Dental Financial Planning: Turning Chaos into Financial Freedom - Part 10

122:Dental Financial Planning: Turning Chaos into Financial Freedom - Part 10

In this episode of The Dental Boardroom Podcast, host Wes Read, CPA CFP®, shares key financial and tax strategies for dental practice owners. He covers retirement plans (401(k), SEP IRA, Simple IRA, defined benefit/cash balance plans) and explains how to maximize contributions while managing employee costs and staying compliant. Roth IRAs and backdoor Roth conversions are also discussed for tax-free growth.

Wes advises a disciplined investment approach, highlights the risks of speculative investments, and explains how to evaluate debt, use tax deductions, and leverage payroll strategies for family members. He also explores fringe benefits, state-level tax breaks, and practical ways to improve practice profitability, like raising fees and moving toward fee-for-service models.

Finally, he emphasizes automating savings, debt payments, and retirement contributions to secure long-term financial success. This episode gives practice owners practical tools to reduce taxes, boost cash flow, and grow wealth inside and outside their practice.



Key Points

• Understand the differences and trade-offs among 401(k), SEP IRA, Simple IRA, and defined benefit/cash balance plans.
  
• Use Roth IRAs and backdoor Roth conversions to secure tax-free retirement growth.
  
• Avoid risky, illiquid investments inside retirement accounts—stick to disciplined, diversified portfolios.
  
• Evaluate debt payoff vs. investing by considering interest rates, volatility, and financial goals.
  
• Use payroll strategies (kids, spouses) to reduce taxable income and build long-term wealth.
  
• Document home office deductions and leverage allowable fringe benefits cautiously.
  
• Maximize savings with state-level pass-through entity tax deductions.
  
• Regularly raise UCR fees and consider transitioning to fee-for-service to boost profitability.
  
• Automate savings and contributions to build financial resilience and consistency.
  

Resources Mentioned

📄 Financial and Tax Strategies PDF

Transcript:

Wes Read:  Welcome back. It's Wes and we carry on our journey through the process of financial planning for a dental practice owner. Now some of our listeners might be actually medical practice owners. All of this still applies for a medical practice owner. However, there are some nuances that we apply for dental practice owners.

Just wanna throw that out there because I did get news that I do have some medical practice owners listening as well. Who are generally S corps, who generally have a very similar profit and loss statement, who generally have the same tax issues as a dental practice owner. Well, I'm excited to carry on today because today I talk about the things that I love talking about, which is how to accelerate your financial independence through financial planning strategies.

So I'm gonna talk about some strategies here. This isn't a comprehensive list. These are some of the key basic ones that every dental practice owner can and should be doing at some level in order to reduce their taxes  and by reducing their taxes, increasing their surplus cash available to go to their personal balance sheet and build financial independence.

Okay, lemme talk about some of these. Here we go. Number one on my list. If you're watching YouTube, it is right on the screen for you. If you are not, never fear, I will narrate this as I go. Number one, 401k. Profit share defined benefit plan. So in a dental practice, a a small, all really, all businesses in the country can have a what's called an ERISA plan.

ERISA is Employee Retirement Income Securities Act. I can't remember what year. It was like 1960 or 70, something around there. It defined the way that a business can set up a tax advantaged savings account slash investment account for its employees in order to promote their retirement. And there's a lot of these,  there are IRA versions and I want to distinguish between personal IRAs and business IRAs.

Personal IRAs are a what's called a traditional IRA or a Roth ira. Those are not tied to the business. They, they're not subject to ERISA rules. These are personal, they have nothing to do with your employer. However, there are business versions of IRAs. There's the simple IRA and there is the, there's the SEP ira.

And this isn't a podcast on differentiating between all of these, but let me bottom line it for you. Simple IRAs. Simple IRAs crap. You can barely put anything in there. I mean, that's, that's all relative. Maybe if you're a young associate and you're working as an independent contractor and you want something simple and you wanna put aside, you know, 12, $13,000 a year, great.

But if you're really wanting to accelerate financial independent. $12,000 a year isn't gonna cut it. It's not gonna get you  there. And so they're limited. Simple. Iris are very limited on how much you can put in. Then there's sep, Iris Sep. I allow you to put in a lot more, you know, you could be putting in somewhere around what is, what is the Max SEP IRA contribution.

This year changes every year set by a max contribution. 2025. It is up to 70,000. Or it's the lesser of 70,000 or 25% of your own compensation limit. And again, I'm not gonna go into all the rules here, but bottom line is you can put in a lot more into a SEP IRA problem is whatever percent that you put in for you, you have to put in for the, for your team that's eligible and a lot of 'em are gonna be eligible for 'em.

And so if you put in 25% of your W2. And let's say you pay yourself 200,000, so that's $50,000 that you put in. You gotta put  in that same percent for your staff. So if you put in, what did I say? You put in 25% of your W2 compensation, that's $50,000 on $200,000 of W2 compensation. You gotta put in 25% of your team.

So if you have a team member making $50,000, you gotta go put in $12,500. For them. That's a lot. And so one of the challenges with the ERISA plans, these business retirement tax advantage savings and investment plans is that you've got to construct a plan. You gotta design a plan that A, meets the ERISA rules, and B, maximizes contribution to the owner relative to the team.

And I don't wanna sound incompassionate here. I, we all care about our employees. We couldn't do what we do without  our employees. They are, I won't say your biggest asset. Your reputation is your biggest asset, but some will say they're your biggest or second biggest asset is a great team and they're all trying to become financially secure.

