The Dentist Retirement Plan Lock Box

Tax Benefits or More Taxation?

Picture of by Dr David Phelps

by Dr David Phelps


s your dentist retirement plan actually a lock box?

 I recently read an article in the Kiplinger Tax Letter;

Kiplinger has been in the marketplace for many decades and has been on the forefront of tax strategies for business owners and high net worth people, even consumers who are trying to make it through the tough times we have today.

This article was titled Retirement Plans – Don't Be Tricked Into Voluntarily Paying Higher Taxes

 Retirement plans? Wait a minute. I thought retirement plans were supposed to save us on taxes?

You see that's the misconstruction here. You get a deduction by putting money into a retirement plan. 

Well, what's that? 

What is your dentist retirement plan?
Dr. David Phelps, Founder of Freedom Founders

That's a traditional IRA, could be a Roth IRA, an office 401k plan, cash balance plans, defined contribution plans, etc. They're all tax deferred vehicles. The key word is tax deferred

Now there's nothing wrong with deferring taxes if you're utilizing the opportunity to compound the gains inside that vehicle. That's the benefit and everybody gets sold on that. There's nothing potentially wrong with that. 

The problem, though, is that we are delaying the payment of taxes to a date and time in which, I believe, the taxes will be much higher. 

I don't see taxes going down for anybody in the near term or the long term because of the amount of debt that this country carries. So, you have to think hard about that. 

Now there are other issues with it which we’ll get into. You can read the Kiplinger piece found here, but I wanted to comment on what I thought was a great beginning to an article.

I'm not a fan of tax-deferred plans, for those who wish to orchestrate their own financial future.

Kiplinger did not bring this up but here are some reasons why I’m not a fan of tax-deferred plans.

The Dentist Retirement Plan Lock Box

(1) Your money is locked up.

When you put your money in a retirement vehicle, it's locked up until you're 59 ½. You cannot take any distributions or any of that capital back out to use without paying a penalty before the age of 59 ½. I call it the 401k or retirement plan lock box.

Is that really what you want to do? 

I know your advisors, your CPA, or your money managers all tell you, “This is the way everybody else does it. It’s the way you save taxes. So why not just stack it up?” 

I've had so many people in Freedom Founders, members who are younger than 59 ½, sometimes in their forties with 10-20 years to go before that lock box money ever becomes fruitful and useful to them. 

Yes, they can learn to self direct it (what we do in Freedom Founders) and if you can get it into better investments than what’s in the stock market volatility, that's a positive. 

But the fact is, many of these young doctors could essentially be Free For Life, having the option to work or not, if they had access to that money. 

Not to deplete it, not to take the principal down, but to actually take that nest egg, whatever amount it is, and have it working for them. Then they could take distributions out as they need to. 

Instead, it’s locked up. They can't get into it. Now they’ve potentially pushed off their retirement date until at least 59 ½ when they could've done it as early as their forties or at least early fifties. That's a big problem that I see. 

(2) It keeps you uninformed.

By advocating your future finances to a money manager or a 401k administrator, you've essentially taken your eye off the ball. 

You think you need to put your money in a dentist retirement plan like this because that's what everybody else does. That's what everybody says to do. It's the default mechanism. 

But what have you learned about orchestrating your own financial future by doing that? The answer is nothing.

Absolutely nothing. Zero. You put it there, and you forget about it. Or you get the monthly reports and see what kind of volatility it’s in; Sometimes it's up, sometimes it's way down and you fret over it, but you have no control. 

You never learn anything about managing your money by just putting it on a Wall Street tax-deferred vehicle.

(3) You trade in long-term capital gains for a higher tax rate.

Do you realize that when you put your money or investments in tax-deferred retirement plans you convert long-term capital gains and potential depreciation offsets that can come in the form of investing in alternatives into ordinary income?

It's what I call a converter from tax benefits to more taxation. 

It’s not only the fact that your taxes will be higher later when you finally take the money out. But you've lost the benefits of long-term capital gains, which are taxed at, at least, half the rate as your ordinary income tax rate will be in the future. 

You destroy that opportunity.

(4) There is a loss of the stepped-up basis – generational wealth transfer.

If you're thinking about generational wealth transfer, the desire for your kids to be able to benefit from what you created, and you want to turn that over to them in a traditional dentist retirement plan of any sort, you actually lose that opportunity

Your kids, your heirs, and your beneficiaries will have to pay tax on that money after you pass away. 

When they acquire your accounts, they'll pay tax at the ordinary income tax rates. Is that what you had in mind? 

Probably not. That’s why I recommend keeping money, what I call, unfettered, or out of the government plans. These are the plans that the government will try to incite you and attract you into with these great benefits, but you don't know the downside.

Instead, why don't you keep the money unfettered? 

Unfettered means no rules, nothing there restricting it. I can get at least the majority of the same tax benefits or retirement plan benefits if I invest in alternatives like real businesses or real estate. 

My favorite is real estate, as you probably know, and I can get the same tax deferral without being restricted by the rules. I get a stepped-up basis when it goes to my heirs. I don’t lose that like you do in a standard, professional doctor or dentist retirement plan. I don't lose the capital gains basis. I don't lose the depreciation cost, or segregation aspects. 

There are just more benefits to learning how to orchestrate your money in your own plan, going forward.

