I enjoy being my own boss, especially after I learn how much American businesses are supported financially from the perspective of tax efficiency.
I was also happy to learn more about the awesome flexibility, options, and much higher limits of tax-advantaged savings available to a business owner rather than an employee.
What is my business?
Aside from my W2 day job (sometimes night, too, sometimes around the clock… 24 hour shift) as a radiology resident, I also receive 1099 income from my tutoring/consultation business, book royalties, and this blog (even though the bog is in the deep red in terms of net profit.)
Why do I want to learn about business owner tax-advantaged savings?
After I max out the 18k limit of 401k at my residency program and the 5.5k Roth IRA, I need more tax-advantaged saving space. I much prefer to put money in a tax efficient vehicles such as individual/solo 401k, SEP-IRA, SIMPLE IRA discussed in this post, than a taxable brokerage account (although I currently do have about $1,200 play money in a free, fee-less, mobile app called Robinhood).
Self-employed individuals and businesses employing only the owner, partners and spouses have several options for tax-advantaged savings: an individual 401(k) plan, a SEP IRA, a SIMPLE IRA or a profit-sharing plan. Each option has distinct features and amounts that can be contributed to the plan each year. Use the self-employed 401(k) calculator to estimate the potential contribution that can be made to an individual 401(k) compared to profit-sharing, SIMPLE or SEP plans for 2008.
The business owner wears two hats in a 401(k) plan: Employee and employer.
Contributions can be made to the plan in both capacities.
The owner can contribute both:
Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
2015: $18,000 or $24,000 if age 50 or over; and
Employer non-elective contributions up to:
25% of compensation as defined by the plan, or for self-employed individuals, see discussion below.
One can contribute to an IRA, move it into a 401(k) account, and contribute in-full to 401(k). However, not all of the contribution would be a deductible contribution.
401(k) employer may make an in-kind contribution to the plan. All other rules still apply – i.e., a disqualified persons may not be securing the loan.
Employer matching or non-elective contributions are always made “pre-tax.” Employers cannot make Roth contributions.
Get a larger/printable version by clicking on this comparison table.
Name of the game, it’s how much you keep, not how much you make. I’m not advocating extreme financial hoarding, I’m advocating smart stewardship of your hard earned dollars.
Like WCI always says, physicians have won half of the wealth building battle. They’ve got high income. The other half is learning to manage the high income appropriately so that high income translates into high net worth.
While many attending radiologists I know are making 300k+ per year, I’m astonished by how little their net worth is relative to that giant income. Very few of these doctors with low net-worth-to-income ratio are true spend thrifts. Where did their money go, you ask?
Here I’m sharing a few tips on how to keep more of those dollars, though on the surface seem high, when adjusted for 26 years of schooling/training, ½ million in educational costs, really isn’t very high. (Whether becoming a doctor is financially sound choice or not is a discussion for another day.)
1. Pay taxes yesterday: Roth.
Buy your nest eggs on sale, with paying lowest taxes possible during training years. The decade spent in medical school and residency/fellowship is critical to efficient wealth building.
2. Tax-advantaged retirement saving accounts.
Maximize tax shelter by stowing away money in Tax-advantaged retirement/ health/ education saving accounts (18k in 401k, 5.5k in Roth/Back door Roth, 53k in solo 401k, 14k per child in 529, HSA.) Don’t start a taxable brokerage account outside of these tax-sheltered saving until you max them out!
3. Turn your hobby into a business.
Businesses pay themselves first before paying taxes. Employees like many doctors pay taxes first before paying themselves. Be a business.
4. Pay your family, especially kid(s).
Pay your child 5.5k this year for their labor or work, and allow them to pay their own taxes and fund their ROTH IRA. If your child is Mini’s age (8 yo), by the time he/she retires, there will be more than 300k from this one time 5.5k contribution.
5. Transfer your income into lower tax brackets.
Paying family members, kids in lower tax brackets is a great way to decrease your taxable income (high tax bracket) and increase their taxable income (lower tax brackets).
6. Stop Churning.
If you are a supersaver and maxed out all tax-sheltered saving accounts, and started a brokerage. Don’t churn (ie. buy and sell frequently) or your return will be heavily reduced by the taxes associated with transactions.
7. If you churn, churn with Roth dollars.
If you are vain and believe in turnover, at least do it in Roth dollars so that you are paying more taxes on top of the transaction fees.
8. Spend your business income.
Pay yourself, your business first by investing in assets. Spending your business income on assets, will not only bring you more money (by definition of assets), but also reduce the net taxable income from your business.
9. Spend less with your employee income.
Your income from employment is post-tax, so saving a penny equals making 2 pennies.
