Speaker 1: You are listening to Your Practice Made Perfect. Support, protection and advice for practicing medical professionals, brought to you by SVMIC.


J. Baugh: Hello everyone, and welcome to today's episode of Your Practice Made Perfect. My name is J. Baugh, and I'll be your host for today's episode. Today we're going to be talking about financial planning, and to help us discuss this very important topic is Daniel VanderSteeg. Daniel, welcome to our show.


Daniel: Good morning, Jay. Thank you so much for having me.


J. Baugh: Well, thank you for being here to talk about such an important topic as financial planning. Before we dive into the topic here, Daniel, would you mind sharing a bit about yourself with our listeners?


Daniel: Yeah, absolutely. So I'm with Strategic Financial Partners. We're headquartered in Memphis, Tennessee. We've got offices all throughout the Southeast. And really how we came to connection today was, we are the corporate partner with the Tennessee Medical Association for Financial Planning. And so, we've been in Tennessee since 1933 with a focus on financial planning, with professionals and business owners. And we've had a wonderful relationship with the TMA. And we're so excited to be here to talk with you all today. A little bit about me personally, I'm actually second generation at Strategic Financial Partners. I work on a planning team with my father. I'm a certified financial planning professional. And really with my practice, it's centered around helping my clients who are professionals and business owners make decisions regarding cash flow, investment planning, insurance planning, tax strategies, and estate planning.


J. Baugh: Well, it sounds like you and your firm have a lot of experience in this area and can give us a lot of good information today. So, once again, thanks for being with us. So, to kick everything off today, let's talk about some tax strategies that our listeners should consider.


Daniel: Absolutely Jay. So, in tax planning, what we always want our clients to know is that every financial decision we make bears some sort of tax consequence, and that doesn't have to be a bad thing. So, I view my job as making sure these are positive consequences, not negative consequences. And so, Jay I'm sure you're extremely familiar with the 401K plan. And we all know that's where the majority of Americans save most of their money for retirement. But as we're working with these clients and we're working through their financial planning, what they come to realize is, a dollar is not really going to be a dollar in retirement, because that money is going to be subject to the tax code. Are you familiar with that, Jay? Do you think a lot of the listeners are familiar with that?


J. Baugh: Well, I think a lot of the listeners will be familiar with that. I think they'll know that 401Ks have the tax consequences after the fact.


Daniel: I'll give you a recent example. I was working with one of my clients and his dad had done extremely well, and the client wanted to pull out $300,000 from a 401K plan to build a secondary home. And what we realized is, okay, yes, we might want to spend $300,000, but how much is that really going to cost us? It might take $400,000 of the 401K or IRA to spend that. So what we're trying to really shift our focus on, especially for new clients that are in accumulation mode, we want tax diversification. And so, when I'm talking about tax diversification, we try to educate our clients on the tax control triangle. Basically saying, when we save money, there's three main areas that we can save this money. One is going to be pre-tax. That's what we're talking about now with the 401K and the IRA, pretty much any employer sponsored plan.


The second is going to be a taxable account. Most people have that through checking and savings and CDs. That's also going to be non-retirement brokerage accounts. And third is going to be what we call tax advantage. That's going to be our Roth IRAs, Roth 401Ks, HSA and cash value life insurance. So, when we're working with clients, we don't think that one is necessarily better than the other, but we want to make sure our clients are diversified and they've got these different tax strategies built up. So when they do retire, if the tax code is really high, we're going to have some other assets to pull out that aren't going to be taxed at ordinary income. Maybe we're lucky in 35 years from now we're in a low tax environment, where we can pull out some of our pretax money and not get hit as hard. So we believe that flexibility for our clients is really going to give them more control of their money in retirement.


J. Baugh: Well, we certainly see a lot of changes in the tax law and updates are always happening, and we've certainly seen a lot of tax law changes and updates in the last four years. And when you look back at the last four years of tax law changes, what do you see as one of the biggest impacts?


Daniel: Jay, there has been a lot of changes, no doubt. Some positive ones as well, we've seen taxes come down. But as a firm, we've spent a lot of time talking about the SECURE Act. And the funny thing about the SECURE Act, it came out January 1st of 2020, but we all know what happened in March, so we forgot about it. Right? COVID happened, and we haven't really talked about it a whole lot. I don't even think people realize the consequences yet, and the challenges that are going to follow, but we see the Stretch IRA has been eliminated. Jay, are you familiar with what a Stretch IRA was?


