Retirement Plans and Your Dental Practice: Weighing the Options
A retirement plan for your dental practice is essential to the long-term retirement goals for both you and your employees. Practices that have a plan in place and contribute on a consistent basis have the best opportunity for retirement success.
A dental practice’s retirement plan should accomplish two things:
- Maximize the benefit to the dental practice owner
- Provide a tax efficient way to build wealth over the long-term
The plan type should also be monitored periodically, and adjust according to where your practice is in its life cycle. Whether your practice is a new start-up, an established practice, or you’re beginning to consider the transition to retirement, choosing the right option can ensure your retirement plan is maximized.
Simple IRA Plan
The SIMPLE IRA Plan is geared to those practices that are just beginning and would like to have some type of plan in place. The plan allows all eligible employees to defer from their pay on a pre-tax basis up to $13,500 (2020 limit). Employees age 50 and over can make a “Catch-Up deferral” of $3,000 (2020 limit). The practice is required to contribute either a match of the employees’ deferrals up to 3% of compensation or a 2% of compensation flat contribution to all employees who are eligible – whether they defer or not. The plan does not require any additional administration costs or annual government reporting, which makes it cost effective for new practice owners. Setting up a SIMPLE IRA Plan is just that: Simple.
401(k) Profit Sharing Plan with Safe Harbor Provisions & Profit Sharing
For those practices that have a handle on their cash flow and are looking to grow, a 401(k) Profit Sharing Plan with Safe Harbor provisions provide an enhanced benefit and higher contribution rates. The plan allows all eligible employees to defer from their pay on a pre-tax or after-tax basis up to $19,500 (2020 limit). Employees age 50 and over can make a “Catch-Up deferral” of $6,500 (2020 limit).
The practice is required to contribute either a match of the employees’ deferrals up to 4% of compensation or a 3% of compensation flat contribution to all employees who are eligible – whether they defer or not. The plan’s Safe Harbor provision guarantees that you, as the practice owner, will be able to defer the maximum IRS allowed limit from your compensation of $19,500/$26,000.
In addition to the Safe Harbor contribution, the practice can contribute a Profit Sharing contribution with the goal being able to maximize the practice owner’s allocation at the IRS individual annual allocation limit. For 2020, the IRS individual annual allocation limit is $57,000 if under age 50, and $63,500 if age 50 or older. The IRS individual annual allocation is the combination of your Employee Deferrals and the practice’s Employer contributions such as Safe Harbor and Profit Sharing.
Cash Balance Plan
Mature practices with higher cash flow and profitability allow for a more robust retirement plan. For those practice owners looking to make significant retirement contributions in a relatively short time frame, a cash balance plan may be the solution. By taking the benefits of both a defined contribution or 401(k) plan and a defined benefit plan, one can make retirement contributions far and above those allowed by a 401(k) plan alone. For those owners age 55 and over, the annual contributions could well exceed an additional $100,000 per year in contributions.
Cash balance plans have required annual contributions that are actuarially determined and you have to be ready to commit to funding the plan for a minimum of 3-5 years. If keeping the funding at this high level may be in question, this plan design may not be right for you. However, if you can do it, you can make significant contributions while minimizing your taxes at the same time. Cash balance plans allow for design flexibility if there is more than one owner and different structures based on your desired outcome.
No matter the size of your practice, there is a retirement plan for your organization. Finding the right match and following up with periodic assessments to determine necessary adjustments will help position you for success through every stage of your practice’s life cycle.