Many practice owners will struggle for to grow their revenues and profits – and therefore their incomes – from a cold start. Others may buy a healthy, existing practice or see fast growth. Whatever the case, achieving even a modicum of success can bring its own set of questions and challenges.
For most practices that start cold or small, somewhere around $600,000 to $800,000, the owner will step beyond just making a good living into being a high earner. As an employed OD, the upper limit on wages tends to be no more than $175,000 (there are exceptions, of course) and is typically about $150,000 in a private practice setting.
Let’s just say any practice earning over $200,000 in pre-tax income is stepping into the high earner role. As practice owners see their income grow, I often get the question: now what? Here are some suggestions:
- Get advisors who can help you. Full disclosure: I am neither a CPA nor a CFP (Certified Financial Planner). If you’re a high earner, you’ll need at least a good CPA who can help not only with tax preparation but also tax planning and business management advice. You’ll probably also want a good financial planner to help with investments and retirement planning. To that end…
- Build wealth OUTSIDE your practice. First, you shouldn’t put all your eggs in one basket: diversify your assets so you’re not dependent on your practice. But second, you need to recognize that your practice is incredibly valuable as a source of income and cash flow, but only somewhat valuable as an asset you’re going to sell some day. The equity value of your practice should be the cherry on top of your retirement, not its primary source of funding.
- Plan for – and pay – your taxes. I get it. No one likes paying the government. But the benefit of private practice optometry is that your taxes are very predictable. Set aside a reserve account for taxes and contribute to it every month. If you’re still in a growth phase, be forewarned that most owners have a big surprise in their tax bill as their income grows, so talk proactively with your CPA as your pass the $200,000 income mark.
From a tax savings standpoint, you can deduct equipment purchases and some personal expenses, but by and large, if you want to lower your tax bill…
- Maximize tax-preferred savings accounts. Over the long run, the best way I’ve seen to lower your tax bill and grow your wealth is to maximize your contributions to an IRA, 401k, or – especially – profit sharing plans that allow you to contribute up to $55,000 in pre-tax income into an account that grows tax-free. Your CPA or CFP can advise you on the best option for your situation.
- Build a personal reserve account first. I don’t subscribe to everything to everything Dave Ramsey says, but he’s right on this one: the first bit of saving you do should be to build a personal reserve account of at least six month’s personal expenses. If you have a family, you might want 12-24 month’s expenses. Put it in cash, a money-market account, or a non-retirement investment account.
- Set a reasonable cash reserve target. Practice owners who don’t have enough cash in the practice account will inevitably have some stressful months when it comes to making payroll or paying bills. But it’s an equal mistake to keep too much cash in the practice account: that income is already taxed, it’s exposed if the practice is sued, and it doesn’t do anything for you in the practice account. Take it out and invest it elsewhere.
A conservative reserve target is one month’s expected expenses. Subtract your expected income from the practice from the revenues and divide that number by twelve. At regular intervals, take distributions any time your month- or quarter-end checking account balance is above your reserve target. If it’s below, skip the distribution and wait for reserves to build back up.
Private practice ownership opens doors for optometrists to enjoy a higher income than they could ever have as employees. Money isn’t the only reason to own your practice; owners can control their time, mode of practice, and the people they work with in ways employed ODs cannot. Use these tips to make the most of your income as a practice owner.
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