Retirement Options For Dentists

It’s never too early to save for retirement, but with any major decision there are plenty of options. This is especially true for dental professionals who benefit from higher earnings throughout their career. The following article will detail some of the best retirement options for dental professionals and how these methods impact their taxes.

Traditional 401K

The most common retirement option for most individuals is a traditional 401(k). A 401(k) is a type of qualified profit-sharing plan that allows employees to contribute a portion of their pre-tax wages to individual retirement accounts. These retirement accounts are typically funded through employee payroll deductions and can include an employer match. The following are just a few pros and cons of investing in a 401(k).

• Employee contributions to a 401(k) are tax-deductible (subject to limitations).
• Employer can contribute to employee’s retirement accounts.
• Money grows tax-free and is only taxable when distributions are made.
• High administrative cost.
• More rules, tests, and procedures when running a 401(k) plan compared to other plans.

Choosing a 401(k) is great for dentists in an S-Corporation because 401(k) contributions can be made using payroll deductions. However, there are some limits:

Contribution Limitations – For 2015 through 2017 the contribution limit for a 401(k) is $18,000 per year. Participants who are age 50 and over may make additional catch up contributions of $6,000 per year for 2015 through 2017.

Additional 401 (k) Options 

There are several different options that fall under the umbrella of a 401(k), but offer some unique flexibility.

Safe Harbor 401(k) – A safe harbor 401(k) plan is similar to a traditional 401(k) plan. However, unlike a traditional 401(k) plan, safe harbor plans must provide for employer contributions that are fully vested when made.

These contributions are typically employer-matching contributions and may have built-in profit-sharing ‘bonuses’ based on the profitability of the practice. The main benefit of choosing a safe harbor 401(k) plan is that, compared to a traditional 401 (k) plan, it’s not subject to nondiscrimination test and other reporting requirements that increase administrative costs. This works best for smaller, single-owner dental practices.

SIMPLE 401 (k) – A SIMPLE 401(k) is great for small practices that want an effective, cost-efficient way to offer retirement benefits to their employees. These plans are not subject to the annual nondiscrimination tests that apply to traditional 401(k) plans, therefore, SIMPLE 401(k) plans benefit from reduced administrative costs.

SEP IRA

A Simplified Employee Pension (SEP) plan is a retirement plan established by employers, including self-employed individuals. SEP plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay.

The main reason employers choose to set up a SEP plan is the low start-up and maintenance costs. Another advantage of a SEP plan is the flexibility of employer contributions; since contributions are discretionary, employers decide if they will fund the SEP for that year. This works great for employers who want to give bonuses based on annual profits in the form of retirement contributions.

Even more so, the contributions are tax-deductible. The most you can deduct on your business’s tax return for contributions to your employees’ SEP IRAs is the lesser of your contributions or 25% of compensation. The maximum contribution for 2017 is $54,000 ($53,000 for 2015 and 2016) and contributions to employees’ SEP-IRAs are not included in their gross income.

SIMPLE IRA

A SIMPLE IRA plan is great for small practices because it allows employers with a simplified method to contribute toward their employees’ and their own retirement savings. Employees typically choose to make contributions through payroll deductions and the employer is required to make either matching or nonelective contributions. An employee may defer up to $12,500 in 2016 and 2017.

Employers are required to match up to 3% of an employee’s salary. For example, an employee contributes 3% of their pay and the dentist matches that 3% contribution. If the employee only contributes 1% of their pay then the dental practice only matches that 1%. Lets say the employee wishes to contribute 7% of her salary; the practice is only obligated to match 3% of their salary.

Summary

There are many options, not all are mentioned in this article,  for dentists when it comes to saving for retirement which is why it’s important to consult with a financial planner. Seeking the advice of a professional that understands the impact of taxes on one’s retirement savings account, especially for dentists, is critical when deciding which retirement option to choose. For more information, please consult with your financial advisor.