Thursday Troubleshooter: What retirement plans are best for dentists?
QUESTION: I’m looking into retirement plans for my dental practice, but I just don’t know which one to go with. Can you please help?
ANSWER FROM DR. JAMES PITTS, consultant with Dental Consultant Connection: This question is a lot more complex than it might seem. The answer depends on a great many factors. The ages of the dentist and team members are important. The size of the practice, the number of employees, and the longevity of the employees are critical. Tax needs of the dentist play a huge part in the choice, as well as the time until retirement. Many other components go into choosing the ideal retirement plan. There is no one perfect answer, however, there are two choices that are widely used in dentistry, and one that is adopted more sparingly.
The two common choices are a SIMPLE IRA Plan, and a 401(k) type plan. Younger practices tend to use the SIMPLE Plan. The administration and employee costs for this type of plan are typically less. For a dentist under the age of 50, the salary deferral amount is $12,000 per year. Typically there is a small corporate match associated with this type of plan. This is a good vehicle to begin saving for retirement.
The 401(k) plan is also widely used in dental practices. Administration and employee costs tend to be higher than the SIMPLE Plan. With the 401(k), the salary deferral amount is $17,500. This plan is sometimes designed to have a corporate match and a profit sharing portion. A total of $52,000 per person could potentially be invested for 2014. The 401(k) plan is used throughout dental careers and can reap great tax savings for the dentist.
The other type of plan I will mention is a Defined Benefit Plan. This is not as widely used in dentistry but can have very large benefits to the doctor. Although the administration and employee costs are much higher than with the other two types of plans, the amount of money a dentist can save is much higher. This type of plan is generally used when a dentist is older, his or her team is younger, and the dentist is close to retirement. A Defined Benefit Plan can be used to “catch up” on retirement savings if the dentist hasn’t saved enough.
Before choosing any of these plans, I advise dentists to consult with a tax professional. Every dentist’s situation is different. If used correctly, a Dental Office Retirement Plan can be a cornerstone of a dentist’s financial retirement portfolio.
I was able to retire after 26 years in clinical dentistry at the age of 51, financially independent and debt free. My passion as a licensed financial advisor and registered investment advisor representative is to help my fellow dentists build and grow wealth and reach their financial and retirement goals.
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