MtoM #138: Doc Helps Change His 401(k) Plan and Finance 101: Tax Brackets

This is the White Coat Investor Podcast, Milestones to Millionaire. Celebrating stories of success along the journey to financial freedom.

This is Milestones to Millionaire podcast number 138. Family doc changes as 401k.

If you are finding our podcast informative and helpful, check out our website. Since 2011, we've been working hard to provide valuable personal finance and investing information. Through thousands of blog posts written by an array of authors, you can find information on how to manage your student loans, fix and avoid common financial mistakes, understand your retirement accounts, optimize your investments, find professional help at a fair price, get started investing in real estate, and so much more, all at no cost to you. You can find out more about the courses we offer, the conferences we put on, the newsletters we provide, and interact with other WCI readers through our online forum. Head on over to whitecoatinvestor.com to start learning today. You can do this and the White Coat Investor can help.

All right, welcome back to the podcast this is Milestones to Millionaire where we celebrate your successes and use them to inspire others to do the same. You can come on this podcast. I don't care what your milestone is, we'll celebrate it with you. You can apply whitecoatinvestor.com Milestones We've got a great guest today, a new milestone we've never had before. And afterward we're going to talk a little bit about tax brackets, so stick around. Our guest on the Milestone to Millionaire podcast today is Dr. Brian Reichenbach. Welcome to the podcast.

Thank you.

Let's start with telling us what you do for a living and how far you are out of training.

I'm a family doc still doing some obstetrics in Northern Indiana and I finished medical school in 2004 and residency in 2007.

Okay, very cool. And we've got a unique milestone we're going to celebrate today. I don't think we've done this one on the podcast. We're what, 138 episodes into this podcast and never done this one. Tell us what you managed to do.

Well, what I managed to do was I watch my 401k new policy changes every year. And for a number of years now, we kind of get surveys or, you know, our CEO will ask, well, is there anything we could do? And I've been responding for years. Hey, it'd be nice if we had an after tax option in the 401k to utilize Mega Backdoor Roth. So I'd made the request to him and our survey people for a number of years. I'm not on the 401k committee, and I'm not sure if that played a role or not. But sure enough, this year in January when they gave new 401k rules, I noticed, oh, there's an after tax option. So I took advantage of that and am able to max it out. It allows a 10% contribution and with the 22,500 limit this year, and then they max out at a $3,500 match, that gets me up to 40,000 that I can put in. So being able to max that out, 400,000 income on 10%.

Pretty cool. Pretty cool. All right, well, so this is not insignificant, right? This is something. Lots of people have come to me over the years complaining about their 401, and I give them some tips on how to maybe get some changes in it. And most of the time I suspect they are not successful. But you have managed to actually get your 401k changed, number one. Number two, max it out. So congratulations to you on that. That in and of itself is no small feat. So just surveys. They just send you annual surveys and you just said, hey, after tax options, that's it?

Well, again, I'm not on the committee. So I responded to these surveys. And then when I'd have a meeting at least annually with our local administration folks, I said, well, gosh, that'd be a nice option if you have anything you can do. So as a little bit of a squeaky wheel, I'm not sure if it made any difference or not, but sure enough, it's there. Whether I contributed or not, I did recognize it.

The bigger change I see some people trying to make is sometimes they're just in a terrible 401. It's not that they don't have a Roth option or they don't have a mega backdoor Roth option. They just have terrible funds, terrible fees, et cetera, and they go in and try to get it changed. And what they discover. Discover is that the plan is put in place by the best friend of the practice owner or, you know, the pr one of the senior partners and their job starts becoming, you know, maybe not as stable as they thought it was because they're becoming the squeaky wheel and messing up that relationship. It doesn't sound like you had any of those problems.

No, you know, we've had index funds available for a number of years and it's had a, you know, S&P 500 fund and a mid cap fund and a small cap fund and international fund that kind of look to be index funds so since I started with the organization, the options have been reasonable. It's with principal, which is kind of a bigger group.