J. Baugh: I have heard that term, but maybe if you could give us some of the details of what a Stretch IRA is.


Daniel: Yeah. Absolutely. So, pre-2020, when we had non-spouse beneficiaries of any sort of pre tax retirement accounts, such as a 401K, such as in IRA, when we were getting those assets to the non-spouse beneficiary, they could use that as a legacy tool and take just a little bit of money out of there in a given year and satisfy the IRS requirements. Well, they changed that with the SECURE Act, and they eliminated this ability to stretch these IRAs and keep them over a period of years. And now, you've got to get the money out in 10 years no matter what, whether you take 10% a year, whether you take it all on the first year or the 10th year, we really have to eliminate these accounts in 10 years. And Jay, I'm sure you can see it, but for some people this is an issue.


J. Baugh: Yeah, I'm sure it is. Anytime there's a change in tax laws it can create a lot of considerations that people need to be thinking about and how they want to work around some of those issues. Now, for the listeners that may have either already been working on some financial planning or plan to embark on that journey soon, what are some of the areas that you see clients miss in their planning?


Daniel: I think a lot of clients and a lot of people do some things really, really good. And I think what I'm about to talk about is mainly something advisors miss. And it's because we're trying to do a good work on accumulation. We're trying to do good work on making sure our client's money is going to last. But often, I think we overlook giving away money. In working with clients, and the clients that I've worked with, as we approach gifting and giving money away, we realize, our clients, they experience a lot of joy in being able to see their blessings. I think so often our clients are going to rely on the estate planning documents to make that happen. And unfortunately, they never get to see it. So, one thing that we encourage clients to do at Strategic Financial Partners is, give the money while you're alive, watch the blessing, be there when you can bless people.


Just having the conversation, you can't take it with you. And there's really only four places that the money's going to go. It's going to go to your children, charity, church or the IRS. So you asked about some areas that we see clients missing their planning. And definitely, estate planning is one that we miss. I think the biggest reason we miss estate planning is because the advisor and the client often doesn't want to take the time to do it. It can be a timely process. It's a process that involves meeting with additional attorneys, spending extra money, and honestly, going to places mentally we don't want to go to in terms of recognizing our own mortality. But I'll give you all just a quick story, and I'm not going to share too much information, because this client was a physician client of mine and may know people listening to the podcast.


But I was working with a great client of mine in his mid 40s, and throughout the financial planning process, we were fortunate enough to have taken the time to get all of the estate planning documents in place. This included powers of attorney, wills, setting up trusts, because the family was slightly atypical. And five weeks ago, my client passed away tragically. You don't expect a client in their mid 40s to tragically pass away. But having those estate planning documents in place leaves no questions. And for me, it was just a charge to realize, if any financial planner is out there working with clients and we're not doing the estate planning, we're not doing our job. But also to the other doctors and physicians and practice owners that are more DIY. It's something that you need to do. Don't pull documents down from online. Go sit down with an attorney, somebody that's passed the bar for the state that you live in and that you practice in, and get the documents done. It's worth the time and the money.


J. Baugh: Well, that's a very eye opening story that you told, and it's good for our listeners to hear that. And I also liked what you said earlier about the gifting while you're still alive, and that you get the benefit of seeing your children or whoever you decide to give those gifts to, they get to enjoy the fact that they've given those gifts to someone while they're still alive rather than waiting until after they've passed. That's some very good advice that you gave there regarding planning for gifting and estate planning. So tell me, Daniel, what are some practical aspects of the SECURE Act and the elimination of the Stretch IRA?


Daniel: So with the loss of a Stretch IRA, I'd like to give you all just an example of what it looks like, so you understand how to plan for it. So, imagine if we have a physician that has $2 million saved in an IRA and then passes away later in life. His wife is no longer alive. So that money is going to go to a non-spouse beneficiary, and he has two children. One of the children, let's say, followed in the father's footsteps and is a physician and the other child is not working. Maybe there's some issue where the child is not able to work and doesn't have an income. So, if we can't stretch these assets over a long period of time, and we're forced to get the money out of this account over 10 years, we're going to take this $2 million bucket of money.


