Month: March 2015

Tax-Deferred retirement accounts shelter your present income from present taxes

Posted on by SmartMoneyMD

Shelter your income from taxes

Most employers provide their employees with retirement accounts such as 401k, 403b (non-profit), or Simple IRAs to allow sheltering of income to present taxes. If you are an independent contractor, you can open similar accounts for yourself.

The fundamental premise of these retirement accounts allow you to defer present income taxes until you withdraw these funds during retirement. These vehicles are advantageous with two assumptions:

  • Your present marginal income tax rate is higher than your overall tax bracket in retirement.
  • You have options to invest the funds within the account tax-deferred until withdrawal.

 

If these conditions aren’t fully met, the tax advantages of retirement accounts are lost.

For instance, as a hot-shot cardiothoracic surgeon salaried at $500,000, your federal marginal tax rate as a married filer is 39.6%. This means that the amount you make above the next highest bracket ($457,601) is taxed by Uncle Sam at 39.6%. If you invested $18,000 of that to a 403b account, your effective income is decreased by that amount and you don’t have to pay taxes on that $18,000 (yet). At a 39.6% federal rate, you “avoided” paying $7128 in federal taxes on that amount.

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In retirement when you withdraw your $18,000, you start filling the tax bracket at the 0, 10, 15% brackets. You will hopefully pay less than $7128 in taxes in the future than now simply because you aren’t making a $500,000 salary. Obviously if the income tax brackets are reconfigured such that you get taxed at a rate higher than your present marginal rate, you’re screwed.

Condition #2 means that you are growing that $18,000 at some respectable rate (hopefully beating inflation) that allows it to be equally or more meaningful when you use it during retirement.

Lastly, tax-deferred doesn’t mean tax-free. You will still have to pay taxes on your earnings when you take the money out!

Questions? Sound out below!

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Diversify your assets through different vehicles

Posted on by SmartMoneyMD

Diversify your earnings

Aside from spending less than you make, diversifying your assets help minimize your chances of losing your hard earned cash. As doctors, we’ve worked hard to command a good income and are unfortunately also at higher risk of losing it all. Since we can’t accurately predict the future, the next best thing to preserve our wealth is to store it in various vehicles:

  • bank
  • investments
    • stocks
    • bonds
    • gold
    • rental homes
  • home
  • life insurance
  • under the mattress
  • retirement accounts (IRA, 401k/403b/pensions)
  • collectibles (cars, baseball cards…etc)
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We’ll discuss the merits of each of these vehicles in future posts. Hopefully this post doesn’t convey any new information to my readers, but many of our colleagues do not actively think of this.

How to replace the rear brake light on a 2006 Subaru Impreza wagon

Posted on by SmartMoneyMD

We plan to post various handiwork tips that the authors have encountered over time. Saves money, effective, and makes you a more well-rounded professional! The following was written by Smart Money MD contributing writer (a surgeon).

One of the rear brake lights on my 2006 Subaru Impreza hatchback burned out last week. The dealer charges $98+tx for the repair. One of the other Subaru aftermarket garages was in the $40 range, but was closed on weekends and relatively far away. The bulb itself at Autozone is $6 for a pair. If you buy a box of 10, they are $1.50 apiece. If you order on eBay, they are even cheaper. The bulb model is a 7440/7443. This scenario is a prime example of your time cost of money, where DIY (you are the handyman!) will save you money. Given that I’d have to skip a half day of work to take my car to the garage, I decided to replace the bulb myself. The steps are relatively straightforward if you don’t have rusty bolts.
Access to the panel is from the rear hatch, and there are two screws:
Rear hatch of 2006 Subaru Impreza wagon
Rear hatch of 2006 Subaru Impreza wagon
There is a top screw and a side screw (I did not label the screws in the diagram. The Phillips head only unscrews part way.
Rear plastic screws. Lift gently.
Rear plastic screws. Lift gently.

You can use a needle nose plier to pull the screw and the fastener out vertically. Be sure to pull gently so that you don’t break the plastic fastener/seat. The plastic panel then pops out, and you see that the metal housing is fixed with two hex bolts (size 10, I believe):

Use Size 10 hex bolts
Use Size 10 hex bolts

These bolts can be unscrewed using a long handle bolt wrench or thin nose vise grips. The bolts in the photo above have already been removed. I ended up using WD-40 to loosen some of the rust build-up on the bolt. At this point, then entire light housing unit can be slid out.

