kinda, I don’t know, like, like picking something off the shelf at the supermarket, but it’s actually, it requires a relationship. It requires communication. It requires analysis and there can be a huge difference in total cost and benefits between, you know, what advisor whose plan you replaced did in terms of benefits and costs and you able to increase the benefit and trim the costs significantly. And I think that’s, you know, I understand why you love Mondays with stories like that.
Rickie Taylor (06:11):
Yeah, that was awesome. So yeah, I mean a great situation, again, like you said, building the relationship is going to be key.
So one of my little soap boxes on this podcast is to serve as an advocate and a provider of resources for the physician entrepreneur, the practice owner, and the doctors who are trying to practice medicine on their own terms. And so I see this discussion very much in that light. And as you know, I, I’m a business owner, myself and my other business, owning friends and physicians who own businesses. There’s a lot of moving parts. There’s a million things to think about. Not only do you need to be clinically excellent and giving excellent patient care, but you need to be thinking about all the functions of the business. You need to be either outsourcing or coordinating all those elements to make sure that your business is functioning properly, profitably in compliance with all the rules and regs for healthcare and the IRS and all that. There’s, there’s just a million things to think about. And I think about the retirement plan specifically as being a very high impact area, where having the right strategic partner is going to
Rickie Taylor (07:18):
Improve your financial experience, reduce your taxes, increase employee retention, have a lot of benefits, but as a busy physician or practice owning physician, it’s often, it’s tough to know, like how do I find someone I can trust? How do I know that the plan is the right plan for my practice, et cetera. So talk a little bit about what is it like for you to interact with either a physician or a practice manager or a group? How are you able to sort of evaluate their situation or how is it, you know, an excellent benefits advisor? What should somebody be looking for? What kinds of things should this advisor bring to the table in order to give all these really positive outcomes that I just described?
Rickie Taylor (08:02):
Yeah. That’s another great topic. And, you know, I would say this is a great opportunity for an advisor or consultant to really build that relationship that we’ve been discussing by getting an understanding of what they can do to help ease some of the processes and procedures. Okay. So when you think about it, the retirement plan is sometimes seen as a burden. Okay. If, especially if there’s a lot of work being done, a lot of manual work and, you know, essentially if you don’t have a good team in place, you’re absolutely going to get frustrated with it. So of course, you know, we can’t do everything for the client, but we certainly want to find ways to streamline some of the process. For instance, submitting electronic contributions instead of writing a check, okay. That’s how it was done way back when, but some folks are still doing it now.
Rickie Taylor (08:51):
Not only that giving participants access to their accounts, as opposed to having a sponsor, you know, have the company send out a statement every six months or the year. Right now, we’re in the age of technology where we want things at our fingertips and rightfully so your retirement plan should be one of those things. I would even say loan features, making loan features available online for easy viewing. So you can see what you have available to take a loan and you can see what your current loan balances. So there are many, many other things, but again, going back, we want to make the process easy. Okay. When you’re running your physician practice, the retirement plan is the furthest thing from your mind. But again, going back to the team, as long as you have a good team who is proactive and letting you know some of the deadlines that may be coming up and Hey, we want to make sure we notified you that your census is going to be due, or we got to get these notices out. That’s always going to be very beneficial.
And so maybe talk briefly about that. There’s a coordination aspect. So we’ve got payroll, we’ve got employee benefits, we’ve got employees getting paid, we’ve got withholdings happening. We’ve got that money going from, instead of the employee account, their checking account, it’s going to some other accounts somewhere, and then that money needs to get invested. So there’s a few moving parts. Talk a little bit about how do you, or, or how does you know, any excellent benefits advisor? How are they going to streamline that? Create transparency, improved communication? What does that process look like?
Rickie Taylor (10:21):
Yeah, absolutely. So I would say first and foremost, the firm that you’re dealing with in terms of doing the administration, they’re typically responsible for a lot of those notices going out. Okay. not only that you’ll have typically someone at that firm who can help you with those questions. So the questions should not fall on the HR manager. The question should go to the provider, which would be your TPA for the, this matter. So creating a streamlined process and note, letting them know if you have conscience [inaudible] questions. If you have distribution questions, if you have regular retirement planning questions here is where you want to go. Okay. I want to try to make that as clear as possible because again, yeah, that’s a whole part of me helping the administrator or HR administrator alleviate a lot of stress behind the scenes.
