Like any dental treatment plan, all retirement plans are not the same.In fact, there are so many retirement plan options that it’s worth it to study up on your choices. The choice for one doctor might not be a great choice for another. So let’s break down the basics of retirement plan options.
“Regular old traditional” 401K — Most people associate their retirement plan at work with the term 401K, and this is a very common form of retirement savings plan. 401K is not an investment, but a code of law that allows employees to contribute to an account tied to a group of employees, at the same allowing their employer to match a certain percentage of compensation. The plan is funded with pre-tax dollars taken out of your paycheck (through payroll deductions). Matching can be optional and can have a vesting schedule. Employer contributions are tax deductible.
However, all good things have limitations. Salary deferrals, or the amount you can put in your account out of your “paycheck,” can go up to $17,500 in 2014 and $18,000 in 2015, plus $5,500 in 2014 and $6,000 in 2015 if the participant is age 50 or older. Total contributions from both employee and employer match are limited to $52,000 for 2014 and $53,000 for 2015 (not including "catch-up" elective deferrals of $5,500 in 2014 and $6,000 in 2015 for employees age 50 or older).
401K includes some other options as well
The Safe Harbor 401K —The Safe Harbor plan combines the traditional 401K with the easy features of a SIMPLE IRA (which I will discuss in a moment), so it is a great option for small businesses. A Safe Harbor plan allows an owner-operator to avoid large administrative expenses common with a 401K while taking advantage of high contribution limits. Generally, employers match contributions dollar-for-dollar up to 3% of an employee's income.
It is common to see a Profit Sharing component with the Safe Harbor plan design. Profit Sharing is an elective “bonus” contribution based on the profitability of the practice. It is normal to see employers elect to contribute a percentage of profits to employee’s accounts. Contributions can be based on employee compensation, years of service, or another formula.
The Solo 401K — How can a sole proprietor with no employees receive the benefits of a 401K without the high costs? Enter the Solo 401K plan, a retirement savings vehicle designed for sole proprietors with no employees other than their spouse. These plans currently permit contributions up to the same 401K amounts mentioned above. The Solo 401K is a great way for a solo practitioner to get the savings benefits of a large employer-sponsored plan. A freelance doctor who works for other dentists, is not a rank and file employee, and has no employees working directly for him or her, could benefit from using a Solo 401K.
The Roth 401K —Many dentists cannot contribute to a Roth IRA due to household income. That paradigm changed with the advent of the Roth 401K. In effect, you contribute after-tax income to a Roth 401K. Provided your account has been open for at least five years, when you reach age 59½, your withdrawals will be tax-free. Also, you can save a lot into a Roth 401K. The contribution limits are currently the same as those for a traditional 401K plan.
Here are plans that look, act, and feel like a 401K
The following plans have some different features that generally keep them easier to administer.
The SIMPLE IRA — The SIMPLE IRA is like a 401K – a small business retirement plan with mandatory employer and optional employee contributions, and a current $12,000 annual contribution cap ($12,500 for 2015). To keep the SIMPLE IRA “simple,” an employer agrees to match up to 3% of an employee’s salary dollar-for-dollar. So if an employee contributes 3%, the dentist matches that 3%. If the employee contributes 2%, the dentist matches that 2%. On the other hand, of an employee contributes 10% of his or her salary, the dentist is only on the hook for the 3% match.
The SEP-IRA — This employer-funded plan gives businesses a simplified vehicle to make contributions toward workers’ retirements (and optionally, their own). The employer contributions are 100% vested from the start, and the employer can supplement the SEP-IRA with another retirement plan. Your contributions to your SEP plan are not reduced by the contributions you or your employer make to your employer’s SIMPLE IRA plan.
SEP plans only allow employer contributions. For a self-employed individual, contributions are limited to 25% of net earnings from self-employment (not including contributions for yourself), up to $52,000 for 2014, $53,000 for 2015.
That’s a lot of choices, and there are actually several more.The common mistake we see dentists make is that they implement “something,” just any retirement plan without having a professional design the proper strategy. Asking the right questions may be the first step toward implementing the right plan for your future or company. Ask a qualified financial advisor or business retirement plan consultant about your options today.
If you have questions about your retirement plan options or would like a second opinion, my firm will gladly provide a free analysis of your plan design, and help you decide if what you have is the best fit. Just send me an email at [email protected].
If you think that a conversation with a professional that specializes in dentistry would be helpful, feel free to reach out to me at 865-357-7373 or visit my websites at southeastdentaladvisors.com and sdp-planning.com.
ALSO BY WILL PARRISH: Why 96% of dentists struggle to retire: Stretched too thin
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The 11 commandments of risk management for the dental professional, Part II
Will Parrish is a founding partner of Slate, Disharoon, Parrish and Associates, LLC, located in Knoxville, Tennessee. Feel free to contact Will with questions via email [email protected] or directly by phone at (865) 357-7373. Visit their website, sdp-planning.com, or connect with Will on Linked In 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.
