Retirement Plans in the Dental Practice

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Choosing which retirement plan to offer the employees in your dental practice is a major decision, but not one that is without options. From traditional 401 (k)s, 401 (k)s with profit-sharing, SEP IRAs, and SIMPLE IRAs, you may find yourself wondering which plan will is right for you and your staff. After all, the right retirement plan can:

  • Help you save the most for your own retirement as the dentist owner.
  • Provide valuable tax savings for the practice.
  • Retain key employees.
  • Attract more qualified hires.

The following provides an overview of the most popular retirement plans used by dental professionals and how each impacts the monetary and management aspects of the practice.

Traditional 401 (K)s

The traditional 401 (k) is the most commonly known type of qualified workplace retirement plan. These plans allow employees to contribute a portion of their pre-taxed income to individual retirement accounts and possibly even receive an employer match up to a certain percentage. The employee elects how much of his or her paycheck to contribute each pay period and the funds are transferred through automatic payroll deduction.

The Pros The Cons
  • Employee contributions to a 401 (k) are tax deductible.
  • Employer can make contributions to an employee’s account.
  • Employer can deduct contributions made to employee accounts.
  • Money grows tax-deferred and isn’t taxed until withdrawn. 
  • High operations costs.
  • Complex to set up and maintain.
  • More rules and stipulations to abide by when running these plans.
  • Employee and employer contribution limits are set by federal law.

 

While 401 (k) s do offer tax benefits to the both the employer and employee, the complex management of these accounts may cost the practice more in frustration and time than the tax benefits are worth, especially for a small practice without a dedicated or outsourced HR professional handling operations. Some dentists also find the federally mandated contribution limits to be a major drawback.

The Profit-Sharing Add-On

Many dental professionals will opt to add the Profit-Sharing option to their 401 (k) plan so that they can control how much they contribute to their employees’ accounts based on how well their business did that year. Unlike 401 (k)s with employer match, profit sharing 401 (k)s allow a dentist owner to choose how much money he or she will contribute to their employees’ plans each year. Not only does this allow dentist owners to make fewer contributions if profits are down, but also allows for higher annual contribution amounts to attract and retain top talent. A traditional 401 (k) only permits employees to contribute up to $19,000 per year (as of 2019), but a profit sharing 401 (k) allows up to a $56,000 per year contribution from the employer. The combination of the 401 (k) with the profit sharing allows both employee and employer contributions to be made in order to maximize individual retirement savings and enhance practice benefits packages.

SEP IRAs

Simplified Employee Pensions (SEPs) are designed to be used by the self-employed or dentist business owners with only a handful of employees. Unlike some other plans, SEP plans only allow for employer contributions. Contributions are made directly to the IRA held in the employee’s name and can be as much as 25% of an employee’s income (or $56,000 per year, whichever is less).

The main advantages of the SEP plans are the low start-up and maintenance costs. Another benefit, though, is the flexibility of employer contributions. With SEPs, employer contributions are discretionary—that is, an employer can decide whether or not to make contributions year-to-year. This works great for employers who want to give bonuses based on annual profits in the form of retirement contributions.

However, a major drawback is that owners must contribute to their employee’s accounts at the same rate they contribute to their own. If the business owner wants to contribute 25% to their own SEP IRA, they must also contribute 25% to each of their employees’ accounts. This may become quite costly for a business owner with more than a few employees.

The Pros The Cons
  • Simple set up.
  • Little administrative paperwork.
  • Employer can decide to make contributions year to year.
  • Withdrawals permitted at any time, but will be subject to regular income tax.
  • High Contribution Limits: Up to 25% compensation but no more than $56,000 for 2019.
  • No IRA reporting or compliance testing needed.
  • Must be offered to all employees who are at least 21 years old, employed by the employer for 3 of the last 5 years and had compensation of $600 for 2019.
  • Dentists obligated to make matching contributions to all employees—including themselves.