Yeah. So what you don’t want, what a practice, what a physician or an HR manager would not want is somebody, you know, blowing up their phone or knocking on their door in the middle of the day saying, Hey, I need to change my contribution from 3%, 4%. Or like, I need to take a loan from my 401k. Can I do that? Or I need to adjust my investments. You’re you’re saying that a good advisor is going to put themselves is going to virtually stand at the door of the HR manager and say, hold on, is that a 401k question? Let me see if I can answer it first before we bother the other employees of medical practice. Is that accurate?
Rickie Taylor (11:45):
Yeah, that’s absolutely accurate. And I like the way you put that, Justin, that was really good. Awesome.
So one of the fundamental benefits of a pretax retirement plan contributions, and I want to talk about retirement plan types here in a minute, but the reason this is important is because doctors pay a lot of taxes. The way our income tax system is set up in America, the more money you earn, the higher percentage of attacks you’re going to pay on each incremental dollar. So if you make 200, okay, versus 300 K versus 400 K versus 500 K or more your tax rate in general, all things being equal, your tax rate is going up. The amount of the percentage of your total income that you’re paying to uncle Sam was going up. One of the best mechanisms that we have here in America, under the internal revenue code to counteract and inappropriately high tax bill is employer provided pretax contribution plan of different flavors.
Meaning I can save money and not have it be taxed this year and in, so doing reduce my taxable income. So a physician who was making 400 K, they’re going to bring that taxable income down off of that 400 K number to something less and have a lower tax rate in a tax savings this year, tax deferral into the future. And then whenever they take that money out of that investment account in the future, it’s going to be hopefully taxed at a lower rate. That’s the rationale for the plans, which we’re discussing. So in that light, let’s talk a little bit about the two I’ll call it the two different types of plans and this, by the way, for our listeners, this is an incredibly technical topic. There’s texts, whole textbooks written about this. So this is going to be another one of these criminally superficial fly by type of expositions on this topic. But I want to talk for a minute about defined benefit versus defined contribution and start using perhaps some words that our listeners are gonna understand, like a 401k for three B, things like that. And Rickie, maybe just give us a, a brief explanation of what these plans are and how they fit into this discussion.
Rickie Taylor (13:52):
Absolutely. And I want to kind of dovetail back to something else first. Okay. Because we were talking a lot about taxes, pre tax and things like that. So I want to kind of mention the pre tax deferral and a Roth deferral. Okay. Because that’s going to be really prevalent in a 401k design. Okay. So essentially most plans, you know, people are familiar with the pretax. So here’s a prime example. If you’re making $50,000 and you say, okay, I want to put $10,000 into my pretax. 401K. The government is only going to tax you on $40,000. Okay. That 10,000 is going to go into your account. It’s going to grow with earnings. And then we take the money out. You’re going to pay taxes on the 10,000 plus the earnings. All right. So that’s the pretax side. They have the Roth side. The Roth is your after tax portion.
Rickie Taylor (14:49):
So again, using the same example, if you’re making $50,000 and you put 10,000 into your Roth deferral, the government is actually taxing you on the full 50,000. That 10,000 is going to go into the account. It’s going to grow. Now here’s a couple of caveats. One, the account has to be established for at least five years. And two, you have to be at least 59 and a half before you take the money out. When you take the money out, it is completely tax-free. Remember you already paid taxes on the 10,000, but the earnings is, is it’s going to be coming out tax free. So this is an amazing opportunity when we’re designing plans. We’re always putting in both options because we want to give our clients the ability to do both. If they choose to. Now, of course, ultimately having a conversation with their financial advisor is going to help make that decision a little easier. So I just wanted to make sure, sure. We, we kind of dovetailed into that just a little bit
And that’s a good distinction. Let me briefly zoom in on that for a second. So if you’re a practice owner or a practice manager, and you’re thinking about how do we put a plan in place that’s going to serve the different cohorts of employees or partners that we have, the way that we’re trying to benefit. Physician owners, equity owners, who are very high income employees is going to be probably different than the way we’re trying to benefit, you know, the administrative staff or people who are making in that, you know, 35 to 100 K range who are going to be more likely to want to have access to a Roth, a Roth 401k, rather than, you know, the higher earners who want to do a traditional 401k, more likely. So being able to have the flexibility for both of those as somebody who’s putting these plans in place as a physician, who’s trying to set something up that their employees are going to benefit from. You want to make sure that you’re constructing a plan in a way that everyone’s going to be happy with it.
