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Tax Shelters Provide Both Long-Term and Short-Term Benefits For You and Your Practice
At the base of the Statue of Liberty, the inscription is: “Give me your tired, your poor, your humble masses yearning to be free.” What an impressive sight and a meaningful inscription this is. In this great country of ours, I have taken the liberty, as I always do, of modifying that statement to apply to something all of us can relate to: money. When it comes to money, the statement should read: “Give me your tired, your poor, your humble dollars yearning to be free — tax free, that is.”
That’s exactly what you need to do with “your tired, your poor, your humble” dollars: Give them shelter. I am talking about the kind of shelter that will protect your money from the elements that will erode and destroy it. These elements are inflation and taxes.
You can’t afford to let inflation erode your financial program. While the inflation rate has only been around 4%, even that rate can devastate a financial program in a few years.
Taxes are the biggest culprit in this scenario, because no matter what your gross rate of return is, you must subtract at least 40% to cover taxes, both federal and state. That is a healthy chunk to remove from your profit. To really add insult to injury, even if you make a big profit, all you are doing is increasing the amount of the check you have to send to Uncle Sam. How’s that for a depressing fact of life? Well, that’s the way it is — unless you have planned for some protection for your poor, humble dollars crying out for shelter.
Retirement plans are one of the best ways you can earn interest without current tax liability. This is the ultimate shelter. Despite that fact, many doctors still have a mental block when it comes to putting a retirement plan into place. So, let’s approach things from a different perspective.
I want you to make sure someone very important is on your payroll. The salary you pay this person may be quite low, possibly the lowest on your payroll, and you won’t have to pay Social Security for this person. No vacation or sick pay, or fringe benefits.
The person you need to get on the payroll is the person you will be when you are ready to retire. Most of us pay “everyone else” first, and then whatever is left over, we keep for ourselves. All I’m suggesting is that you move “yourself” up the food chain.
Let’s view this expense as “another employee.” Since this is just another employee, you should make sure a “salary” is paid on a regular basis. After all, there’s no employee who is going to allow you to put his or her salary off. Since this is the “salary” of an employee, you need to be very careful with it. Deposit into an extremely safe and secure investment so that when your “employee” (you, when you retire) needs it, it will all be there. That should not bother you, because the salary you pay this “new employee” comes right off the top. In other words, you don’t have to pay income taxes on that money. It’s even a nice tax break for you now.
You may have to put some dollars into this special account for your other employees, too, but you don’t have to pay taxes on that money, either. If those employees leave, most of those dollars will be credited to your “new employee” (to you, when you retire).
There are other plans that you can put money into just for yourself. Which plan is best? That’s a good question. But it really depends on your individual situation. No matter what plan you choose, though, doing something to fund your retirement is better than leaving it all to chance.
If you’ve been hesitating to open a retirement plan, I understand where you are coming from. It’s not that you don’t want to save tax dollars. It’s the thought of dealing with qualified plans and tax laws and tax forms and the Internal Revenue Service. So instead of focusing on all those details, for now just concentrate on getting that “new employee” on the payroll. That is really the biggest step. After that, you’ll be on your way.