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For the 2006-2007 Impreza hatchback models, the housing is slid out in AP (Anterior-Posterior) direction. This means that if you are standing directly behind the car, you pull the housing towards yourself. If you have an older model Impreza, the housing should be pulled laterally outward. Be sure to pull gently so you don’t break the plastic fasteners inside:

Blue plastic fastener viewed from side of car
Blue plastic fastener viewed from side of car

In my case, I slid the unit towards me in the back. The photo above is viewed a four-thirds view from the side. The left of the photo is the rear of the car. You can see the direction of the blue plastic fastener that to remove the light housing, you slide the light housing posteriorly. The corresponding grip on the plastic housing looks like this:

Grey plastic seat that corresponds to the blue seat on the car
Grey plastic seat that corresponds to the blue seat on the car

At this point, you will have access to the wires and the light bulb sockets from behind:

Subaru Impreza 2006 wagon rear bulb socket
Subaru Impreza 2006 wagon rear bulb socket

The socket is unscrewed counterclockwise, and the bulb can be unseated from the socket by pulling vertically. Be sure to wear clean gloves when removing the bulb so that you don’t get oil smudges on the bulb. Oil and grime will result in irregular heat distribution on the bulb and can cause premature burnout. After replacing the bulb, just reverse the steps and put the bolts back in. The entire job probably took me less than five minutes. Not bad for a surgeon!

Note: If you have a sedan model, access to the socket is through the rear carpet paneling.

If you have any questions, please sound off below! I did not label the photos with arrows, but hopefully the instructions and photos are self-explanatory!

That fancy TV will cost you way more than you realize

Posted on by SmartMoneyMD

Fancy TV costs more than you think

Thinking about getting a new 78” 4K Curved TV? Our favorite online retailer has it “on sale” for $5997.99 with free shipping! As a high income doctor, you can afford it right? You probably could, but you’re really paying much more than you realize.

Imagine that you are a neurosurgeon in California who works 80 hours a week making $700,000 a year. Surely you can afford this fancy entertainment gadget, right? Suppose you are a real baller and pay $6000 for the TV, $500 for a wall mount, and another $500 for the handyman to install and mount the TV to your living room wall. After all, you’re a brain surgeon.

So for $7000 out the door, you have a nice shiny new TV that you hardly have time to use. (For simplicity, we won’t include the recurring costs for satellite or cable of at least $100 a month.)

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As a high-income married earner, you immediately put yourself in the 39.7% federal marginal tax bracket (for 2014). You are also in the 11.3% marginal state income bracket in California (on top of the $54,054 fixed tax: see: https://www.ftb.ca.gov/forms/2014_California_Tax_Rates_and_Exemptions.shtml).

You will have to earn roughly $14,285.71 using marginal tax dollars in California to pay for that $7000 TV! If you run your own practice with a 50% overhead, you’d have to earn twice that!

While we can look into the cost in more detail and account for the exact numbers, the conclusion is that we need to be aware of the real cost of the ancillary amenities we buy—it is much higher than the price tag we see and possibly eats into our savings more than we realize.

Enrich your life outside your career

Posted on by SmartMoneyMD

do you limit yourselfI am guilty of this myself. Doctors are notorious for keeping a narrow mind within medicine. We think that being great at medicine helps compensate for other shortcomings.

News flash: it doesn’t.

We need to spend time outside of our career to keep a well-balanced lifestyle. It really doesn’t matter what you do, whether you cook, exercise, wash your car, read, or all of the above. I will intersperse my entries on occasion with tutorials on routine “blue collar” work that will help you get ahead.I know too many medical residents or students who are “too busy” to clean their apartments or cook their meals. Read Ben Brown’s analysis of a doctor’s value.  Unless you’re financially independent several times over think twice if you’re too good to wash your dishes.

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Spend less than you make

Posted on by SmartMoneyMD

Spend less than you make

This applies whether you make $30,000 a year or $300,000. For doctors and other “professionals” who command a 6-figure salary, there is always an apparent public expectation that you can afford and should have a fancy house, car, boat, or airplane. That is unfortunate.

There are many trade specialties such as plumbing, carpentry, handiwork, and electric wiring that also command similar income yet we don’t expect a carpenter to drive a BMW or own a million dollar home.
This public image of the profession is detrimental to our financial health. While we can gradually adjust up our lifestyle (to a certain extent) with a higher income, it requires active control to translate a high income to a high net worth. I recommend reviewing The Millionaire Next Door. It is slightly outdated, but the portrayal of wealth was surprising to me.
More concepts to follow!
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