Rickie Taylor (16:37):
Yeah. I’ll just continue. Absolutely. All right. So now you talked about the defined benefit plan, the defined contribution plan, the cash balance plan. So here’s the situation. When you think of your 401k plan, your 401k profit sharing plan, that’s considered a defined contribution plan. It provides an account value that is predicated on employee contributions. Maybe even employer contributions. If the company is doing a match or profit sharing or going to safe Harbor and the performance of the stock market. So if you choose to retire at a specific age, there is no guaranteed amount that you can expect at that particular age. That’s the defined contribution. Then you have the defined benefit plan. And essentially just like it says a defined benefit at a specific age and time. So DB plans now I’ll tell you one, they are 100% employer funded. Okay. So the company is bearing the brunt of the entire cost.
Rickie Taylor (17:34):
Not only that the company has to make sure that a specific amount is in that account when that employee turns a certain age and is ready to retire. So keep in mind that, you know, doesn’t matter what happens with the market. The company’s got a fund that account. All right, now I’ll also mention DB plans. Defined benefit plans are becoming a little more obsolete as the case cash balance plan, which is another form of defined benefit plan is coming more into focus. Okay. And there’s a little bit more flexibility in terms of the design of the cash balance plan, especially when it’s coupled with [inaudible] plan. So what I see and what I talk about a lot is having the 401k, that’s going to sincerely benefit the employees of the company, but the cash balance plan, considering as a much higher contribution level, as well as a much higher tax deduction level, those are typically more for the employer the business owner, and maybe some of the management that are higher ups as well. Doesn’t really matter. That’s why you’re going to have a great consultant to really talk through the different details about it. Okay. so again, I would say on your DC side defined contribution, that’s your 401k cash balance and DB guaranteed amount at a specific age.
Got it. And so the defined contribution in general is a little bit more of a, it’s a little bit more of a straight forward vehicle, a little bit more of a straightforward structure. Then once you get into the cash balance pension plan and other DB plans, we’ve got to integrate actuaries and lots more of, you know, different types of specific testing. That’s beyond the scope of this discussion, but I want to give our listeners an idea of we’re sort of going to start on the simple end of the spectrum, and we’re going to ratchet up and ratchet up and ratchet up and give some examples of what might a good
Rickie Taylor (19:28):
Look like for practices of different sizes and different goals. So let’s start sort of at the very basic level, say, I am a, I’m a fellow, I’m a pain management fellow, and I want to go out and start my own practice. So it’s literally just me. Maybe I’ve got like an IRA that I’ve, I’ve got a Roth IRA from residency and fellowship. And, and now I’ve got maybe a solo 401k. Like when I first hang out my shingle and I start doing some business and I’m able to make some contributions, I basically have a one person retirement plan that doesn’t even require someone like our expert, Rickie Taylor, to help us with, they could potentially set that up themselves. But at some point they hire a couple of employees. Maybe they bring in a partner or another associate physician, and they want to be able to offer something, some kind of savings vehicle where we can go from no capability whatsoever under the employer plan to save something to the most basic option. So in that kind of situation, where say we have somebody at the front desk and we’ve got maybe a couple of nursing staff, and we’ve got a physician who wants to just keep everyone happy and give some kind of option. What might we be looking at as far as our retirement plan set up? Or what questions are you going to be asking before you can even answer that question.