Also, and so the problem is, is if that 60% of every dollar coming outta your pocket for these retirement plans goes to your employees, it's incredibly inefficient. It's cred, it's incredibly demanding, and really unsustainable. So when I say we're trying to maximize, how much goes to you the owner? Relative to your team, it's because we're trying to create a sustainable contribution plan that can last year, after year, even for decades.

And so if you go with the SEP ira, it's not sustainable. If you're trying to max yours, way too much goes to your team. So the one that we like, that we use all the time is not the simple ira. It's not the set ira, it's none of the eras, the business eras. Yeah, we do.  Roth Iris, which I'll talk about next, but that's a personal account, not a business account.

And so a 401k is the natural next step because 4 0 1 Ks are fantastic for small businesses that have say, 20 employees or less. Once you start to get up more than 20, you end up having so much staff of requirements that you can't necessarily use it to maximize your own as the doctor. Benefits, but if you've got 10, 12, 15 employees or the, you know, the less, the better from a ratio standpoint as to, in terms of how much goes to you and how much goes to the team, this is phenomenal for most of our doctors.

We're able to max their contribution, which is, if you're under 50, it's somewhere around $70,000. If you're over 50, it ends up being roughly closer to 80, and that changes every year. So I'm just sort of giving some benchmarks right now. In order for you to get that, you have to contribute to your team at some level.

What  we like to see is at least 70% of the money outta your business checking account going into the 401k plan for you and your team. 70% or more goes to you and your spouse if you have your spouse on payroll, which we get a lot of our client spouses on payroll, especially spouses who are sort of. Stay at home, watch the kids spouses.

We love to get them on here so we can fund their retirement plan as well. You get them on the plan, now you're up closer to around a hundred thousand dollars that you're funding into this 401k. However, you've gotta do it. You've gotta do it for your team as well. And so if you have a hundred thousand dollars going out, we wanna see at least $70,000 of that going to you and spouse, 30,000 to your team.

Now you may say, well, Wes, $30,000. That's still a lot to the team. Yes, but remember. A hundred percent of this is tax deductible, so that a hundred thousand dollars is probably gonna save you 30 to $40,000 in taxes depending on your tax rate and what state you are in. So in many ways, the amount of money you save in  taxes alone covers the staff costs.

Now you have 70, 80, a hundred thousand dollars into your own 401k that's gonna grow tax deferred for a long time. It is a great strategy Now. These 401k plans do come with administrative costs, and they're a bit layered and they can have a bad reputation for the amount of costs. Historically speaking.

One of the things that a good financial advisor will do, and this is what we try to do for our clients, is try to minimize those expenses. Those expenses include. The record keeper. That might be Fidelity or Vanguard or Schwab, whoever's sort of holding these accounts for your employees to log in, make their, uh, their selection of investments, yada yada, that's called the record keeper.

Then you have the third party administrator who does the testing at the end of the year to make sure it's compliant with those ERISA laws. And sometimes the record keeper will have a baked in third party administrator to do the testing and sometimes they don't.  But the record keeper might be keeping 0.25% of the balance in the account, or maybe it's a fixed amount of a couple thousand every quarter.

Um, and then the TPA usually charges for standard 401k, somewhere around a thou, uh, $2,000 a year. And then they'll charge periodic updates when laws change. And then if you move into a bigger bucket, so once you've maxed your 401k and inside of your 401k, when I said you can do 70,000, that's when you layer on this element of the 401k called a profit share component to the 401k.

This, it's called a Safe Harbor Profit Share. Once you layer that on, that's how you get up to 70, 80, a hundred thousand dollars in your 401k for you and your spouse. Without that extra safe harbor profit share, you're maxing at like 23,000. If you're under 50, roughly 31,000 or so if you're over 50. So you're a lot more limited if you don't use the extra safe Harbor profit share for your 401k.

But once you've maxed your 401k profit share, you max that and you have extra cash. You're like, what do I do with this?  If you are a little bit older than your staff, if ideally you're about 10 years older than your average staff age, and maybe your debt's paid off in your practice and your cash flowing really well.

Now you can move into a defined benefit plan where you can put two, three, $400,000 a year into this thing for, for a good period of time before it caps out. And uh, and so that also comes with a staff cost, but usually a lot less of a staff cost. So when we do our financial planning strategies, one of the very first things we do, because these things are such slams dunk, they're such slam dunks.

If you structure them right, you plan for them right. And you fund them, right? They are tremendous in saving, in taxes. And so, uh, your defined benefit plan is also a hundred percent tax deductible. So I've had clients who maximize their 401k defined benefit plan. It's called a combo plan, a 401k defined benefit.

Some, sometimes people call the defined benefit plan, a cash balance plan, but they're the same thing. Uh, a combo plan, let's say you're  really cranking it and you could put in $300,000 in there, you might be saving between a hundred. And $140,000 in taxes from doing that. And so the advantage is you just cut half of your tax bill, possibly more off.

The disadvantage is the monies now is inaccessible for a period of time because that's the whole purpose. It's gonna grow. Tax deferred for a long time. It's gonna compound and it's gonna turn into something magnificent, 10, 15, 20 years down the road. That's why these things are, you can't just look at the cost.

Sometimes I'll get a client to say, west, I feel like I'm paying a lot of costs on these things. So let's go back to the cost conversation. You got the TPA, you've got the the record keeper, and then you'll have an investment advisor generally. And the investment advisor is the one who sets up the funds that are available for your staff to choose from.

They're the ones who will provide education to your team on how much they can contribute. What the employer's contributing, all of that stuff, they sort of oversee it,  um, strategically and check in on it. That's what a good advisor will do. Now, what we do here at Practice CFO is we go beyond just what is the lineup of investment options, and we really go into the design of the plan.