Very cool. So I got put on my 401 committee. They actually invited me onto the 401 committee just a few months ago. One of the things I brought up in our last meeting was hey, can we get an after tax contribution option? Because right now I'm not making enough to max out our 401k just based on employer. And when I say employer, I'm talking about me self matching options up to the 66,000. The only way I can get there is by doing after tax contributions these days. And so I finally got them to actually, hey, we can do this. You might be the only one using it in this 400 doc mega group we are now. But hey, things can change. It's worthwhile if you can get onto 401 committees. They are not intensive committees. It's way easier than being on MEC or you know, some quality committee in the hospital. You know, these things tend to meet a couple of times a year for an hour. And that, that tends to be it. But you'd be surprised. You can make a big difference if it's a big organization. And you know, even small changes when they're multiplied by many people can make a big change. All right, so let's talk a little bit about how you're able to make as much money as you are as a family doc. Because when I look at the averages, when I look at these salary surveys, you are making significantly more than the average family position in the country. Tell us what you've done to boost your income during your career.

Yeah, mostly being busy. You know, I think somebody on your show some time ago said there's kind of three keys that I kind of liked. Be affable and able and available. And you know, I had not heard that before, but I think I've been those three things, you know, over the number of years since I've started. So part of it's just being available and willing to listen to folks and try to work people in if they want seen. And mostly boost by volume is how I've done it.

How many patients do you see in a typical day?

Anywhere between typically 30 and 40 on a day.

What's your payer mix look like? You're in private practice, I assume.

You know what, I am employee of organization. So I've got an RVU based contract. Although when I started I was in private practice and then we sold to our local hospital entity. So I'VE been an employee for the last 14 years of my career or so.

You may not know what your payer mix looks like then.

Well, I actually do a little bit, but not as much as I used to. So it's about 50 to 60% private insurance, I think, which is pretty high, I believe, and then maybe 5% cash pay and probably about 20% each. Medicare and Medicaid.

Okay, so not that atypical from lots of places. Obviously my emergency department's got a higher cash percentage than that, but I don't think that's all that unusual. Well, you mentioned you do ob. Do you do anything else unusual that procedures or something that you think boost your income compared to the average?

No, not. Not enough to make a difference. OB would be the most unusual thing. I did do inpatient medicine for a number of years. My first 11 years out of training I did inpatient medicine and staffed a nursery and did some deliveries and. And it's not high volume obstetrics. It's probably between 30 and 40 a year on average with a range of 24. And my busiest year I think was maybe 57 or 58.

How much are you, how much of your ability to negotiate do you think had something to do with your income?

You know, it is a big organization. They kind of have a standard contract. I don't know that I had all that much negotiating power against their standard contract.

And you're living in a state that most people consider a pretty good state to practice in. Indiana. What do you think your decision to live there, move to there to practice there. How much impact do you think that had on your income?

I think Indiana is a great place to practice medicine. We've got some favorable malpractice climate in our state and I think that allows me to do some procedures in the office and still do some deliveries and was able to do some inpatient medicine for a number of years. So I think that's played a big role. Plus I'm kind of in a smaller community within a smaller community. A lot of docs at least coming out, they want to be in the bigger towns. So there's lots of available patients. And it so happened when I came in there, a couple of docs retiring and a pediatrician left town and it was pretty easy to grow practice.

So you were busy right from the beginning?

Pretty busy from the beginning.

How about family situation, Married, kids? Did your spouse work?

Married? She's not currently working. She's a teacher by training and worked while I was in medical school. And she is a Very community involved, volunteer. She's the president of our school board and serves on our university board of trustees and runs another couple of other committees in town. Currently it's mostly volunteer work. She gets a little stipend here and there, but not a lot. And then I have two kids, one who's a sophomore in college and a senior in high school this year.

What kind of impact do you think having a stay at home spouse has had on your ability to earn?

It's actually had quite a big impact. I think if I've got a delivery in the middle of the night, I know the kids are taken care of, don't have to arrange childcare. She was home almost completely the first several years before they were in kindergarten and school. She was kind of home full time. So it allowed for me to kind of focus on the practice and getting patients billed and worked in and still let me do my deliveries and inpatient medicine when needed.

Very cool. What advice do you have for a doc who would like to increase their income 50% or even double their income? What advice would you give to them?

Well, I think what I said earlier and you said before, be available and affable and able. And I think just being competent and friendly helps another big thing for me. And I don't know if anybody said it on the show or not, but I think the value of a good nurse is underrated. I've got two fantastic clinic nurses and if one of them is gone, the clinic is not nearly as efficient. I can't work people in because they don't know how I want to do things. I think the value of a great nurse, especially in a clinic setting, is overlooked. I've got two nurses that have been with me for a number of years. They know how I like things, I know how they work. There's something to be said for continuity and competent staff around you. So I would say, you know, be kind to your staff, recognize the superstars and treat them particularly well.