Rickie Taylor (20:47):
Yeah. And again, there’s a lot of questions that can be asked and you really want to ask questions because at the end of the day, you want to design a plan that the owner’s looking for. Okay. And not only that they’re relying on us for our expertise. I mean, the only way we’re going to know this is if we ask the questions, I would say, I’ll talk a little bit about a life cycle of, you know, a business owner, the business self, and when discussing business retirement plans, there actually does seem to be an order or evolution that happens, which flows from the businesses in infancy into maturity business, as you mentioned earlier, may start off small, maybe one to three, even four employees. So yeah, simple IRA might make sense. Okay. Because there’s no administration, there were no fees associated with it. Okay.
Rickie Taylor (21:39):
There are no major complicated steps. Then maybe after a few years, the company has grown in size and revenue and they can now afford to add more money to the retirement plan. Now we jumped from a simple IRA to a set by IRA, right? Because the contribution limits or higher now a key thing to know on a set by array, the SEPs are 100% funded by the employer. There is no employee contribution, so there’s no opportunity for the employees to take a tax deduction. Okay. And then maybe from the SEP we go to the 401k. Now here’s the key thing. The advisor who’s working with you on that CEP should be paying attention to how much is actually going in. Okay. And then maybe upon the review, they say, okay, you know what? You guys have asked the great amount into your 401k, I’m sorry into your setup.
Rickie Taylor (22:28):
And you know, you have the ability to add in more money. Let’s take a look at a 401k and see how that can benefit you a little bit more as well. So of course, as the progression goes, the advisor’s going to reach out to a retirement plan. Consultant, have the conversation, look at all the details and determine the, Hey, you know what it is, time to move on from a SEP IRA, two or four, one K of course, there are many more features with the 401k than with the set. Just off the top of my head. You have a loan feature, you have the employee deferring some of their own money taking a tax deduction. You have the Roth opportunity. So there’s a lot more detail in that 401k. And then let’s talk about the cash balance now, because remember the cash balance is going to be your bigger opportunity. Okay. So for instance, let’s say
Pause for a minute, Rickie, because before we get to the cash balance stuff, cause we just glossed over, I think a lot of great detail. I want to just pause for a couple minutes on a few of them. So for the smaller business, it sounds like the simple IRA is the sort of the lowest barrier to entry. It requires a very low, if any employer contribution, there’s very little, if any expenses and we don’t need to involve actuaries or do any of that advanced testing kinds of things that I mentioned before. That’s hence the name simple IRA. So if somebody out there is listening and they’re thinking I’m currently doing nothing in my very small practice and I want to do something better than nothing at minimum cost. Sounds like the baby step option is going to be this simple IRA. Is that fair to say?
Rickie Taylor (24:01):
Yeah, that’s absolutely fair to say. And really easy to set up. You just simply have a conversation with your current financial advisor. If you don’t have one, you can find one.
Yeah. And then going from that simple IRA and the setup is a little bit, I think of a, sort of a different animal. If you don’t mind, I’m going to kind of skip over it because I want to focus on things that allows the employee to have some skin in the game and to have their own little built their own little pot of money that they can contribute to build their own nest egg. So if we go from just simple to the 401k, this is then a plan of sort of one layer, more complexity at its simplest option. And it allows the employer to pay into a 401k at some percentage in terms of a match. So talk a little bit about like, what does the match, why might an employer want to use a match? If you’re thinking I want to go from a simple to a 401k as an employer, as a business owner, there’s probably some motive of either retention or attracting other good employees. So talk a little bit about how you asking those types of questions lands you somewhere productive in that discussion.
Rickie Taylor (25:06):
Absolutely. And thanks for that just, and so when you’re dealing with a retirement account retirement plan, it’s always going to be beneficial for the business owner because there’s always going to be some sort of tax deduction. Okay. So right off the bat, whether it’s a simple IRA as set by IRA or even a foreign key for that matter, okay. The tax deduction to the business is going to be important. Now, keep in mind, these are employer sponsored plans for the employer, as well as the employee. Most employees now, nowadays are really paying attention to what type of retirement plan does this business have that I may consider working at. So essentially for the business owner, key things are obviously tax deduction. Second is going to be current employee retention as well as attracting new great employees. So there’s a key benefit there. Okay. And again, of course talking about, you know, some of the employer contributions like the match, for instance, I mean, we, you can structure the match to be any level that we want.