Now let’s switch gears and talk about what you can do with traditional retirement plans in order to self-direct and begin to get more control back.

The Roth conversion. 

Now this is a benefit. Whether you have a traditional plan or you're self-tracking your money, you can always convert a traditional IRA into a Roth IRA. That's one thing I would recommend doing or consider doing if you have money already there. 

You just need to talk to your advisor and your CPA to understand the tax consequences, but I believe it's better to pay tax on the acorn (the smaller amount of money now) as opposed to paying tax on the Oak tree (when it grows up and you take those distributions out at your ordinary income tax rate).

Remember, a Roth IRA is, at least today, tax-free on the distributions.

You can convert any amount in a traditional IRA to a Roth, pay the tax today, but not pay tax going forward. 

That could be one big proponent you can use to mitigate some of the negatives of your current traditional tax-deferred retirement plan.

The J curve strategy.

This one's very nuanced so I'm just going to give an overview of it. You're probably not going to get a full understanding of how to do it because you have to be involved in investing your tax retirement accounts in alternative investments like real estate or business. 

It does not work on the stock market with Mutual funds, index funds, ETFs, annuities, any of that stuff. It doesn't work in any of those. 

That's yet another reason why you need or should be thinking about how to be an advocate for your own financial future by investing in alternatives.

So, I've got a traditional retirement account and I can invest in any asset if it's self-directed. For example, I can invest in certain types of real estate or businesses. 

The J-curve strategy says that you invest at a certain basis point with your dollars. Then, for reasons I won’t go into here, that asset actually temporarily goes down in value for a period of time. It could be 12-18 months, but we know that that's going to happen, for reasons that again I won’t go into here.

The upside here is that the same asset that went down in value is going to go back up again significantly. Imagine the shape of the letter J. You invest your traditional IRA at a basis point before the value has been lowered (the tail end of the shape of a J). Then within the next several months, an appraiser will appraise that asset at a lower value (up to 50% and at the bottom of the J shape). 

This means you could do a Roth conversion at the low point in the J curve (when the value has been lowered but before it rises in value). You’ll be able to, potentially, save 50% on the taxes of that conversion. 

Watch for the J curve in your dentist retirement plan.
The J Curve

Then on the upside, (the point at which the investment asset value goes back up at the top of the J shape) it's now in a Roth IRA and you’ve mitigated the taxes going forward. It’s a big strategy that your financial advisor or CPA is not gonna have a clue about or have even heard of. Ask them about it as part of a dentist retirement plan, I promise they won’t know.

Small hinges swing big doors.

Making what seems to be small, nuanced changes in the way you manage your own money instead of abdicating it to a money manager or financial advisor will give you huge benefits on the backside. 

Of course, the sooner you do this in life, the bigger the compounding value is. 

But even if you're in your fifties and have money in traditional IRAs, or you're trying to get out of the volatility of the stock market, changing that plan now can set you up for the rest of your life. This way you're not worried and playing that scarcity game.

We are taught well in school how to make money. It's the way the world works. Get an education, get degrees, become a professional, climb the academic ladder as high as you can, then you'll have a great job for life. 

Is that what you really want?

No, I want freedom. 

Learning how to make your money work as hard for you as you did for it is the key. Nobody teaches that in our education system. You've got to learn that by self-education and you have to place yourself in tribes and communities where others are doing that.

This part of a professional, doctor or dentist retirement plan is not going to be in your local investment clubs which invest in stocks and bonds. 

I'm sorry. It's just not going to be there. It's not going to be with your best CPA wealth advisor, because if they were that good, why are they still working trading time for dollars?

I always say, be careful from whom you take advice. Has that person actually created in their life, what you're seeking? If they haven't, maybe you need to step back a little, be careful not to take all of their well-intentioned advice and learn to do it on your own.

Do you have a dentist retirement plan or lock box?
What is your dentist retirement plan?

That's what we do in Freedom Founders. I've found that the best way is to surround yourself with people that are on the same path as you – where there's social proof of the concepts, frameworks, and philosophy of life that you’re looking to live and lead. 

Don’t fall for the mainstream Wall Street marketing media that's out there and seems to have overtaken most of the messaging in this world today.

It's always up to you. Stay focused on your freedom.

P.S. Are you in a common dentist retirement plan that locks up your money? Request your personal discovery call here.

P.P.S. Whenever you’re ready, here are some other ways I can help fast track you to your Freedom goal (you’re closer than you think):

1. Schedule a Call with My Team:

If you’d like to replace your active practice income with passive investment income within 2-3 years, and you have at least $1M in available capital (can include residential/practice equity or practice sale), then schedule a call with my team. If it looks like there is a mutual fit, you’ll have the opportunity to attend one of our upcoming member events as a guest.

2. Become a Full-Cycle Investor:

There are many self-proclaimed genius investors today who think everything they touch turns to gold. But they’re about to learn the hard way what others have gained through “expensive” experience. I’m offering a free report on how to become a full-cycle investor, who knows how to preserve and grow capital in Up and Down markets. Will you be prepared when the inevitable recession hits? Get your free report here.

3. Get Your Free Retirement Scorecard:

Benchmark your retirement and wealth-building against hundreds of other practice professionals, and get personalized feedback on your biggest opportunities and leverage points. Click here to take the 3 minute assessment and get your scorecard.

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