So each child is going to have a million bucks. So, they're probably going to pull out about a $100,000 a year over 10 years. Now, for the doctor, this isn't necessarily a good thing. He's probably already in a high tax bracket. So, as he pulls down this 100,000, that he has to pull out now because of the loss of the stretch, he or she may only net $65,000 a year. When you look at the sibling, and they don't have a lot of income, they're not paying a lot of taxes and they pull down $100K, maybe they're only taxed at 20% and they get to net 80. It doesn't equalize the estate anymore.


And so, what we're doing, because we have a lot of clients in situations like this, we're actually looking at alternatives to say, "Okay, if the Stretch IRA is no longer, which means these pre-tax accounts are no longer legacy assets, what are some things that we can do?" And we're having a ton of conversations talking about Roth conversions, brokerage accounts, and of course, permanent life insurance. So, we're trying to get back to the basics with legacy planning now that the Stretch IRA is gone.


J. Baugh: I want to take this in just a slightly different direction now, and talk a little bit about an area of the law that is always very controversial. And that has to do with employees versus independent contractors. I know there's a lot of law that surrounds the question of whether or not someone is an employee or an independent contractor. So how does planning work for independent contractors?


Daniel: Great question. So actually the gentleman that I just mentioned was an independent contractor, right? So I've got a lot of experience in this, and for all of the independent contractors listening here, there's a good possibility that your financial advisor is an independent contractor. I know I am. So, being an independent contractor presents challenges and opportunities, right? In terms of challenges, you're not going to have access to a robust benefits plan from an employer. You're not going to have access to some large retirement plan from a hospital or practice group. And you're not going to have somebody helping you withhold taxes, right?


But on the flip side of the challenges, there's a lot of flexibility and opportunity with being an independent contractor. The first thing I'll tell you, if you are 1099, save cash for your taxes. That's where I see people, especially those that make a large income, they see all this money coming in and it goes back to basic finance 101. We've got this cash coming in, sometimes we don't realize that I need to be parking X for my tax liability, yet it gets spent, right? So, number one is discipline. Number two, I truly believe if you're an independent contractor, you need to hire a team of professionals to help you through this.


And you need to find one individual that you lean on and almost hire as your personal CFO, because there's going to be a lot of things we're going to have to look into if we're a high earner that's 1099, I've got to figure out, where do I go get the best disability insurance? Because I don't have that through my group. Where am I going to go find a CPA to help me with all of my deductions? Who is going to really be the person that is going to challenge me in terms of bringing ideas to the table? Because as an independent contractor, you want to bring as many ideas to the table as possible. For the retirement savings aspect as an independent contractor, you've got a lot of opportunity to defer money.


Going back to the tax control triangle. One thing that I do recommend is looking into a Solo 401K. Depending on your provider, you might be able to do a Roth Solo 401K. And although you don't get a large tax deduction, you will have the ability to save some money on a tax preferred basis which will help you in your future planning. And really the final pitfall I see for independent contractors, people don't think about self-employment tax. That's one that hits hard. People might think, "Okay, I make X. I'm in the 35% tax bracket." But when push comes to shove and it's time to pay the bill, you might not have everything you need, because you didn't save for the self-employment tax.


J. Baugh: So, Daniel, let's go in another slightly different direction, and that has to do with people who are business owners. We have many listeners who own and run their own practice. So, do you have any high-level tips or advice for a business owner regarding their financial planning?


Daniel: Yes. Absolutely. So, going back to Strategic Financial Partners, we operate as a team. And my role is really working with individuals. And so, I would like to bring in Pat Crowley. He is an attorney that works within our group. He runs our wealth strategies department. And whenever I'm having conversations with business owners about their planning and the planning of the practice, I'm going to bring in Pat Crowley.


J. Baugh: Great. We're glad to have Pat with us today. So, let me provide a little background. Pat began his career in law in 1981. In 1984, he transitioned into the financial services industry, working alongside advisors in complex subject matters. As director of SFP Wealth Strategies, Pat is a subject matter expert and resource to their advisors and clients on issues affecting families of varying wealth profiles. He's proficient in the business planning arena, and also has expertise in taxation offering a variety of services.


Daniel: And so, Pat are you on?