How much can we fund? It's gotta be embedded into that cash flow projection I just talked about in my last episode. It's gotta be baked into that. What happens too often is that a salesperson from a big investment firm, a big financial firm, will come in and they'll plug you in, do just this very generic 401k plan, and then they leave you to do all the mechanics.

You gotta get all set up in payroll. Every payroll you have to what's called process the contributions by making sure the deductions get remitted over to the investment company. You've gotta, at the end of the year, do the census. You've gotta work with your TPA for testing. You've gotta decide how much am I gonna fund, uh, as the employer contribution, all that stuff.

You're left to do that  yourself. And guess what happens? So much? What happens is that the doctors end up not understanding it, not having the time to administer it. They don't fully fund it. They try to fund it. It gets kicked back because they don't, they don't comply with the regulations and so it didn't meet what was called the A DP and A CP testing.

And so it ends up being this big thing on their p and l that's just costing them money and expenses and contribution to their employees, and they're getting very little personal benefit out of this. This happens all the time. You don't set up a 401k until it's clear that your financial plan and your financial projection says now is a good time to do this.

Timing is essential when it comes to plugging in these rigorous, demanding erisa. Savings accounts in your business. So for us, we, uh, as, yes, we do love to set these up because we can accelerate our client's financial  independence, but we will never set it up. Until it's the right time. If you're struggling on cash flow without one, it's not the right time to set a 401k.

We gotta get other things in order to create surplus to then know that we can start funding the 401k plan. Alright? But this is a key financial planning strategy because if you have extra cash, this is a significant low hanging fruit to reduce taxes and build tax deferred growth. Now, I'm not getting into this podcast on what you put inside of your four oh k.

Whether you put stocks or bonds or mutual funds, or exchange traded funds, index funds, there's all sorts of investments that you can put in here. And right now, the White House, Donald Trump, the executive branch, is they're trying to expand. 4 0 1 Ks to be able to access private placement or access equity in private companies.

IE private equity investing, venture investing, things like that. Historically, the government has not allowed those because there's so much risk in those and to do it well yet to be highly informed. Now, I personally don't agree  with what the administration is doing here because imagine your hygienist or your assistant deciding to go invest money.

In a, in a hedge fund or a private placement equity fund, or a private debt fund, these things are incredibly, incredibly complicated and the people who are gonna lose out on these are your people who don't understand them. And so you're gonna see a lot of people lose money on this. That's why for most of your employees, and for even most doctors, we like to go with an asset allocation index, low cost strategy.

And try to get what the markets get on average and not, and, and keep your expenses to a minimum by doing that over time, it's not sexy. It's singles and doubles. You're not hitting home runs, but it's what is secure. It's tried and true, and it will compound and do miraculous things over time. Trust me on that.

When you're swinging for the fences, trying to time the market, especially you're trying to get in private placement debt without really understanding it, or PE funds or  venture capital money. It's a risky place. And yeah, there's some people who make a lot of money and there are a lot of people who lose a tremendous amount of money.

There's a lot of appeal, sort of, uh, uh, shiny appeal to these private investment options that you hear about because sometimes you hear about it and you're like, oh, I'm being left out. I'm being left out for more. The real money's made truth is that's a sales pitch that somebody's trying to get you to, to play something, and they're gonna make really good investment or fees on those because private stuff, hedge fund, private placement.

This is not pay your advisor 1% annually. This is gonna be significantly more than that. And it's like goes into a black box. You don't get regular reporting on it. You don't know what its current value is, and it's not terribly liquid. You can't get out of it easily either. So I've gone off a little bit of a tangent as I'm known to do on what goes in these 401k profit share defined benefit plans.

You really want to keep these to safe Vanilla index funds  allocated across, uh, blue chip companies, international companies, emerging market companies, maybe some bond index funds, maybe some inflation protected stuff, but pretty much your basic asset allocated, uh, portfolio. Structure there. Okay, that's 401k profit share defined benefit plan.

Oh, one more comment, I'll say on the defined benefit plan. The defined benefit plan, I, I should do a whole podcast series on this 'cause it's such an amazing tool when managed. Right. The defined benefit plan is defining how much benefit you're gonna pay to your employees when they retire. Now the reality is whenever somebody leaves your, your company, or when you do actually retire.

Everybody takes the option to roll it out and put it in an IRA account. You're not actually paying a benefit. Like my dad, he worked for the city of Santa Clarita and now he gets paid every month from the city, a pension plan of, I don't know, three, four, $5,000 a month till he dies. That's a true pension plan.

You are not gonna pay that even though this is a pension plan, because your document will basically make your  employees roll their funds out into an IRA account, just like a 401k, no different. But because it's defining a benefit, if the market drops by 80% in some horrible depression scenario, you're gonna have to go in and you're gonna have to fill up that defined benefit plan again, which may, which means you may have to go drop 500,000, 800,000, a million bucks into that thing all of the sudden in order to get it back up because it has to maintain a certain level to meet those future payout demands.

That's why it's called a def. That's what it's called, A defined benefit as opposed to a 401k, which is the defined contribution plan. The 401k simply defines how much you're putting in now, and it's, it's nobody's obligation to make sure it reaches a certain balance later. That's the employee's responsibility to invest it well.

But a defined benefit plan, which is a hundred percent owner country con, uh, an owner contribution employees don't put anything in there. The employer has to make sure that it's  funded at a certain level to meet those future demands. And so if the market tanks, you gotta go drop in more money in that defined benefit plan to refill that tank.

