In the 38th episode of 'Retire Early Retire Now,' host Hunter Kelly from Palm Valley Wealth Management discusses various financial planning strategies to help physicians minimize their tax liabilities. The episode emphasizes maximizing retirement accounts, such as 401(k)s, 403(b)s, SEP IRAs, and HSAs, to save on taxes. Kelly also touches on tax-efficient investment strategies, asset location, and the importance of tax loss harvesting. Additionally, he encourages consulting financial professionals for personalized advice and highlights the services offered by Palm Valley Wealth Management.
Check out the Palm Valley Wealth Management Website PalmValleywm.com
In the 38th episode of 'Retire Early Retire Now,' host Hunter Kelly from Palm Valley Wealth Management discusses various financial planning strategies to help physicians minimize their tax liabilities. The episode emphasizes maximizing retirement accounts, such as 401(k)s, 403(b)s, SEP IRAs, and HSAs, to save on taxes. Kelly also touches on tax-efficient investment strategies, asset location, and the importance of tax loss harvesting. Additionally, he encourages consulting financial professionals for personalized advice and highlights the services offered by Palm Valley Wealth Management.
Check out the Palm Valley Wealth Management Website PalmValleywm.com
And welcome to the 38th episode of retire early retire. Now I'm your host hunter Kelly owner, Palm valley wealth management. And I do this podcast every Tuesday morning to help physicians retire early or retire now. And if you liked this podcast, go ahead and leave a five star review on your favorite podcasting app. We're also starting to film and post these on YouTube. So if you want to see more content outside of this podcast about different financial planning topics for physicians, go ahead and subscribe to that channel. You can just find me at hunter Kelly CFP. If you think this would help one of your colleagues go ahead and share this episode with them. But today, we're going to talk about how to reduce your biggest expense and that is taxes. So each year it over your lifetime. You were biggest expense will be taxes. one way you can maximize and continue to grow your wealth is to minimize what your. Paying to uncle Sam. And so today we're going to talk about a couple of different things that we can do as physicians to minimize this bill. And so the first thing. That we will want to do is maximize your retirement accounts. So, uh, with your employer, you may be offered a 401k for 50 70, and we've talked about this. A few weeks ago with how to maximize that. But. As it currently stands, you can put up to$23,000 in your 401k or your four, three B. And then if you're offered. A 4 57 B you can also put a, another$23,000 into that account. For a total of 46. And so if you were hovering around that 24% tax bracket or the 32% tax bracket, this could be somewhere between a 10. Two$15,000 savings each year. Um, as you move forward, as long as you're maxing those out, because those are going to come out. Those dollars are going to go in those accounts. Pre-tax. Um, and then also you'll probably get a little bit of a match, especially on either the four, three B or the 401k. Um, so. Who doesn't like free money. And then let's say you are maybe a contractor or you own your own practice. Uh, you can either one open up your own 401k through that particular business entity. Or you can open up a SEP or a solo. K if it's just you in the business. And you can actually put up to$69,000 a year into account. And so all of that money would go in pre-taxed and again, if you're in that 24 to a 32% tax bracket that could save you upwards of 20, 25, maybe$30,000, depending on how much you're putting in. And where your tax bracket ends up being so, um, utilizing and maximizing those retirement accounts. I know that's not the most profound thing, but it's the first step that we want to take to start minimizing those taxes. Now what you don't want to end up doing? Is going along and Maxine these things out for 10, 15, 20, 25 years. And not considering other tax minimization strategies. Uh, because you could end up with ballooning. Uh, your tax tax liability later on in life when needing to take a distributions for retirement or potentially having RMDs. When you turn 73 or 75, depending on what age? It is when we get there. And taking those requirement, minimum distributions and how that works is basically. You're going to put into these accounts. You're going to turn of a certain age. Uh, Right now it stands at 75. And when you hit 75, the government is going to say based off the total amount that you have and pre-tax accounts. We're going to require you to take off this much each year. And it's based off of a life expectancy table. So each year you're going to take more and more out. So that being said, If you put. Uh, the max in for, like I said, 20, 25, 30 years. That account is going to be very large, right. And. If you don't need necessarily a hundred thousand dollars a year in income or$200,000 a year in income