Rickie Taylor (26:12):
I mean, you can do 25 cents on a dollar 50 cents on a dollar, a dollar for dollar up to a certain percent. Okay. Of course, during that consultation phase, we want to ask the questions of, okay, sir, or ma’am do you want to offer a match? And then we explain it, okay, I’m not going to allow the PA the plan sponsor to say, Hey, yeah, I want to know a match, but I don’t really know what it is. Okay. As a consultant, that’s my job to fully explain the details of it, the benefits of it, the downside it. Okay. So you have to keep all of that in mind.
Yeah. And I can tell you as somebody who’s reviewed a lot of employment agreements and like offer letters and things like that, I can, I look at the companies and I say, okay, they’re doing like a, a 1% match or 50% on the first 2% or something like very low retirement plan contribution to me, this says, you know, this is a company that they just don’t want to spend a lot of money to retain their employees and keep them happy. So if you’re going in and like chasing a big salary number, but the retirement plan contributions are very, very sparse. It’s just something to be aware of. In my opinion, I think it says something about company culture that these types of sort of intangible, but definitely real. They have real financial impact. If, if a company isn’t willing to spend money to help their partners or their employees retire, move towards financial independence, you know, that, that just says something it’s a data point, but you gotta obviously put in with all the other data points before you’re making a decision, but that’s definitely something that I look at.
Yeah, absolutely. So, okay. So the next sort of threshold, we talked about the 401k what’s the next step. So, you know, the cash balance pension plan is a different animal, the 401k as an employee, if I’m a, if I’m a physician, actually. Yeah. If I’m a physician and I’m an owner, I have this limit, this IRS limit and a 401k plan of, I think it’s like $57,000. It’s inflation adjusted. So it inches up every year of which 19,500 is the employee contribution. And the remainder can be put in by the employer. They may not put in that whole amount. That kind of depends on how the plan is set up. That’s the defined contribution. That’s the 401k plan type. The cash balance pension plan is the type of plan where we go from the mid 50,000 range up to the, you know, into the six-figures potentially a couple of hundred K depending on cash flows. And a lot of other factors, this is basically like the varsity level pre tax savings tax deduction move that only the proactive business owner or practice manager is going to be able to attain potentially. So talk about making that transition from the JV varsity, and what kinds of questions are you asking as an expert advisor to make sure that the cash balance pension plan is in fact a good fit?
Rickie Taylor (29:10):
Yeah, absolutely. Thanks Justin. So I would say the cash balance plans are natural conflict and peace when discussing whether to go bigger, larger than a 401k. And I’m typically reviewing pieces of the puzzle, which include the compensation of the business owner, the age of the business owner, the employee makeup in terms of obviously the number of employees, employees, and I have to look at their age and compensation as well, because this, this is all a factor. So because of, I would say the huge tax deductions, the IRS is really paying attention to these types of plans and they want to make sure they’re not being set up for huge tax dump. Okay. So when I’m having these conversations again with the questioning, I need to make sure that this business owner fully understands how this cash balance works and they need to have the cashflow to be able to sustain the plan and the contributions for anywhere between three to five years. Okay. That’s an important,
Good point. And I want to pause there because that’s very important. So in considering a cash balance pension plan, one of the linchpin considerations is are you going to have stable, reliable cash flows for the foreseeable future? Because if you bump into something, you know, this is, and this is actually a perfect example. Cause I guarantee you there’s practices out there right now, who, for whom coronavirus presented and unforeseen [inaudible] apocalyptic event where case volume plummeted and cash flows have been crushed and people out there who have these cash balance plans are scrambling to be able to fund this contribution, which they they’ve sort of signed up for a couple of years before thinking that their cashflow is going to be reliable. Now they have cash crunch and they’re going to have to, you know, come out of savings or do a line of credit or do some, get creative, potentially to be able to continue to make this, to fulfill this commitment or else they’re going to have problems with the IRS and big tax issues, et cetera. So that cashflow stability is definitely a key question here.