And so, uh, if it's otherwise, otherwise, it's called underfunded and you can't be underfunded in the defined benefit plan. That's why in the defined benefit plans, we're doing heavy bonds, heavy fixed income, we're not. This is like we're going for a four to 6% rate of return. We're not going for a seven to 10% rate of return.

So if the s and p fell 70%, you might only fall 30% and you're probably not underfunded at that point, you're probably still fine. So these defined benefit plans need to be invested very, very uniquely because of the nature of those accounts. Okay? That is number one. 401k profit share defined benefit plans.

Let's go on to number two, financial planning strategies. Number two, financial planning strategies. Hold on one sec, lemme get my bearings here. Okay.  Roth conversions. Roth conversions are phenomenal. I do it. Uh, while most of our clients do it, most of our clients make too much money to be able to, uh, fund a Roth.

A Roth is you pay taxes. Now it goes in there and then it grows tax free, not tax deferred. 'cause tax deferred. Eventually when you pull the money out, you're gonna pay taxes on it at ordinary rates. Tax free is, it's gonna grow and you're not gonna pay tax on the growth, and then you're gonna pull it out and you're not gonna pay any taxes when you pull it out.

I love Roth IRAs. It's like stacking nickels. 'cause you're only putting six, $7,000 a year, six or $7,000 a year depending on your age, uh, for you and for your spouse. So you might only be getting 12, 13, $14,000 in there per year, but it's tax free. And if you do that every year for let's say 20 year period, it really adds up nicely.

Eventually you get a million dollars of a tax-free account. And then when you retire, you can pull  selectively out of that Roth era enough to live on so that you don't have to pull as much out of your tax deferred, because the more you pull outta your tax deferred, the more you're gonna pay in taxes and it could bump you up to higher tax brackets.

So that's called, that's called tax allocation across your investments and tax withdrawal strategies in retirement. Again, this all falls under good financial planning strategies. That's what we do here at Practice CFO all day long. It's what we focus on. It's the, it's our core mission to help our.

Doctors have a remarkable journey in their life with their money, their assets. So the Roth conversion is you fund money into a regular IRA because there's no income limit on how much you, there's no income limit on how much you can contribute to an ira. However, if you make too much money, you're not gonna get a tax deduction for funding your ira.

And so you put in what's called after-tax money into your ira, and then from there you immediately, within minutes convert it over into the your Roth ira. So it goes into the ira. Then it opens up a back  door from the ira and it's, it sort of leaves the back patio, takes a few, you know, walks, walks a few steps, turns, goes up the back patio of the, of the Roth IRA and goes in the back door of the Roth ira.

It's like your neighbor. You got your back door, go through the fence, go into the back door of your neighbor's house. It is a backdoor conversion. You went through the front door of your house, out the back door of your house, and then into the back door of your neighbor's house. Same thing here. You go into the ira, then you leave the IRA on the backside and you come into the backside of the Roth ira.

Because you can't go into the front side of the ira, you can't go into the front door of your neighbor's house because you make too much money. So the Roth IRA allows you to do that sort of loopy loop, sort of scenic path direction into the Roth ira. And, uh, we do it every year for our clients. We, a lot of times what we do is we set up a brokerage account at Schwab, which is where we hold our clients money, Charles Schwab.

And we, uh, will, it can be a, a  joint account, it can be a trust account, but it's a taxable account. Let's assume that we're maxing our 401k. Maybe we can't do a defined benefit plan. It doesn't make sense yet based on your age and cash flow, but we do wanna do a Roth conversion. So that's when we will, um, op open up at Schwab.

We may open up a, a taxable account. We fund that every year. Maybe we put two 3000 a month in there, so it gets to 24, 30 6,000, and then we pull from there and we fund your IRA and then we convert it to your Roth ira. That sort of is a systematic, automatic way of building this tax free account. Some of our clients have kids with Roth Iris.

We'll do a similar thing to fund their kids Roth Iris. So love Roth Iris. We're doing 'em for about 300 clients, uh, right now and are very good at doing that. Next on our financial planning strategies is invest rather than pay down tax deductible debt. I mean, come on, you buy your practice. For many of you, you got your practice at like a three or 4% tax deductible rate.

Now, over the past year, inflation's uh, been up. Our tax rates are, uh, or interest is up closer to 6% or so, six to 7%, and that could be going up more. We will see, depending on what happens with inflation, but we're getting back to what historical norms are, which is banks make money not off three or 4%. They make money off of six, seven, 8% return for a standard business loan for a healthy borrower.

And so let's say you're at five or 6%. And let's say you're in the 40% combined tax marginal tax rate. If, if your, if your loan is at 6% and you're gonna get a tax deduction on that at 40%, that's 2.4% off the 6.4%. So that's 3.6% is your actual. Rate of return that you're getting by paying off that 6% rate because you're already getting a tax deduction on that 6% because it's a business debt.

And so what is the after tax rate that you're paying on that debt is 3.6%. So are you happy with the 3.6% return rate of, uh, return or return on investment? Maybe, maybe you're happy with that, but historically markets have given a lot more than that. Now, right now as we speak, 2025 stocks are, uh, uh, valued, uh, at close to two times two standard deviations above their historical averages, which means relative to history, I'm not gonna say relative to the future, because the history doesn't necessarily perpetuate into the future.

It often does and usually does, but relative to history, stock valuations are exceptionally high right now. Exceptionally high right now. So are you gonna get 10% over the next 3, 4, 5, 7 years? I don't know. I don't know. Maybe not. Maybe, maybe paying off the debt and getting a 3.6% fixed, guaranteed predictable rate of  turn makes you feel better.