from these particular accounts, then you're going to have to start taking distributions much. Higher rate. Then you normally would create any more tax liability. Uh, for you and ultimately paying more taxes. Right. And so. Some things that we'll talk about here in just a second, we'll help minimize that particular scenario for you. So where do we want to start as maxing out this 401k's. 4 57 solo K's SEP IRAs, things of that nature, Roth IRAs, which would come out post-tax. And going and grow tax deferred and tax free later. Um, but that's step one, right? The next thing we want to do is we want to maximize your kind of ancillary accounts, which would be, uh, your HSA. So if you're you're a family, you can put up to$8,300. A year. So that can again be another couple thousand dollars in savings taxes. Cause that be. I comes out. Pretax as well. And then also, if you have kids and you're paying for daycare, Uh, schooling and things of that nature. Uh, you could put into an FSA dependent care. As well. And so with all these different accounts, I mean, you could put upwards to 50 grand. If you're in a separ solo, It would be upwards to closer to 80 grand a year away. And then you could see massive tax savings just from doing these few things. And so the next thing you want to start planning for is tax location. So what is tax location? So he looked tax location up on Google. Chat. GPT, whatever the case may be. Um, The definition would be asset location refers to a Chaterjee in placing investments and different types of accounts to maximize tax efficiency. In the overall tax or after tax returns. So essentially what this is saying is that we're going to match. Our investments. With the type of accounts based off how these investments are tax. So our less or more inefficient. Taxed, uh, investments like, um, corporate bonds. Uh, real estate investment trust, things of that nature. We're going to want and tax deferred accounts. Are more growth oriented. Uh, type investments we're going to want and tax free type accounts. So like our Roth IRAs. So. Are inefficient ones we want and tax deferred accounts like IRAs. Uh, 401ks things of that nature. And our more growth oriented that we want. Like Roth IRAs, things of that nature. And then also in our brokerage accounts or after-tax accounts, we want our investments to be again, more tax efficient. So potentially like municipal bonds and a more growth oriented. Uh, equities. So things that are not going to produce a lot of interest, because those are not as tax favorable to us. Uh, each year as those particular investments produce interest. Unless it is a municipal bond. And so, uh, once we determine what our goals are, Um, And how we're contributing to each account. Then we want to start to pick those allocations. And so the next thing I want to focus on is that brokerage account or after-tax dollars because, uh, I feel that advisors really miss. Um, opportunity here, especially as a physicians or high income earning professionals. Uh, start to build up these accounts because if you're. Again, if you're a physician that is making 3, 4, 5,$600,000 a year or more. Uh, just putting into your 401k or some sort of employer. Uh, plan for retirement is probably not going to be enough. Uh, to reproduce your income. Uh, over a 20 year period, it's only going to be. Maybe three to 5% of your, your income that you're saving. So you're going to want to use an after-tax account or brokerage account. And so, um, some things that you can do in those accounts to help mitigate taxes. Would be one to pick more tax efficient. Uh, investments like more growth oriented. Uh, type investment. So this could be ETFs. And so let's go. Let's just talk about the most efficient to the least efficient. So most efficient would be buying, uh, individual stock equities that are more growth oriented and have qualified dividends. Um, and so. You can find those, those are going to be the most. Uh, tax efficient. Obviously we want to make it within the means of our risk tolerance. What type of growth. He want things of that nature. Or appreciation about stock. And then, so the next thing you would want to look at is maybe some ETFs. So let's say you don't have a large sum of money starting out. Well, ETFs may be a better bet than taking individual stocks. So you're not super concentrated. Um, because if you only have$10,000 starting out and you just got out of residency, like, Hey, I have a. A couple thousand dollars a month that I can put toward this brokerage account. Well, starting out, you're not going to have enough. Or maybe not even want to do all the research to look into these stocks. So ETS will allow you to work a lot, like a mutual fund. They'll pull funds together. And you'll have a basket of stock. So a lot of times there'll be an index fund. That'll track, let's say this and P 500, the Russell 3000 NASDAQ, whatever. And then other ETFs have different objectives as well, but these are more tax efficient. Uh, then let's say mutual funds. So the most sufficient being individual