Rickie Taylor (31:17):
Yeah, absolutely. Sorry. Continue. Okay. So essentially you know, when you’re looking at the huge tax deduction, this all plays in part with, you know, the 401k, the cash balance, the overall financial planning process of the business owner. Okay. Because think about it, the business is a part of that. Person’s financial planning and, you know, we want to take advantage of, you know, as many tax breaks that we can. Okay. So again, looking at, you know, the compensation, the age, the employee makeup, all of those things are major factors in determining if we want to go bigger to the cash balance over the 401k plan.
And so just to give us an idea of what this might look like, I want to look at sort of the physician financial experience. So if we have, you know, a practice owning physician whose total income is maybe half a million bucks, and if they have done zero up to this point, they’re paying taxes on most, if not all of that and have a big six figure tax bill every year, if we take the first layer of, you know, the first tier retirement plan option, maybe they’re saving 19 five and therefore Ronk, and maybe there’s another like 20 or 30 K profit sharing contribution. So now instead of being taxed on the whole 500, they’re reducing their taxable income, say 40 grand. So now their taxable income in the current tax year is 460 K and their tax bill maybe went from 200 to like a hundred.
And I don’t know, I’m just making these numbers up 182 K. So they’ve essentially saved themselves about $18,000 in taxes by installing this plan. So you can see the economics here, how this starts to work like, well, Jesus, if I can save myself 18 grand in taxes, it makes sense to pay a little bit of money, to put a retirement plan in place, to be able to not only help me save taxes, but my partners and my employees, et cetera. And so that’s the experience there. And then if we layer on a cash balance pension plan in a case where there are stable and reliable cash flows, the cash balance pension plan is in accordance with the goals of the partners, et cetera. There’s a lot of caveats here, but assuming all that works, we may be able to save, I don’t know, a hundred K and a cash balance pension plan. So that this compensation that was previously experienced as taxable income is now made in a contribution to a pretax retirement account. So now we’ve gone from 500 to four 60 to three 60, and the taxes have gone from 182 K down to, I don’t know, again, I’m sort of making these numbers up a hundred and I don’t know, 40, so we’ve saved another $30,000 in taxes because of this massive pretax opportunity. Is that, is that fair to say? Or is there any parts of that that you would tweak or correct Rickie?
Rickie Taylor (34:09):
Well, that is, that is very fair to say. I would say a lot of the tax break is actually going to come from the employer deductibility. Okay. So the corporate tax is what’s really going to be benefited here. So when you think about, on the 401k side, the deductability is up to 25% of eligible compensation. So let’s use round numbers. If the, let’s say the payroll was a million dollars, 25% of that is 250,000, as long as the employer contribution, whether it’s safe Harbor match or even profit sharing is under that $250,000 Mark. That employer contribution is 100% deductible. Okay. And then when you think about the cash balance and the DB side, the actual deductability increases I wanna say just over 30% or so and think about it. I mean, you’re putting in hundreds, potentially hundreds of thousands of dollars into this cash balance plan that theoretically could be a huge tax deduction to the business.
Good point. So I’m glad you brought that up there. There are obviously, this is subject to the way your business is structured, how much you’re paid in terms of salary versus a partnership distribution that comes via [inaudible] and the tax ability that you’re experiencing as a, you know, somebody who’s making contributions and also having cash balance pension plan contributions made at the practice level. This, this is again, is a gross oversimplification, but I’m trying to illustrate the net impact to the physician owner. And I think that all I want you to understand here is that the cash balance pension plan is sort of a, it offers a next level opportunity with significantly increased benefit and just something to be aware of.
Rickie Taylor (35:56):
Okay. So talk a little bit about what the process is like. So if I’m listening to this thing, can Holy cow, like I can at least get into the JV level, if not the varsity level of retirement plan installation with my practice or my company. And I currently have nothing, and maybe I need to call someone like Rickie to be able to come in and evaluate what are my needs, what are my goals? And, and how does this whole process work? Take us just briefly through the process of excavating relevant facts and sort of fitting kind of like I’m envisioning, you’re like no pun intended, like a tailor sort of taking measurements based on how someone is their, their unique configuration. And then you’re going to create a suit for them that hopefully they, they think it’s just really amazing. So what what’s that process like?