Now, typically what I would do is I'd say, let's keep investing that into your four oh K. Let's keep buying stocks, bonds, mutual funds, index funds, et cetera, in order to maximize our return. Even if the market does fall and your investments see a 30% decline and then a 15% decline in two consecutive years, just say two horrible years.

Even then the money that you're putting in while it's falling, you're buying stocks when they're, when they're valued a lot lower. And the whole concept of buy low sell high is not easy 'cause you gotta buy when it's falling. That's, that's like the only way, unless you buy in a startup company that just goes public and you bought it early on.

Then you buy low sell high. But generally speaking, if you wanna buy low, sell high, you gotta buy it while it's falling. 'cause good luck predicting exactly when it hits bottom. So that's why buy low, sell high is really hard 'cause you gotta buy it when your emotions are screaming at you not to do it. And so let's say you have this debt and you can get a 3.6% guaranteed rate of return by  paying off extra debt payments, great.

Or the market's falling, you could take that extra money and put it buying these stocks as they're falling because you're probably getting a better deal. And as you watch the rest of your stock value just plummet, just remember, if you're not pulling on it, pulling it out right now, that's fine because you own the same number of shares and so when it comes back, it's gonna, it's gonna come back in spades and you'll enjoy that full rise.

I wouldn't be terribly concerned about seeing a decline in your assets when you're in the accumulation years of your 30 forties and fifties. As you get closer to retirement, you wanna move into less volatile stuff, for sure. Okay. So I like to invest rather than pay down good debt. Now, if you have bad debt, if you've got a line of credit that's at eight, nine, 10%.

If you have credit card debt, if you have a shark loan, you know if you've got a high interest car loan, wherever you have high debt, high interest debt,  especially debt on things that are consumer items that. In other words, lose value. You want to pay that off pretty quickly. And in some cases I may even have you pay that off before funding a 401k or a Roth ira.

But a lot of times I want to get that tax deduction first where we can get it. So number three is, uh, invest rather than pay down debt. And really number four, which isn't on here, but would be pay down bad debt. Pay down bad debt. That should definitely be a top priority here. Alright, let's go onto the next financial planning strategy, your home office.

Now, a lot of CPAs don't like their clients to do this. I have, I love my clients to do it. Never been an issue with an audit. Uh, as long as you're following the rules. And the rules are that you gotta use a portion of your home regularly and exclusively for your business. Now, what I like to call it is your administrative place of business.

It's where you do your admin work. You might go over your accounting. You might plan for the next day. You might look at your production reports. You might deal with hiring and termination, um, decisions at  your home office. It's totally legitimate in the tax code. There's nothing wrong with that. Now, it's gotta be used exclusively for that as well.

And is the IRS gonna come and see a baby toy in the corner and they're gonna say, ah, nope. It's not used exclusively for business. That's why. Maybe you gotta be careful, but what I might do is get everything set up. So it's obviously looks like business. Take a picture, keep it on file. Then if the IRS does do an audit, which again, this is not a high audit area, you could send in that picture showing that it clearly is a business use space.

And you gotta use it regularly. Now, two benefits from this home office A is you get to deduct a portion of your utilities, and if you're renting a portion of your rent, pro rata based on the square footage of that room. So if that space, it doesn't have to be a wall off room, it could be a corner of your living room, but let's say that space is 10% of your overall house costs, rent and utilities, then you can take, let's say you pay for the year, a hundred thousand dollars and all of that.

Then you can take a $10,000 tax deduction, it's probably gonna save you  around $4,000 in taxes. Who doesn't want 4,000 bucks? If I gave you 4,000 bucks right now, you'd be pretty stoked about that. Here. Here's 4,000 bucks and a hundred dollars increments. That'd be, that'd be awesome. So this is just a small thing that puts 4,000 bucks right in your hand.

Now again, I said a lot of tax planning is casting a wide net. And it's getting a little here and a little layer and a little layer across 15, 20 different places and it adds up big time. Alright, that's the home office. And, uh, we have, uh, here at Practice CFO, our clients will fill out a quick little form telling us what is the square footage of their home, the square footage of their home office space, what the costs were, and then we bake the numbers into the tax return.

Alright, another one, kids on payroll. Look, I did this, I still do it. My son's leaving a college and he is doing a little bit of work for me with some online marketing, that kind of thing, and I pay him a decent amount for sure. And guess what he's doing with that? He's helping pay for a lot of college costs.

Did I just convert my college expenses into tax deductible expenses? Did I just make the IRS pay for  40% of my son's college education? Yeah, but my son is working for me legitimately, and the IRS can't tell me exactly how much I pay him. I mean, it does need to be reasonable, but you can get pretty high for somebody who's doing online marketing, managing social media, stuff like that.

Maybe even help me prep for some of my meetings. He legitimately helping out. He's got his own practice, CFO, email, he's got access to all of our tools, uh, in order to do his work. You know, I actually have a job profile for him. Now, is he getting paid exceptionally well for the amount of work he does?

Absolutely. Am I toeing the line? Absolutely. Am I crossing the line? I don't think so. But again, good tax planning. There's no other way to mitigate the massive friction of taxes. Then to tow that line and to know the tax code on all of these different areas and to maximize your tax deduction on them. So kids on payroll, you know, I always had my kids on payroll and I would fund them from the age of about six years old, uh, is when I would put 'em on.

And we do this for so many of our clients. I'd say 90% of our clients we do this for,  the other ones we don't for some extenuating circumstance, but most of our clients do do. This has not been an audit issue. As long as you have documentation of what your kids do, and the amount that we pay them typically has been the amount of the standard deduction on your 10 40 tax return.