 

SIMPLE IRAs 

Savings Incentive Match Plans for Employees (SIMPLE) are retirement plans for practices with fewer than 100 employees and allow dentist owners to set up retirement accounts for both themselves and their employees. They are relatively similar to SEP IRAs in that they are simpler to set up and maintain than the 401 (k) option, but unlike the SEP IRA, SIMPLEs allow for both employer and employee contributions. This can be appealing for employees who want to also make their own contributions to their accounts.

SIMPLE IRAs do offer lower contribution limits, though. Unlike the traditional 401 (k) which has a $19,000 (plus $6,000 catch-up allowance for individuals over age 50) contribution limit for 2019, and the SEP which allows for the lesser of $56,000 or 25% income per year, the SIMPLE IRA only has a $13,000 (with a $3,000 catch-up for individuals over 50) limit.

Like with the 401 (k), contributions are made pre-tax, which means the funds also grow tax-deferred until withdraw, at which time the distributions are taxed at the regular income tax rate. There is a 10% penalty for withdrawing funds early; the penalty increases to 25% if SIMPLE IRA withdraws made within two years of signing up for the plan.

With a SIMPLE plan, employers must either match employee contributions up to 3% of an employee’s income, or make a fixed contribution of 2% of compensation for all eligible employees (even if the employee does not make their own contributions). This means that employees who contribute nothing from their own income to their plan will still receive a 2% contribution from the employer. However, the dentist owner can decide which arrangement of the two to utilize for his or her practice.

These are plans benefit employers with fewer than 100 employees who are looking for simple set-up, stress-free maintenance, and the option for employees to contribute to their own plans.

The Pros The Cons
  • Little administrative paperwork.
  • Both employer and employee can make contributions.
  • Funds grow tax-deferred and are taxed as regular income upon withdrawal in retirement.
  • Dentist is only obligated to match employee contributions up to 3%.
  • Employee can decide how much to contribute.
  • Salary reduction plan.
  • No IRA reporting or compliance testing needed.
  • Must be offered to all employees who are at least 21 years old, employed by the employer for 3 of the last 5 years and had compensation of $600 for 2019.
  • Low Contribution Limits
  • Employer must make matching contributions or contribute 2% of each employee’s compensation.
  • Must be offered to all employees who have compensation of at least $5,000 in any prior 2 years, and are expected to earn at least $5,000 in the current year.
  • No vesting schedules.

 

Choosing a Plan

You’ll want to ensure that the plan you choose makes both economic and practical sense for your practice. That is, you’ll want to make sure that offering these plans through your practice isn’t adversely affecting your own net profit. Does the tax saving exceed how much is contributed to employees? Does a large enough percentage of profit go to your own retirement account? These are just a few things to consider when choosing a plan.

If you are unsure about which plan would best suit your practice, we’d be happy to help you evaluate them in the context of your other business financials. At Harbor West, we specialize in helping dental professionals maintain strong financial footing in both their personal and professional lives. Contact us today to discuss how an office-sponsored retirement plan could fit into your bigger picture.

This information is provided for general purposes and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the information, please consult your Financial Advisor for individual financial advice based on your personal circumstances. Neither Harbor West nor Geneos Wealth Management, Inc. provide tax or legal advice. Harbor West is a division of NorthEast Community Bank. Securities and advisory Services offered through Geneos Wealth Management, Inc. FINRA/SIPC Investment Advisory and Financial Planning Services offered through Geneos Wealth Management, Inc. Investments are not FDIC Insured. Investments are not deposits of the financial institution and are not guaranteed by the financial institution. Investments are subject to risks including loss of principal.

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Regulatory Disclosure: The information on this website has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. This website is neither an offer to sell nor a solicitation to buy any securities. Gerard Gruber offers Securities and Investment Advisory and Financial Planning service through Geneos Wealth Management, Inc, Member FINRA/SIPC.  Investments are not FDIC insured. Investments are not deposits of the financial institution and are not guaranteed by a financial institution. Investments are subject to investment risks including loss of principal amount invested.