Any advice for employees that would like to have a better 401k than the one they're currently offered?

You know, I don't have any grand advice on that. Again, I was a little bit of a squeaky wheel and since I'm not on the committee, I don't know that it made the change, but I did recognize that there was a change. So, you know, our 401k sends out new rules every year, what the new guidelines are. So pay attention. You might notice, oh, there's a new Roth option or after tax option or something like that so I would say.

Just watch, pay attention, read your plan document. Good advice. All right. Well, Dr. Reichenbach, congratulations on your new 401 changes. Congratulations on your income. Thank you for being so willing to come onto the podcast and share your story with us and inspire others to do the same.

Thanks so much.

Right. I hope you enjoyed that interview. It's always fun to get something new to talk about on here. Although I will celebrate people paying off their student loans or paying off their mortgage or becoming millionaires till the cows come home. It's always inspiring to me and I think to most of you out there, but it's good to mix it up every now and then and get something unique, man. Do not be afraid to be a little bit of a squeaky wheel with your 401. You just have to be a little bit careful, you know, in a small partnership and actually know what's going on behind the scenes, why you have that 401 in place. It might be that your boss's best friend has really suckered him and you could cause some real problems by pointing that out sometimes. So be careful, be a little bit politically savvy as you bring up your employer's fiduciary duty to you with regards to your 401. But this is a big piece of your retirement savings. Fees make a big difference. Quality of the investments makes a big difference. The options for contributions like Roth and after tax contributions and in plan conversions, those sorts of things can make a big difference. So, you know, lobby for those changes. Try to get the best possible 401 you can in place. All right, I promised you we're going to talk about tax brackets, so let's do that. There's a huge misunderstanding out there about how tax brackets work, Right? People fear being knocked into or jumping up into the next tax bracket, and that's completely inappropriate. You should not worry about that. And I'll tell you why. It's because you only pay that higher tax rate on the money in that bracket. Okay? So if you think about this, if you're married, taking the standard deduction, you've got a tax bracket, for lack of a better term, of something like 25%, 26, $27,000, whatever the standard deduction is this year, that's essentially the 0% tax bracket. Okay? So that first $26,000 you earn is not taxed. Yes, it's taxed for Social Security taxes and Medicare taxes, but you don't pay income taxes on it. You probably aren't paying state income taxes on it. Either. So it's essentially the zero percent bracket. If you're giving more to charity or you have a bunch of tax and mortgage interest write offs that you have even more than that. That 0% bracket might be even bigger than that. Well, after the 0% bracket comes the 10% bracket. Okay. And if you are single, that bracket's not very big. It's only $11,000. If you're married, it's twice that. Okay. But basically for married people, it's another $22,000 you can earn on top of your standard deduction that only gets taxed at 10%. So now you've made something close to 50 grand and only paid like $2,000 in tax. So that's awfully good. Right? That's a very low tax rate. What's that work out to be? That works out to be like 4% as an effective rate. Yes. Your marginal tax rate was 10%, but your effective tax rate was only like 4%. The next bracket's a much larger bracket. For single people, it goes from $11,000 to $44,000. For married people, it goes from $22,000 to $89,000. That's the 12% bracket. That's hardly different from 10%. So another huge bracket, people can be earning six figures a year and have a marginal tax rate of only 12%. Pretty awesome, right? Very favorable. We have a progressive tax system as far as the income tax system goes. You know, when you look at Social Security, that part's actually regressive. And of course, the Medicare tax is mostly a flat tax, but the income tax system itself, very progressive. So you can earn quite a bit of money and still pay very, very little in taxes. And that's why it's so surprising, right, when people go from being a resident to being an attending. Residents think they're paying taxes. They actually aren't paying very much in tax at all. And so it's a huge surprise when they become attendings, and all of a sudden they're now paying more than they were earning as a resident in taxes. Well, after the 12% bracket comes the 22% bracket. That's again, a pretty decent sized bracket. It's about $100,000 for married filing jointly, folks. And then the 24% bracket, again, another huge bracket. It's about, what, $160,000 bracket, that you're still in the 24% bracket. So the bottom line is you can be earning as a married couple filing jointly close to $400,000 a year, not have any of it taxed at more than 24%. Then there's a pretty big jump after that. You go to the 32% bracket, the 35% bracket, and then the 37% or the top bracket right now starts at $578,000 for singles and $694,000 for married filing jointly. And so that's above that. You're paying maximum tax rates. Okay, so that's the way the tax brackets work. It's important to understand how they work so you can make smart decisions as you go along. For example, you don't want to turn down a raise because it's going to knock you into the next bracket. That would be a huge mistake just because you don't understand how brackets work. Now, there's other things that go into your marginal tax rate. There's some phase outs on some of the deductions and things like that. There are a few cliffs in the tax code, such as those associated with IRMAA for those of you getting ready to be paying for Medicare. But for the most part, most phase outs are gradual. And of course the tax brackets are relatively gradual as well. But that's how they work and it's important to understand that. Okay. Another thing you ought to understand about taxes is there is a difference between taxes that are withheld and taxes that are actually paid. Okay. People, for example, make a comment to me all the time. Bonuses are taxed higher than regular pay. Well, that's not true. Bonuses are taxed exactly like regular pay, but the withholding is often different. And the only rules about withholding are that you have to stay in the safe harbor. You have to have enough withheld or paid in quarterly estimated taxes, which is what those who are self employed typically do is send in a check each quarter. It's not actually every quarter. You send them in in April and June, just two months later, and then in September and then four months later in January. But it's quarterly estimated taxes. You have to get into the safe harbor, which basically means you got to either pay within $1,000 of what your tax bill is this year or you got to pay 10% more than what your tax bill was last year to get in that safe harbor. Otherwise you may end up paying some penalties and interest when it comes time to settle up with the irs, because that's what tax time is. You're just settling up. If you had more withheld or paid more in estimated quarterly taxes than you owe, they send you a check. If you didn't have enough withheld and didn't Pay enough in quarterly estimated taxes, you send them a check in April. But these are two different things. Don't misunderstand the difference between what is withheld and what you actually owe, because they're often very different things. Also, it's surprising a lot of people just don't really look at their paychecks, their pay stubs, very carefully and think everything coming out of their paycheck is tax. That is not the case. There's lots of other things that come out of your paycheck. You know, it might be court ordered child support. That's not tax. It might be your life or health insurance premiums. If you're buying it through the employer, it might be 401k contributions, et cetera. That's not all tax, right? You can't say, whoa, uncle Sam's taking 40% of my paycheck. Well, no, you're using it to buy health insurance, you're using it to buy retirement savings, that sort of stuff. So make sure you understand what's actually coming out of your paychecks before you complain too much about your tax burden. A typical effective tax rate for most white coat investors is probably between about 18% and 30%. That's what you're probably paying. If you're an attending physician, you know, that's how much of your income is actually going toward taxes. And that includes payroll taxes, Medicare and Social Security. That includes state income taxes, that includes federal income taxes. You know, this idea that you're paying 50% of your money in tax is probably not correct. I make a pretty good income and I'm not paying 50% of my money in tax. It works out to be about 33% in my case. So it's, you know, I've definitely run into docs that are paying a little bit more than me. Most of them live in places like New York and California. But for the most part, most docs are paying less than I am in tax because their income's lower.