holdings. The least tax efficient being mutual funds and the reason why mutual funds. Are less tax efficient one. They don't trade data or enter daily. So, uh, if you want to sell at, let's say 11:00 AM in the morning while you're, if you put that trade order in, you're not trading until the end of the day. The next thing. Uh, because these mutual funds generally are more active. Um, you get what's called a capital gains distributions toward the end of the year. Um, so there are scenarios where your account value could be now. And, um, You would still end up owing taxes. Um, Potentially, because you're going to share in the gain or the loss of any positions that the manager is holding, um, or, or selling. Right. And so. Uh, you just have to be aware of that. And so that's why I generally say you're more actively trading mutual funds. We don't necessarily want a brokerage account we want, and our traditional or a tax deferred accounts because, uh, they're going to reduce more taxes. And so. In order to just not worry about it. We can put those on our retirement accounts. And so, uh, so the types of investments that you want in there, single holdings or ETFs, generally speaking. And then from there, uh, you want to make sure that you have some sort of way to maybe. Um, capture some losses. If, if let's say you pay Google and Google is just happened to have a bad year. Well, what you can do is you can sell Google I'm at a loss. And if you have something that you believe in. At least in the short term. Or maybe longterm that either mimics Google. Or, um, it's just a replacement for Google. You can actually sell Google, buy that replacement stock at least for 30 days to avoid what's called the wash sale rule. Walk in that loss on paper. And then you can either go back to Google if you so believe in a longterm. Or, um, you can just stay with the other, uh, stock that you pick. Um, and you can do this with ETFs as well. And so what that's going to do is that's going to allow you to start capturing losses on paper. And. As you see gains, and maybe you need to liquidate accounts, things of that nature for various reasons, large purchases, things of that nature. Uh, retirement, whatever it may be. You can start using these losses. Now you've accumulated over time to mitigate your tax liability and these brokerage accounts. And so this is often missed by advisors and deal DIY wires. So this is something that, um, We do at, uh, Palm valley wealth management. We look for opportunities daily. Uh, and our accounts. And so, uh, the broker or the custodian that we use. Private trust company that we use. Um, they are looking for these opportunities daily. And where I find that most people look for these opportunities that are thinking about tax, all sourcing. They're looking at, let's say the end of the year. Well, if you're only looking at one time a year, well, maybe there was a lot of volatility early in the year. And you miss some opportunities. So. Uh, what our custodian does and, and, and the people that, that helped me with our asset management at Palm valley wealth management. As we look at it daily. Right. And so if there's opportunities to capture. These losses is going to be captured. Um, so that you can mitigate your taxes over time. Right? So, These are a handful of things that you can do as a physician. Um, mainly specifically for an employee. Uh, we can get into another podcast where we talk about business ownership. And where we can maximize that as well. But. Uh, just some general ways to maximize taxes. And again, Um, Taxes are a big deal. It's going to be your biggest expense. Uh, for your entire life. And so. W what better way to help mitigate that, then having a professional on your side, whether that be a CPA. Uh, that does tax planning and financial advisor that has tax planning, but making sure that you understand the tax laws and how to maximize that, whether that's through asset location. Uh, things like tax loss, harvesting, making sure that you're maximizing your retirement accounts and in such a way that you're reducing taxes, but also. Uh, hitting your goals as far as when you want to retire. Um, things of that nature. So, uh, hopefully you'll keep Palm valley wealth management in mind when you're considering hiring out for these types of problems that you want to solve. Um, and if you are looking to do that, you can always go to my website, Palm valley, wm.com. You can book a call with me. Uh, we can do a tax analysis. Uh, on your tax return. Looking at your investments, things of that nature. See how you're doing, and if you want to work with us, she can, if not, then you'll have a better idea of how you're doing. So. Um, This will wrap up this podcast. We'll see you in the next one. This podcast is meant for educational purposes only. It's not meant to be financial investment or tax advice. Please seek a tax legal, financial, or insurance professional. When making considerations about your own situation. At least he Palm valley wealth management in mind when making those considerations.