10. Make tax free money.
Smart credit card use, get yourself cash back with purchases. These cold cash ARE indeed tax free. There’s debate on whether there’s a limit on how much cash back one can make before paying taxes on it. I believe there’s no such threshold. I made 4k cash back last year and did not have a tax form associated with it. But you better check with your accountant and see what he or she says 🙂
All articles by DWM are for informational purposes only and not intended as a substitute for professional advice. Please consult a professional accountant, financial adviser or lawyer, before making financial decisions.
These hands save lives, or something like that. They do place endotracheal tubes, epidural catheters, peripheral nerve blocks, and NG tubes. I’m an anesthesiologist, and I’ve been in practice for a little more than ten years.
I’m not a big fan of the phrase “for a living.” I would never want my job to define my life. I am Living in many ways that have nothing to do with the way I earn money.
Why do you blog?
Physicians earn a lot of money. Physicians spend a lot of money. Physicians burnout and have no good escape. I would like to open other doctors’ eyes to the idea that they might be better off without the lifestyle dictated by the “delayed gratification” mantra.
I want everyone to be happy, and I’m not here to say you’re doing it wrong. But we’re taught to practice evidence-based medicine, yet we’re not living evidence based lives.
I was inspired by Mr. Money Mustache and the White Coat Investor, but there is a wide gulf between their philosophies. While they do share some common ground, I’m essentially here to bridge the gap.
Also, I love to write, and the blog is a great creative outlet for me, which is something I haven’t had before.
Why is your blog awesome?
It’s not. But if it was, it would be from some combination of life experience, attention to detail, humor, a love of numbers, and beer. I have a 4 physicians series that I’m proud of, I write about taxes, frugality, lots of Top 5 lists, investing of course, and some physician issues as well.
I put a lot of time and thought into each post, including this one. When I care about something, I put a lot of effort into it. The blog is like my third baby, but I would drop it in a heartbeat for either of the first two if necesssary.
How many days left until you obtain financial independence?
T-plus about 11 months. I didn’t start the blog until a few months after I was able to declare financial independence. I started tracking our family’s spending about the time I believed I could declare FI, and I’m happy to say that I was right.
I figure a FIRE blog (Financial Independence, Retire Early) would be more meaningful coming from someone who has walked the walk. Of course, following someone beginning their own journey, and chronicling their progress, can be powerful as well.
Any sage advice on money and marriage?
While opposites may attract, it’s best to be on the same money page as your partner. It’s no secret that finances are the number one source of conflict in a relationship.
When you get married, spend more on your guests and friends in the wedding party and less on the flowers and fleeting nonsense. When married, don’t let small money matters interfere with the things that really matter. If you want to be on a fast track to financial independence, learn to be frugal without being cheap.
I would add that my wife is eternally grateful that she has been able to stay home to raise our children without any need to earn a living. She is well educated with a couple bachelor’s degrees and a masters, but her efforts over the past eight years have been directed towards family matters. I believe our boys have benefitted greatly, and you can’t put a price on that.
yes,, that’s us. no stock photos for me.
What are the top 10 things you’d tell your younger self?
I’ll refer you to The Top 5 Things I’d Tell My Younger Self for the first five. Those were things I would tell myself as a new attending. I’ll open it up to any age for the next five.
Don’t burn bridges or hold grudges. Neither will make you feel better.
Branch outside of your comfort zone in college. I had two majors: Biochemistry was one. The other, Genetics & Cell Biology. I was probably a few classes away from adding Biology and Chemistry majors. A quad major would have made me a huge science dork. I wish I had minored in something different, like Spanish or Literature or Kung Fu.
It’s best to plan ahead, but remain flexible. Your plan can, and will, change. I took a meandering path to be where I am today.
Don’t get too excited or distraught over any real or potential romance in your first 29 years. I only know that in hindsight, but the Right One for me came into my life just after my 29th birthday.
Don’t get too excited or distraught over any real or potential Bowl / Playoff aspirations for your hometown college and professional football teams. They will eternally let you down. Expect the worst, and be pleasantly surprised with mediocrity.
What is the #1 money mistake you’ve made that want your readers to avoid?
Don’t build or buy too much house right off the bat. We overbuilt for the area, lost my job due to an impending hospital bankruptcy, and lost a boatload of money on the house. You’re a real doctor now, but that doesn’t mean the “starter home” shouldn’t apply.
An attending of mine gave a lecture to final year residents. He repeated three times: “Rent. Don’t Buy. Rent. Don’t Buy. Rent. Don’t Buy.” He knew what he was talking about. About half of all physicians leave their first job within the first couple years.
What are the 3 most important money lessons you teach your kid(s)?
Daddy works for a living so we can have all that we have. Eventually, that will change to “Daddy used to work for a living, and saved most of what he earned, so that we can live the way we live.”
Save. Invest. Repeat.
Eventually, they’ll be more aware of my site’s existence, and of all the other wonderful sites on my growing blogroll. They will be very well versed in personal finance before they begin careers of their own.
What are the 5 smartest money moves you’ve made in your life?
Married a beautiful woman more frugal than me.