Because if you pay your child that much, then that much is eliminated from the standard deduction. So your child pays zero taxes on that money. So this past year it was $15,000. So I would pay, uh, each kid $15,000. And then on their own tax return, they have a standard deduction, which is a free tax deduction just for breathing of $15,000, which eliminates that $15,000 of income on their W2.

And they don't pay any taxes. Now, they may pay some FICA tax, social Security and Medicare, and they may pay a little bit of state tax. But all in, we've run the numbers, depending on the state, it varies.  If you're in a state that doesn't have state income tax, you don't get as much benefit from this. But depending on your state, you're gonna save somewhere around on the low end, let's say $1,500 per child, and the on the high end, close to around $3,000 per child.

So if you have three kids on there, you're probably going to get somewhere around five to $9,000 of tax savings for those three kids on payroll for the year. They're also accumulating, uh, credits for social security, believe it or not. And with that income you can now fund a Roth ira. Or an IRA for them.

You don't wanna do an ira, you wanna do a Roth IRA because they're not paying any taxes. So you, you wanna do after tax because they're not paying any taxes. So do the Roth ira. You would never do a regular IRA for a kid making just only a little bit of money. You'd always do a Roth ira. Always, always, always.

And we do this commonly for our clients and then the kids can use a portion of that for college. Uh, they can't use all of it 'cause there's  certain rules about how much can be pulled out. Um, but it is the most. Flexible type of account for kids down the road. So we love that. We love, we love kids on payroll.

We love, uh, getting IRA set, uh, Roth IRA set up for the kids, but kids on payroll, that's another key strategy here. So, so far we've talked about the 401k defined benefit, profit share plan. Roth conversions invest rather than paid down tax deductible debt, home office, kids on payroll. Let's go on to the next one.

Spouse on the payroll for the 401k. So I sort of talked about this earlier. Uh, we do this all the time. If your spouse. Is not employed or is employed, but doesn't have access to or contribute to a 401k plan, then you can put them on payroll in your corporation. Just enough such that after paying Medicare and Social Security, there's just enough leftover to maximize the 401k.

And if you're under 50, that's gonna be 23,000. And if you're over 50, I think it's 31,000. And  so you want to pay a couple thousand dollars more than that to pay the fica, and then you get an income tax deduction on a hundred percent of that. Well, you might say, well, Wes, I, I'm now paying extra Social Security Medicare.

That's true. And it's probably at about 12% of whatever you pay them. So if you pay your spouse $30,000, you're gonna pay them 12% of that $30,000, which is gonna be like $3,500 plus or minus, however. You're gonna lose in that area, but you're gonna gain in less income tax. This is an income tax strategy.

You're gonna pay a little more in FICA in order to get a lot more in income tax deduction. So if your spouse funds, let's say, $30,000 into his or her 401k, and your income tax bracket is at 40% combined federal state, you're now saving roughly 40% of $30,000. That's $12,000. So yeah, you're gonna pay an extra 3,500 in fica, but you're gonna save $12,000.

So you're netting  85 $9,000 or so by putting your spouse on the payroll to fund the four oh K. And it's gonna grow and compound DAX defer for a long time and I can't accentuate it enough. That compounded growth is probably the biggest benefit out of all, and not just the sweetener. It's probably the biggest benefit out of it.

To have in growth. That then has growth on itself, that then has growth on itself, et cetera, et cetera, et cetera. Compounding is beautiful. Alright, so that's spouse on payroll for the 401k. Then we go down to the next one, and that's fringe benefits. Fringe benefits. Sometimes we call 'em perks. These are personal expenses that you run through the business.

Now, a lot of CPAs are hyper conservative here. I'm not. I'm pretty aggressive. Uh, you should have a business purpose that you could attach that if you were to stand before a tax court judge, you could say, well, that expense went towards something that did actually fundamentally help my business. And so, fringe benefits are gonna be the following.

Getting your car  very, very beneficial from a tax standpoint strategy. 'cause let's say you buy your car for 50,000, you're gonna, and you're in a, a marginal 40% tax bracket. Between the first year and the ensuing few years, you're gonna end up saving 40% of $50,000. You're gonna save $20,000 on that car from tax savings.

Uh, that's a fringe benefit. Certain meals that if you can justify these meals are for business purposes, then you can run that through certain travel costs that may be both business and personal. You can bunch a lot of the expenses into the business side, including the airfare and hotels. As well.

Entertainment used to be tax deductible at a certain limit. It's no longer you could, if you're really aggressive, say it's not actually entertainment expense, it's marketing expense. I took a friend to the San Diego Padres baseball game and I'm a dentist and they  are a client of mine and I'm recruiting them into the business.

Now that the IRS probably is gonna say that's crossing the line. That's true. However. I'm a little bit, uh, lenient. It's, you're, at the end of the day, you're gonna have to justify that to the IRS if you were under an audit. But coming back to fringe benefits or these perks, some people do put, uh, reclass entertainment as marketing expense There.

And the more aggressive you get, the more you just gotta plan for, um, a downside if an audit were to occur. So what is your psychological risk for an IRS audit? That's gonna vary across dentists. Alright, so those are fringe benefits. We like to really try to run a lot of that stuff through the business. A lot of our clients run pretty much all their Amazon or Costco through the business.

Uh, we don't look at what it is, and we don't try to ask them what's personal and what's not. We just say, look, if you're putting it on your business card, your Amazon and Costco, we're just gonna call it off the supplies period. Unless you tell us otherwise. Just know. Here's what the IRS is gonna  look at.

