By Brian Hufford, CPA, CFP®
There is something incredibly male about a Swiss Army knife. Having one is all about being prepared, having the capabilities to fix almost anything, possessing survival skills, and suffering through self-inflicted wounds. I imbedded one in my thigh as a 12-year-old. Tiffany's makes one of sterling silver.
These days, dentists face layers of problems in the federal tax code: high marginal tax brackets, the alternative minimum tax, and the recently odious Medicare surtax. What is needed is a Tax Swiss Army knife.
Currently paired retirement plans, 401(k) plans and Cash Balance plans are such a bulge-in-your-pocket, all-in-one tax tool. They slash through the impossible complexity and survival-threatening wealth confiscation that existing tax regulations present. Dentists who fully use the deductions offered in paired retirement plans find that numerous tax problems simply disappear.
Not only are income taxes slashed at the highest brackets, but alternative minimum taxes and the Medicare surtax, both of which are additive to regular taxes, can be eliminated as well. Why wouldn't every dentist carry such a tool on a journey through today's dangerous tax wilderness?
So few dentists employ paired plans in their practice tax arsenal that I have had to identify the reasons why. Why wouldn't every dentist seek to benefit from annual tax deductions in the $100,000 to $200,000 range?
Obviously, this amount of savings is a sizeable annual commitment, but so are income taxes that are approaching 50% or higher of dentists' incomes. Most dentists pay annual taxes in the $50,000 to $150,000 range, and are able to meet these obligations each year. Why wouldn't they save for retirement with Uncle Sam matching those savings, dollar for dollar?
Having a Swiss Army knife is mostly about being prepared and equipped for whatever may come. As a young boy, I imagined myself being one Phillips-head screw away from escaping a water trap. Swiss Army knife to the rescue. Most dentists do not want an annual savings commitment beyond simply saving what's remaining each year. There is never anything remaining without adequate planning. Subsequently, dentists are not equipped for an adequate retirement.
These days, dentists seem overly concerned about the dangers of self-inflicted wounds with qualified retirement plans. Many believe that the government will need to either heavily tax or confiscate plan assets to overcome burgeoning budget deficits. There is also the belief that the deferred savings may be subjected to future higher tax rates.
Ironically, it is this fear of a self-inflicted wound that keeps many dentists from using paired plans that would adequately address retirement income needs. Apparently, self-sabotage of a retirement goal is preferable to the imagined danger of a self-inflicted wound.
Sadly, my Swiss Army knife metaphor fails me in this high-tech, App-based world of present-day solutions. Most problems today are not about being unscrewed, uncorked, opened, or cut apart. The self-reliant world of the Swiss Army knife has given way to a heavily interconnected social media one.
Likewise, saving for a successful retirement outcome today involves navigating the complexities of the tax code and all of its ever-changing splendor. Employee costs must be minimized. The total deductions must be aligned with each dentist's budget and retirement savings needs. The best retirement plan solutions today involve no small amount of expense for actuarial and annual plan administration. A Swiss Army knife costs much less than an IPad. Unfortunately, the wilderness excursions of today require a GPS in addition to a cutting tool.
Our modern world has made paying for any sort of intangible service unacceptable. After all, there is an App for that kind of help, right? Turbo Tax has eliminated the need for assistance in tax preparation for all but the most complex tax returns.
Perhaps one of the reasons that dentists end up with retirement plan solutions that are wholly inadequate for their retirement and tax-savings needs is the cost and complexity of the right kind of help. A SIMPLE plan can be administered for free. Payroll companies offer 401(k) plans as part of their complement of low-cost offerings.
Accountants and other advisors eschew paired plans because they require special expertise outside the toolbox of their capabilities. A paired plan arrangement is relatively expensive to implement and administer. Even if the tax benefits make the cost worthwhile, the expense seems unacceptable.
Your exciting tax-savings journey could begin in the year 2014. Be sure to take your Swiss Army knife.
Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Contact Hufford at (888) 470-3064 or [email protected].
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