Know your limits: Update on retirement plan options for dentists

Some things have changed in the world of retirement savings for dentists. Here are some tips from an expert to help you choose the best option for you and your dental team.

In my last article about retirement plans for dentists,Retirement plans: Is a 401K the only option for dentists?,I outlined a few of the basic retirement plan options dentists can consider for their practices. Contribution limits have changed since then, and it’s a good thing to understand the limits for each option.

Be sure to consult with your tax advisor and a qualified financial advisor before starting a retirement plan. The information in this article is a summary, and each plan has nuances that must be considered before choosing the one for your practice.

Traditional and Roth IRA contribution and income limits
Both Traditional and Roth IRAs are limited to $5,500, with an additional $1,000 in catch-up contributions available if a person is over the age of 50. IRA/Roth IRAs have a few rules based on income that can be confusing. Here’s the breakdown from irs.gov.

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $62,000 to $72,000, up from $61,000 to $71,000.
• For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $99,000 to $119,000, up from $98,000 to $118,000.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $186,000 and $196,000, up from $184,000 and $194,000.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Remember this simple rule: Traditional IRAs are tax-deferred and taxes are paid later, and Roth IRAs are taxed now and are tax free for life.

401(k) Limits and Strategies
The contribution limit not including matching funds is $18,000. A person over the age of 50 can contribute an additional $6,000 in catch-up contributions. A “plain old” 401(k) has several uses. If the highest wage earners in the practice want to contribute up to the limit, the capacity to contribute up to $18,000 to 24,000 a year is a good fit. But where a 401(k) really gets exciting is with the addition of a Roth 401(k) component.

Many dentists have a personal income too high to contribute to a Roth IRA. A Roth 401(k) does not have the income limits imposed on a Roth IRA, which can allow dentists to save for some tax-free retirement income. While doctors do not get a tax break today, this strategy allows them to alleviate potential tax burdens in retirement.

SIMPLE IRA: The contribution limit for SIMPLE IRAs in 2017 is $12,500, with a $3,000 catch-up for those over age 50. A SIMPLE IRA can be described as a 401(k) “lite.” A SIMPLE has the same tax treatment as a traditional 401(k) in that funds are contributed from payroll pre-tax. But if the employer agrees to match 3% for every employee that participates, this plan does not require the same annual tax filing and reporting as a 401(k) making it, well, simple.

It should be noted that there are additional rules with a SIMPLE IRA that require consideration. Be sure to consult with a tax advisor and qualified financial advisor to make sure you understand the ins-and-outs.

SEP: Self-Employed Pension Plans are great tools, but they are a bit more complex than a SIMPLE IRA. Here are the rules for SEPs directly from irs.gov:

“The contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of
1. 25% of compensation, or
2. $54,000 for 2017 ($53,000 for 2015 and 2016, and subject to annual cost-of-living adjustments for later years).

These limits apply to contributions you make for your employees to all defined contribution plans, which includes SEPs. Compensation up to $270,000 in 2017 ($265,000 in 2015 and 2016 and subject to cost-of-living adjustments for later years) of an employee’s compensation may be considered. If you're self-employed, use a special calculation to determine contributions for yourself.”

In short, you can contribute 25% of your income or $54,000, whichever is less, and you can only consider up to $270,000 of your income. It is likely that some analysis from your tax and financial advisors is required to determine that a SEP is the best fit for your practice.

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Will Parrish is a founding partner of Slate, Disharoon, Parrish and Associates LLC, in Knoxville, Tennessee. Feel free to contact Will with questions at [email protected] or at (865) 357-7373. Visit sdp-planning.com, or connect with Will on LinkedIn at linkedin.com/in/willparrish/.

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisers, Inc., a Registered Investment Advisor. Slate, Disharoon, Parrish & Associates, LLC and Cambridge are not affiliated. Cambridge does not provide tax advice.