They're gonna wanna see the, uh, the, uh, Amazon receipt. They're gonna want to know what's for business, what's for what's not. Uh, these IRS audits can take a long time. They can take a couple years. Sometimes they're in total nightmare, so you wanna stay outta the iris cross hairs, but I haven't really seen this a trigger.

Amazon a Costco cost. I haven't seen that as a trigger to an iris audit. The biggest thing for an Iris audit, really the only case that we've been subject to that is when a doctor has insufficiently low wages, especially when they have zero wages. You wanna avoid that. For S corporation owners. Alright, the next one is the pass through entity tax.

I did a whole episode on this. This is absolutely fundamental, critical. I can't put enough big words to emphasize how important this one is. If you are in a state that has a high state tax, like California or New York or other states, the Trump tax code of 2017 no longer allowed you to deduct those.

State tax payment income tax payments on your  10 40 Schedule A right next to your home mortgage interest and charitable contributions, you can deduct up to 10,000, but that goes toward your property taxes, which leaves you nothing essentially. Uh, and by way of getting a, uh, deduction for your state taxes.

And, uh, and so that was, that was a big loss for a lot of blue states. That was a big loss. And, um, if you're in, if you're in a, a ta, a state that has no state income tax, like TA like Texas, Washington, Florida, Alaska, this is irrelevant. Fast forward, you don't need this. But if you're in California or another state that has, let's say 4% plus state income tax, this becomes very relevant because what the state did is they said, Hey, guess what?

You can pay your personal state income tax. Through your business. This is only for business owners through your business and deduct it like you're paying Henry Schein or Patterson or any other vendor, and you get a hundred percent tax deduction on that. So it's a, it's paying your state taxes through your entity and passing  through the deduction.

That's why it's called the pass through Entity Tax for PTE. Each state has a, has a sort of specific term. In California it's called AB one 50, but you miss that and you're in those states. You're leaving 10, 15, $20,000 on the table plus. And it's so discouraging when I see a prospective client come in, let's say they're in California and their prior CPA didn't have them make their state income tax through their entity and they missed out, and that loss right there pays for our fees almost entirely.

And so I had a client who I was trying to, uh, a prospective client who was sort of on the fence, do they wanna move to the CFO model, which is our model. We do cost more. I've stated over and over and over again, the CFO model is gonna maximize your cash flow, tax deductions, and wealth accumulation. It pays for itself so many times over when you have a well coordinated financial ecosystem in and outside of your practice.

Now, this particular prospective client, I could not get her to sign, she's she's, she's like, I'm paying my bookkeeper 150 bucks a  month and I can't compete with, that's like less than Walmart. I can't compete with that. You're not gonna get a CFO model, and we're not in the business of just. Dishing out to QuickBooks financial statements every month.

We're in the business of wealth accumulation is very different, but on her tax return, she would've saved $20,000 by doing PTE, and she didn't have the advice and lost that every year for like three years. And I'm thinking that alone, right there pays from so much of our fee and still couldn't get this client.

A weirdest thing. The weirdest thing. She basically took that nugget, I'm sure went back to her CPA, who finally gave her instructions to do it and she did, and at least hopefully is not losing out on that $20,000 a month. Alright, so the PTE very, very important. Just ask, if you're not sure, just ask your CPA say, Hey, does, does our state have PTE and am I making my, uh, state income tax payment through my corporation to satisfy the PTE requirements?

What are the specific instructions for that? Okay. The next strategy for financial planning strategy is simply,  this is so simple. Just raise your fee, your fees. Too many dentists don't do that, and they're thinking, well, why should I do that? Because I'm a PPO provider and I'm gonna be subject to what the reimbursement rates are anyways.

Well, A, it's important that they know what your fees are, so that if everybody reported their fees and raised their fees on a regular basis, they would have to raise their reimbursement, one would think or hope. Over time. So it's a data point for the PPOs to know where their reimbursement levels can or should be at.

That's number one. But number two, a lot of times they raise their their level and they PPO may raise their reimbursement level above what your stated UCR is. So just make sure you're raising those fees and then of course, uh, your patients who are out of a network or maybe your fee for service practice, just raise your fees.

This is so important. A lot of times you're like. Okay, what's the point in raising my fees? Two to 3%. You know, my, my, my patients are, are, are gonna know, yada, yada. I get that. And you're gonna say it's not that big of a  deal. Well, guess what? It becomes a huge deal when you go 5, 6, 7, 8 years without raising your fees because now all of your costs have gone up by 30% and you're still collecting the same amount from your patients.

And that is a recipe for financial disaster. So every year you need to be raising it, at least with inflation. At least with inflation, I say you should be doing it somewhere between two to 4%. Now you can do a one-time fee analysis, and if you're a client of practice CFO, we can do this for you. We get your UCR, we run it through a database that we pay for, and it'll tell you by zip code where you line up and all of your UCR codes relative to the.

Uh, the 50th percentile, the 80th percentile. The 90th percentile. Where do you line up? And then from there you can go through a UCR adjustment plan, and then every year just staying up there, you wanna be probably around the top 80 percentile. And if you are regularly increasing it by a little bit, truth is patients don't really notice when you raise it two, 3%.

And you need to do it 'cause you're gonna be  giving raises and all of your supply costs and your vendor costs, they're all gonna be going up two, three, 4%. So you need to be doing the same thing. Raise your fees. Uh, alright, the next one is transition to fee for service. I've done a number of podcasts on this.

Uh, and this has to be done in a very intelligent, systematic way. And for some pe, for some people, it's, it's maybe even not the right plan. You transition to fee for service, you can do a third of the treatment and make more money, meaning you could work, I don't know, a day and a half, and take home the same amount of money as if you worked four days under a PPO plan because most of your costs are fixed.

