The good news is that sponsoring a retirement plan for the practice not only benefits staff, but it benefits the dentist/owner even more. Dentists are concerned about being able to save enough for retirement. Our latest survey of Ohio dentists indicated that 43% of dentists were concerned that they were not saving enough for retirement (download ebook at for full details atEbook.) These concerns extend over to the decision dentist/owners often struggle with as to whether or not to sponsor a retirement plan for their entire practice rather than just themselves. Factors weighing into this decision include the costs and complexities of implementing these plans. The fact is however, that the often apparent “high” costs are more than offset by the tax savings to the practitioner/owner. Given dentists’ concerns about their retirement, it is essential to leverage the tax deferral strategies offered through small business retirement planning.
Before adopting a retirement plan, every small business owner needs to ask themselves what are the goals of the plan. Is the goal of the plan primarily to generate tax savings for the dental owner or is the goal to enhance employee benefits? Is it important that employees contribute to their retirement savings? How much can the dental practitioner contribute? Having a clear understanding of the aims and objectives prior to establishing a retirement plan will increase the likelihood of the plan’s success.
There are several types of retirement plans a practice can adopt, such as a SEP, SIMPLE, 401k, profit sharing, cash balance, etc. Once the goals are defined, the advantages and disadvantages of each plan can be evaluated. For the purpose of this article, we will show how a 401k plan would have benefited the dentist/owner, because this plan is often a great choice for a mid-career dental practitioner who is in a position to save great amounts for retirement now that some debt has been repaid. The advantage of a 401k/profit sharing plan, compared to some simpler and lower-cost plan types, is that it will allow for much greater tax-deductible contributions. Let’s assume the dentist/small business owner is in the 38% tax bracket (federal and state combined) and has 4 eligible participating employees in his practice. With no employer-sponsored retirement plan, the dentist/owner would be limited to contributing $5,500 or $6,500 per year to his or her IRA. A contribution of $6,500 per year translates to tax savings of $2,470.
In contrast, the dentist/owner with a 401K/profit sharing plan is allowed to contribute up to $60K to his and his employees’ retirement account between salary deferral and matches The owner would now save $22,800 ($60,000 times 38%) in taxes, which is $20,330 more than what he or she was saving with a regular IRA account.
Of course, the tax savings need to be compared to the costs of establishing and maintaining a 401k/profit sharing plan. A realistic example of administration and required employee retirement matching contributions costs for 2017 is:
Third Party Administrator (TPA): $2,500/year
Employer safe harbor match: $3,000
Profit-sharing contribution: $2,000
Initial/periodic costs: Usually there is an initial cost of $1,000 to implement a plan as well as periodic costs to update the plan document.
The total costs to the practice for this ongoing plan would be $7,500. These costs are more than offset by the $22,800 gross tax-savings from our example with a total net savings of $15,300. Importantly, an additional $5,000 is being contributed to the other to participating employees’ retirement plans, providing a valuable employee benefit. This example illustrates the hypothetical cost and savings of just one “cross-tested” retirement plan. Depending on the age and income of the dentist and staff, the saving figures will be different. A cross-tested 401k plan will not work for every dental office. Also, if the dentist is not in a position to save $60,000 then this option becomes less desirable.
Other plan options include:
SIMPLE plan: This plan is ideal for dentists who are limited in how much they can contribute to a retirement plan. Administration costs are much lower, but there is also less flexibility in how the plan is structured. Employers are required to either make a 2% non-elective contribution or a 3% matching contribution of the employee’s salary.
SEP: This administratively inexpensive plan is ideal for dentists who have more money to save (up to $54,000 in 2017) and have no or few employees. The downside is that the business owner makes all the contributions with allocations proportional to all employees’ salaries/wages. There is no opportunity for employees to make additional contributions.
Cash balance plan: These plans create a defined benefit for the owner and participating employees and are usually implemented along with a 401k/profit sharing plan. Unlike a pension plan, however, the cash balance plan is maintained on an individual account basis much like a defined contribution plan (discussed above.) Structured correctly these plans can allow for even greater contributions and tax savings to the employer. Ideally, this plan needs to be in place for seven years.
The tax savings and other advantages of establishing a retirement plan offer a great way for dentists to address their concerns about inadequate retirement savings. The evaluation process above also shows the benefit of making financial planning decisions on a comprehensive basis. By comprehensive financial planning, we mean taking into account the interrelationships of important financial planning variables such as taxes, estate planning, investments, etc. While at first glance 401k plan implementation costs may seem high, the net impact after taxes reveals that there is an overall savings benefit by having a 401k/profit sharing plan. These savings in turn provide a great opportunity to maximize wealth. Dentist/owners who have yet to implement a retirement plan for their practice need to consider their options carefully and implement a plan that is best suited for their goals and their particular practice or confirm that they are utilizing the right plan as their practice grows. Be sure that you discuss the best options with your financial advisor.