If you are finding our podcasts informative and helpful, check out our website. Since 2011, we've been working hard to provide valuable personal finance and investing information. Through thousands of blog posts written by an array of authors. You can find information on how to manage your student loans, fix and avoid common financial mistakes, understand your retirement accounts, optimize your investments, find professional help at a fair price, get started investing in real estate, and so much more, all at no cost to you. You can find out more about the courses we offer, the conferences we put on, the newsletters we provide, and Interact with other WCI readers through our online forum. Head on over to whitecoatinvestor.com to start learning today. You can do this and White Coat Investor can help.

Also, just a reminder, we are in the early bird period for just a few more days for WCICON. The price goes up on October 12th. So if you want to come to this great conference we have in Orlando this year, please sign up. Come. You're going to enjoy it. It's a wonderful experience. You'll learn about finance, you will learn techniques to reduce burnout and improve your own wellness and you'll have a great time. Best of all, it qualifies for cme, so you can use any dedicated CME funds you may have. You can write it off as a business expense if you're self employed. It's a great time. You can sign up@wcievents.com all right, that's the end of our podcast today. I hope you're enjoying it. It's driven by you and what you want to hear on the podc. Send us feedback if you don't like something, send us feedback if you do like something and we'll try to do more of that sort of thing. Keep your head up and shoulders back. You've got this. We're here to help. We'll see you next time on the Milestones to Millionaire podcast.

The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

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