Remember the episode, we did a few episodes back on breakevens. Most of your costs are fixed, you know, 80% of your costs. Are fixed. And so if instead of getting 700 for a crown, you get 1700 for a crown you just quadrupled  or more, what is your net profit on that one crown? If you wanna understand the economics, go back and let's search up the economics of PPO.

Uh, in a business, in a dental practice and learn more there. But if you can brand your practice as a premium brand, as the best clinical provider, the one who gets smiles the best, the one who fixes teeth, the least pain, the, just the best clinical, uh, provider, the branding of your company, your, your reputation.

Remember I said your greatest asset is your reputation. That's your greatest asset. Why? Because if you have that level of reputation and you can do fee for service, you're pulling, you're pulling, if you're pulling the best paying patients, and if you can do fee for service, you will have a much more balanced life with a really strong income.

So that's, but that's a whole big, massive topic. Won't go into that, but that's a, that's a wonderful plan. Financial planning strategy. Is to be able  to do that successfully. Um, if you're running an associate run practice and you have associates coming in and going and you're trying to kind of build something bigger, that may be difficult, you may have to stick with the PPO model because the PPO is essentially what's churning, uh, patients into the chair.

Alright, automatic savings plan. This is so critical. I mentioned it previously. You've gotta set it up. Everything to be automatically happening. Your 5 29 education funding. Automatic, your iris automatic, your 401k automatic, your emergency reserve. Automatic everything's gotta be set up. Automatic, automatic, extra debt payments on your credit card.

Automatic everything automatic. And if you see your cash balance dropping, then you gotta revisit do the cashflow forecast. Go through this rhythm that I'm going through with these podcasts on dental financial planning, and then revise what is the automated plan. It's almost like pipings in a house. You get all these pipings into the different rooms and the water and the sewage.

It all flows and given directions in an automated  way, and periodically you gotta go and redo the piping a little bit, or at least change the pressure through those pipes in order to make the whole thing sustainable. And that's why a good financial planning forecast allows you to understand which pipings need to be adjusted.

So, but the main point here on this strategy, this is a simple one, but it's so powerful, is automatic savings. Alright, the last one I have here on the page is home rental to the practice. This one's definitely getting aggressive. However you can justify this, you can rent out your house for two weeks to your practice.

Maybe once a month, your team comes over for a Friday night party, or you do a training once every quarter, all day at your house, whatever. Are you actually having it? Well, you should be, but what I care about is if the IRS comes knocking that you have documentation, you have evidence. Maybe on one or two of them, take a picture of your team at your house, document what the purpose is, make sure it shows up on your calendar, that kind of thing, just so it looks formalized.

And then you can rent out your  house. You can do it depending on your house. You know, you could do it $500 a night. You could do it $3,000 a night. Depends how big your house is and how much, quote unquote, you're renting. So if you're kind of renting out the whole house with kitchen, living room, the pool, the backyard, all that stuff, you can get pretty aggressive there.

You know, like an Airbnb, a full house rental in in Delmar, California or San Diego, California, anywhere in San Diego, and maybe $2,000 a month for 14 days, that's $28,000 that could end up saving you easily, easily 10 grand right there. So again, going through all of these, you're saving 10 grand here, six grand there, 14 grand there, or 401k.

You're profit share plan. You're saving 30 grand there. Home office, you're saving, uh, five grand there. Pass through any tax. You're saving 12 grand there, raising your fees a little bit. Maybe that's bringing in an extra, uh, 30, 40,000 for the year, whatever it is. You know, you add all this up and it's stacked, maybe stacking quarters or stacking dollars, but it adds up.

And this is true, good effective tax planning because it's safe. It's not gonna drop an  IS audit. In most cases, unlike the r and d tax credit, some of these schemes that people are sold, this is sustainable. It's consistent, it's reliable. We do it all the time. It's phenomenal. The results on Friday, today's Monday, on Friday, we had a client come in that I've been working with for 11 years.

They had almost no savings in their accounts. When we met, they were in their late forties. Sort of mid to late forties. Here we are 10 years later. We did all of these every year for 10 years. In the last roughly three or four years, we started funding a defined benefit plan. Once the practice loan was paid off and the doctor was cranking it, and the doctor is now sitting on close to $4 million, I think about 3.7 million.

Their home is just about paid off. He's now planning to sell the practice to his son next year, and they have now so many great plans for their life in the latter third of their life or so. But the planning was so effective. Started off with a personal financial  plan, a personal life plan backed into the business plan.

Structured the team in place got a cadence of meeting tax flow, tax and cash flow projections. Prioritizing what you're gonna do with your surplus dollar, setting up the pipings for automated fixed contribution, regularly measuring your growth on your personal balance sheet. Staying disciplined when the market goes up and down.

All of these things incrementally add up to be a phenomenal financial planning path. To eventually having in a 10 year period, almost $4 million with a home loan almost paid off. It's been a beautiful, now that was a great practice. Doctor was probably doing about $170,000 a month or so, and, uh, lived, lived below their means.

And so we were able to do these amazing things because the plan, they, they were coachable and they adhered to the plan. And we had regular systematic meetings. The spouse actually was the one who we met with most often and really coordinated the execution on a lot of this. And it was just a beautiful experience for us  and for me, seeing them sort of go through that journey to become financially independent.

It's just been so amazing. Alright, everybody. That caps this episode on financial planning strategies for dentists. Now there are more. There are more, and there'll be unique to a dental office, but I just wanted to go over some of the key ones here in a 50 minute podcast. Until next time. Have a great one.