As a dentist and small business owner, your retirement plan options aren’t limited to just a traditional 401(k) or IRA account. Are you aware of the many other retirement plan options available to you? There are varying tax benefits as the employer, so read on to find out if adding one or more alternative retirement plan strategies is right for you.
Because the traditional 401(k) and IRA accounts are so common, we’ll skip over those and go straight to the alternative options.
401K – Other Options
These accounts are taxed the same way as Roth IRAs; because they’re funded with after-tax dollars, funds in the account grow tax-free and individuals who contribute can withdraw funds tax-free (with some exceptions).
In 2017, you can contribute up to $18,000 annually ($18,500 in 2018) in a traditional or Roth 401(k), with a $6,000 catch-up contribution for people age 50 and older.
Safe Harbor 401(k)
The Safe Harbor 401(k) is a good option for a dentist with just a few staff members. You avoid the compliance and administrative costs of a traditional 401(k) plan. Contribution limits in 2017 and 2018 are the same as traditional or Roth 401(k)s.
As the dentist-owner, you can match employees’ contributions dollar-for-dollar up to three percent of an employee’s income. You can also incorporate profit-sharing as an elective bonus, based on your dental practice’s profitability for that year. Your profit-sharing contributions can be based off employee compensation, years of service, or other situations.
When you’re a solo dentist without any staff, a solo 401(k) can give you the same contribution and tax savings as a traditional 401(k), but without the hassle of maintaining a 401(k) account for employees. You get the benefits of a larger plan and don’t have to worry about the high costs of plan administration or compliance. Solo 401(k) accounts can also cover a spouse, if s/he is the only employee.
In a Simple 401(k) plan, employees are fully vested from day one and regular non-discrimination rules don’t apply. Contribution limits are $12,500 in 2017 and 2018, with a catch-up contribution of $3,000. As the employer, you agree to contribute either dollar-for-dollar up to three percent of an employee’s compensation, or fixed non-elective contributions of two percent of compensation. You can set up the plan anytime throughout the year between January 1 and October 1. Be warned: if you set up a SIMPLE 401(k) plan for your dental practice, you cannot have any other retirement plans for your business.
IRAs – Other Options
The SIMPLE IRA is like a 401(k) in that your employer contributions are mandatory, and employees’ are optional. Contribution limits for 2017 and 2018 are $12,500. Catch-up contributions are $3,000 for people age 50 and over. You can match up to three percent of an employees’ salary, dollar-for-dollar. For example, if an employee wants to contribute five percent, you are only obligated to match three percent.
A SEP plan is a simplified version of retirement savings in which only you, the employer, can make contributions for you or your employees. Your employer contributions are fully vested from day one and you can contribute to an employee’s (or your own) SEP IRA even after they turn 70 ½ – unlike a traditional IRA. You can supplement a SEP IRA with another retirement plan, and it won’t reduce your total contribution limits. As an owner, you can contribute up to 25 percent of net self-employment earnings up to $53,000. You can set up a SEP IRA anytime up to your tax return due date (including extensions).
As a small business owner, dentists can claim a tax credit of up to 50 percent to establish a SEP, SIMPLE, or qualified retirement plan. The credit is applied to costs to set up, administer, and educate employees about the plan. The max credit is $500 per year for the first three years the plan is established. Bonus, you can claim the first year of the tax credit the year before you establish one of these qualified plans.
Other tax credits you can claim include the retirement savings contribution credit, which is applicable or self-employed dentists as well as their employees. The maximum credit is $2,000 and there are income phaseouts.
Defined Benefit Option: Cash Balance Plan
We talked about defined contribution plans above. While they’re the most common, there are still ways for dentists to achieve a guaranteed income stream in retirement with a defined benefit plan. One option is the cash balance plan. A cash balance plan has high contribution limits that increase with your age, but can go up to $210,000 each year, or 100 percent of your average compensation for the highest three consecutive years.
The investments in a cash balance plan are a mix of whole life insurance and securities. The life insurance component is what provides a guaranteed payout in retirement. The administrative costs to this type of plan will be higher in the beginning, and contributions must be made in quarterly installments once the plan is established. You can set up a cash balance or other defined benefit plan anytime before the end of the tax year.
As with any tax incentives, you should consider your dental practice’s retirement plans part of an overall strategy. Work with your dental CPA to decide the best option for you and your practice.
Contact us for any questions or for help setting up one of these plans we described above.