Rickie Taylor (36:46):
Yeah. I mean, it’s, it’s a complete consultative approach. Okay. So for instance, if it’s a brand new planet does not have a retirement plan in place that process can take about, I don’t know, a month and a half to two months. Okay. Because we want to sit down and have the conversation of what do we want this retirement plan to do for the business? What do we want it to do for the employees? And of course, you know, gathering all of the facts and information, the census information running illustrations, because of course we want to show what the plan is going to look like. Okay. And then from the implementation stage, you know, creating documents, creating enrollment material, having the enrollment meeting, and then of course, ready to be able to fund the plan anywhere from, like I said, a month and a half to two months.
Rickie Taylor (37:32):
Now, if it’s an existing plan. Okay. That could be a little bit longer. Number one, I will say every single plan in existence today should be reviewed every three to four years. Okay. Have it benchmark. And that’s kinda what we’re, we’re capable of doing. That’s a recommendation by the department of labor to make sure that a, your plan is still operating. Like you started it. Okay. We want to make sure it’s efficient. So depending on where that plan is, it could take a little longer, as many as, you know, 90 days, maybe even a few more months after that. Typically the employer is going to want to first build a team. Okay. And that team consists of financial advisor, the CPA, and then your retirement plan consultant at the end of the day, the CPA is really helping to drive what the numbers will look like. So they’re an integral part of this team. Okay. Once that’s all said and done again, looking at all of the details and have that consultation of how we want to design this plan is going to be beneficial and making sure we have the best plan design for the company.
Yeah. And so in that context, I can imagine, you know, you’re coming in and saying, what’s your budget? Like, do you have cash flows to support just a little bit of payments into, you know, matching, or do you really want to start stuffing money and allowing your employees to stuff money into these accounts? Or is this a plan mainly meant as a vehicle for the partners to save a bunch of money pretax? Or is this something that we want to sort of open the flood Gates and say, we want to really meaningfully contribute to our employees, financial wellbeing as well. And then things like future flexibility and reliability of cashflows and even the budget, you know, the more complexity you layer on to these retirement plans, the more cost there is associated. And so these are all factors how big your company is, what the makeup is of partners versus employees, et cetera. These are all things that I know that you’re going to want to dig into to be able to make sure that the suit fits.
Rickie Taylor (39:36):
Yeah, absolutely. The suit must fit.
So this has been really a helpful discussion. What, what do you think are the, you know, the next steps or if somebody is ready to go, like, how would you recommend that they proceed?
Rickie Taylor (39:51):
Yeah. I mean, first and foremost if they have a financial advisor in place, a financial advisor, most of the time has relationships with retirement plan consultants like myself, if they do not, and they simply want to reach out directly, I can provide my information. I’d be happy to just have, you know, general dialogue. Okay. but starting with a financial advisor, getting a plan review, either a plan review, or just a regular consultation to see how we can put money into the plan, that’s going to be the first step. Everything else is gonna fall into place with that retirement plan consultant. They’re going to dictate the timeline and the things that are going to be needed to get the ball moving.
Awesome. And we’ll, we’ll include, Rickie’s contact information in the show notes, if you want to reach out to him and his firm. I also work closely with Rickie for these types of opportunities. So you may be talking to me as well. Rickie, I really appreciate your time today. Is there anything else you want to mention in parting here,
Rickie Taylor (40:49):
Justin, this has been an amazing experience. My second podcast. So thank you so much for this. And I’m just excited. You know, I think one of the things that people will learn about me when they do speak with me is I’m a genuinely happy person and it is contagious. So if you’re not having a good day, you definitely want to reach out to me. I’m going to help you feel better.
That’s the one thing that I definitely appreciate about your Rickie. Well, thank you very much for joining us today on the anesthesia success podcast. It’s been a pleasure.
Rickie Taylor (41:19):
Awesome. Thank you so much for having me, Justin,
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