Lived and worked like a resident for a couple years after residency
Read personal finance books. I’ve got a list of recommendations, many of which I’ve read or have come highly recommended from respected authors.
Learned the Rule of 72 at a young age, and have applied it when making spending and saving decisions.
Learn to hunt and gather, because without the object called money, how would I buy anything and survive? Or feed my family? Although, that’s probably not exactly what you meant, so…
Start traveling the world yesterday. Hire tour guides everywhere we go.
Buy and drink a Sam Adams Utopias. I’ll probably do this eventually anyway, even with money being an object.
When did you first start contributing to your own Roth IRA?
Roth IRAs did not exist when I started investing in an IRA back in high school. My parents helped set this up, but I did earn the money, working my way up the ranks at the local grocery store. We converted to Roth when I was in college, when I was in a negligible tax bracket.
When did your child first contribute to his/her Roth IRA?
They haven’t earned any money yet, so that hasn’t happened. Get to work, kids!
What does financial independence mean to you?
The question sounds so simple, but it’s really not. Mathematically, I’ve gone with the definition of 25 times your family’s anticipated annual expenses.
I think it means I’ve won the game, but that doesn’t mean I have to stop playing. In a few years, I’ll have more than Enough, and if I feel ready to leave medicine for good at that point, I imagine I will. There will be many things that I will miss (here’s a Top 5!), but a whole lot more that I look forward to doing. Here’s 50.
Any questions you want to ask and answer to lend more insight to our readers?
How can I connect with you?
Well, I linked excessively to my site throughout this Q&A, so you shouldn’t have too much trouble finding my site. But if you’re still struggling, here’s a link.
I am also active on Twitter and Facebook. My Friendster account doesn’t see much action these days. Do I use what? I have no idea. What’s Tinder?
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The Utah Educational Savings Plan (UESP) state-administered 529 savings program utilizes Vanguard and Dimensional mutual funds, the State Treasurer’s fixed-income fund, and an FDIC-insured account in its five different age-based options and nine static portfolio options.
Florida 529 Savings Plan – Instead of utilizing mutual funds, the Florida Prepaid College Board hires various money management firms to manage the separate investment pools, which are available as either static portfolios or as part of an age-based strategy.
The Fidelity Arizona College Savings Plan is a Fidelity-managed 529 plan follows the same approach as other Fidelity plans in Delaware, Massachusetts and New Hampshire. It features three age-based options; one using Fidelity mutual funds; one using Fidelity index mutual funds; and a third multi-firm option with portfolios that invest in funds offered by several different companies. The plans also offer 11 static options, and one option that invests in an interest-bearing deposit account.
What investment vehicle are you using for college savings?
How old is your child when you start putting money away for their university costs?
Let’s first talk about why I won’t retire at 38, even though I can.
That’s less than 3 years out of fellowship. It would be the beginning of my professional prime as a radiologist. I’d like to use my skills and knowledge from 26 years of schooling to serve others. I get a wonderful sense of fulfillment from draining a patient’s pelvic abscess today; I will also relish saving someone’s life by making a imaging diagnosis in 7 years.
I want to care for others beyond myself and my daughter (Mini Wise Money.) These people include my parents, MWM’s paternal grandparents, some of my extended family, & my sponsor child Mariela.
I want to provide for MWM more than I have been blessed with growing up. While I worked 7 jobs in college trying to send meager money home to help my parents with their 30% interest rate credit card debts, I’d like MWM to have at least 1 but no more than 2 jobs in while going to school full time.
I’d like to keep blogging. Blogging costs money and a lot of time. I plan to support my blog because helping others succeed financially & personally is rewarding to me.
I’d like to give more. I sponsor one child now. I’d like to sponsor more. I may even adopt a child one day, so that Mini is not so lonesome when I’m in heaven one day.
3 things to help you achieve financial independence/ability to retire sooner includes:
I first started my calculations with my current post tax annual income of $52,671 and annual savings of $29300. My annual savings rate is 56%, which gives me financial independence (ability to retire) in 13 years.
Living, Earning, & Saving like I do today; I can retire in 13 years.
Savings include 23.5k in Roth IRA & Roth 403b, as well as 1k in taxable investment & 4.8k in home equity. Note that my home equity does not exactly grow at 5% ROI (return of investment) but I have 5k of additional savings that will make the 4.8k in home equity a bonus even if it’s getting negative ROI (home value drops rather than grows.)
This does not account for the fact that in July 2020, I will get a pretty big raise from PGY to attending-hood.
Accounting for the transition into attending-hood:
My calculations with the jump in salary when finishing fellowship here:
My attending post tax annual income $160,857 (based on an ultra-conservative estimate of 250k annual income, when most rads I know are getting 300k to start at academic/VA jobs) and annual savings $137,486.
My annual savings rate is 86%, which gives me financial independence (ability to retire) in 2.8 years of finishing fellowship (8.8 years from finishing medical school.)