Pat: Yes. So, Dan, the business owner is often perceived as somebody that's, say, different than the professional that's running their own practice. And nothing could be further from the truth. The business owner and the professional running their own practice, they have the same goals. They have the same concerns, they have the same issues in terms of employees, and they have the same issue in terms of seeing income coming out of their business or their practice once they retire. The difficulty often for the practitioner who has his own practice, is making sure that he's properly compensated once he decides to exit. And so, let's think about what all that means.


And from anybody who's entering business today, one of the adages that you'll always hear is that, "The moment you open your doors, you should be thinking about exit." But how do you plan to leave? What will that look like when you do leave, and what should be considered between now and then? And for most people starting the practice, they're really worried about the debt that they've just taken on, making sure that the employees that they've hired are of quality, making sure that they can meet payroll. And so, talking about exit's a little weird, it's a little early for them. But what we're really saying to them, just as any business owner, if you've opened your practice, whether it's today, five years ago, 10 years ago, or 20 years ago, every day you come in as a professional, you make business decisions, and every business decision you make determines what your value will be in respect to that practice.


And let me give you an example. Dan talked about 401K. If I'm sponsoring, if I'm a professional running a medical practice, and the question comes up, "Hey doc, are we going to have any retirement plan?" And the physician thinks about it and says, "Yeah, I'll go ahead and sponsor a 401K plan or a profit sharing of some type." That's a business decision that's beginning to add value to the practice. Because what it's doing, is it's not only allowing you as a physician to put money aside on a pre-tax basis, have it grow tax deferred, but it's also doing something that's perhaps unappreciated, it's allowing you to attract and keep quality employees, which is a significant factor whenever you're starting a practice.


So, all those decisions that you're making about keeping your employees, about attracting new physicians into the practice, about making sure that if you have partners in the practice there's some side of buy-sell arrangement. All of those decisions help add value to that practice, especially to the point where at some point you may say, "Well, I'm ready to sell my practice". Sell it to the new partners that are coming in, sell it to a hospital, to a larger clinic, whatever it might be, but all those decisions I've made have had some impact on value.


J. Baugh: So, Daniel, Pat brings up a good point about setting up the 401K for employees. So, let's talk just a little bit about those who own a practice or run a practice with employees. I'm wondering if you have any tips to help ensure as an employer that you're helping to set up your employees for success.


Daniel: Yeah, absolutely. So, in regards to the 401K, I think the biggest thing you have to think about is, how do I want the 401K company involved? Right? And this will tie into what I'm going to be talking about with financial wellness. There are a ton of different ways to set up a 401K. You can have it all the way down to more or less DIY ROBO, where you're working exclusively with a really large financial institution, or you can hire someone local, someone similar to a group like Strategic Financial Partners. And, when we are working with our business owners and practice owners with their 401K, you get a little bit more. Right?


And that ties into the financial planning, the financial wellness curriculum. We want to have boots on the ground, be able to sit down, have productive and educational conversations with the employees, because we believe in financial wellness. And we know that companies and employers that provide financial wellness have happier employees, because they're less stressed. So, that's really my big advice as you make that big decision about implementing a 401K plan and providing those type of benefits to your employees. Be cognizant of, what do I get with that? And do I want people here helping my employees with their financial wellness? And I think it can go a long way.


J. Baugh: So, Daniel, as we wrap up this episode, are there any last minute tips or advice that you would like to leave our listeners with?


Daniel: I would say from a financial planning perspective, no plan is ever complete. Right? We know tax law changes. We know pandemics hit. There's a lot of variables out there. So, constantly review and know that your plan will evolve, it will change, and set up a big team around you of people that you can rely on and trust to help you make those decisions.


J. Baugh: Well, Daniel and Pat, I want to thank both of you for being with us today. I know that you've given a lot of great advice on a very important topic with financial planning. So, once again, Daniel and Pat, thanks for being with us today.


Daniel: Jay, thank you so much for hosting. We really enjoyed it.


Speaker 1: Thank you for listening to this episode of Your Practice Made Perfect. Listen to more episodes, subscribe to the podcast, and find show notes at SVMIC.com/podcast.


The contents of this podcast are intended for informational purposes only and do not constitute legal advice. Policyholders are urged to consult with their personal attorney for legal advice, as specific legal requirements may vary from state to state and change over time. All names in the case have been changed to protect privacy.