Choosing the right retirement savings plan is essential
If you are like many dentists who own a practice, you share a variety of critical priorities in addition to the practice of dentistry, such as managing taxes, attracting and rewarding valued employees, and establishing a long-term strategy to help plan for the financial futures of your employees. Fortunately, you also share an option that could help address all those goals: sponsoring a workplace retirement savings plan.
There are three broad categories of retirement plans available to dental practices. The one you choose may reflect your practice’s size, financial situation and ability to comply with regulatory oversight and administrative responsibilities. You may want to consider working with a financial consultant familiar with retirement savings plan options.
A Simplified Employee Pension plan (SEP-IRA) may be appropriate for a practice owner, spouse or both, but not employees. It is relatively inexpensive and easy to start and administer. SEP-IRAs also offer small practice owners flexibility regarding both the amount and timing of contributions. Thus, a SEP-IRA may make more sense for a practice with profits that tend to fluctuate from year to year.
Some features of this plan type:
- Employer, not employees, makes contributions.
- Employees are immediately vested.
- Once set up, the plan must generally cover any employee who is 21 years or older, earned at least $600 in the prior year of practice and has worked there during at least three of the preceding five years.
- The 2018 annual contribution limit for each employee is 25 percent of compensation (or, for the self-employed, net earnings) or $55,000, whichever is less.
The Savings Incentive Match Plan for Employees (SIMPLE IRA) is typically valued for its ease of administration and is available to practices with 100 or fewer employees.
Features of this plan type include:
- For 2018, the maximum annual gross compensation amount that can be used to determine the allowable contribution for all employee participants in the plan is $275,000.
- Employees may contribute up to $12,500 of their gross salary in 2018.
- Employer must make a matching contribution of up to three percent of each employee’s annual compensation but may match as little as one percent in two of any five consecutive years.
- Employer may instead make non-elective contributions equal to two percent of compensation for each employee who has earned at least $5,000 during the year, whether an employee has elected to contribute or not.
Qualified plans are generally more complex than SEP-IRAs or SIMPLE IRAs and, often, have more stringent reporting requirements. But they can be more appropriate for larger or growing dental practices. There are several types of qualified plans, which can be broken down into two broad categories, defined benefit plans and defined contribution plans.
Defined benefit plans
Commonly referred to as pension plans, defined benefit (DB) plans promise to pay employees a steady income stream in their retirement years. The amount each employee receives is based on earnings history and length of service. Employers must contribute enough to the DB plan each year to satisfy what’s known as a minimum funding requirement. Owing to the complexity of this calculation and other requirements, administration of a DB plan usually requires professional assistance.
Defined contribution plans
With defined contribution (DC) plans, employers contribute into individual accounts for each employee. Employees may then be given the authority to invest the money as they see fit. DC plans do not require immediate vesting and may allow employee loans.
- Profit sharing plan: Employers can vary the amount and frequency of contributions based on fluctuating profits.
- Money purchase pension plan: Contributions are mandatory, and the percentage amount may not vary.
- Paired plan: Paired plans allow annual contributions to vary, but guarantee a minimum percentage. For 2018, employers can contribute the lesser of 25 percent of earned income or $55,000 to each participant’s profit sharing plan, money purchase pension or paired plan account.Withdrawals from retirement plans are subject to ordinary income tax treatment and if taken before age 59½ years may be subject to an additional 10 percent federal income tax penalty.
These popular DC plans allow employee contributions (or “elective deferrals”). In recent years, 401(k)-style plans have become less complex and less expensive for smaller dental practices. Participants may contribute up to $18,500 for 2018, and employers may also contribute. Total contributions to a person’s account cannot exceed $55,000 or 100 percent of compensation, whichever is less. Those age 50 years and older can save even more by making what’s called a “catch-up” contribution that’s limited to $6,000 a year, for a total of $24,500.
As you review these retirement plan options, keep in mind there are many points to consider. You may want to evaluate your practice’s unique needs and goals. For these reasons, it is generally advisable to speak with a retirement planning professional before making any decisions. The ADA Members Retirement Program is endorsed by the ADA to provide assistance to dentist employers and their employees regarding retirement plan options.
This blog post, republished with permission, originally appeared in the summer 2018 issue of the ADA’s Dental Practice Success. It was written by Santo LoPorto, a senior director and client relationship manager at AXA Equitable. He has more than 25 years of experience in the retirement and financial services industry.
This article has been written for general information purposes only. This material does not constitute an offer or solicitation of any kind and is not intended, and should not be relied upon, as investment, tax, legal, or financial advice or services.