Dentists Should Be Aware of What Defined Benefit Retirement Plans Can Do for Them

Dental practice owners need to take time to plan for their retirement and in this process should know what different retirement plans can do for them. In last month’s column we addressed employer qualified retirement plan options. Here we’ll take a close look at defined benefit or cash balance retirement plans.

So, let’s look at defined benefit or cash balance retirement plans and the gamut they run if the understanding is there to utilize them to their fullest extent. There are creative ways to employ these so that the maximum is gained from their adoption and use.

Employer sponsored qualified retirement plans are extremely useful for the dental practice’s owner for the current year and beyond implementation as a tax shelter as well as a means of saving and protecting for his or her future. The important point in the discussion of retirement plans is knowing what they can do for you. Having the right advisors is the key to the implementation and continued operation of the adoption and continuation of this asset.

With the proper advisors, an unlimited world of possibilities exist that most dentists know nothing about and the effect these opinions can accomplish for the dentist and his or her goals in the short and long term. Dentists and the general population are constantly searching for tax deductions that make sense. They want their tax bill to be as low as it can be. Dentists want something meaningful if their search becomes their focus near the end of the year.

The defined benefit plan and its adoption and implementation near the end of the year:

To achieve a meaningful (material) tax deduction prior to the end of the year, the dentist should think about his or her cost and the time it will take to implement something that is worthwhile. Spending a lot of time attempting to find a minimal deduction that projects a minor amount of savings does not seem like a practical way for the clinician to spend his or her time. For the type and amount of deduction that is desired and needed, it will take the advisors time to find and implement what is necessary to create a deduction that is worthwhile. The cost to prepare the adoption papers for the defined benefit or cash balance retirement plan is not cheap. The knowledge to do so must be substantial.

Depending on the dental practice and the ages and number of employees that work for it, also forces the advisors to be very creative and trustworthy. There may be a one-time charge of between $5,000 and $10,000 for the initial design and adoption of this type of plan. Once in place, there will be annual charges to keep things operating smoothly and up to date. The advice given by the advisors will assist in the kind of investment decisions that the owner, now trustee of the plan, will make. The advisors won’t suggest an investment for the owner, but will offer advice as to whether an investment is recognized by the IRS as an acceptable one. What does the defined benefit or cash balance plan offer for the owner of the dental practice?

Benefits of the defined benefit or cash balance plan that exist for the owner:

Some benefits are obvious to the owner of the dental practice. An example is a tax deduction up to and many times more than $150,000 per year for many years, based on meetings with the advisors and the dentist’s own ideas and goals. Another benefit is the protection of those funds in the retirement plan. While in the plan, the funds are immune from creditors. That means hypothetically, that if the dentist signed a note for $1,000,000 and couldn’t pay it, the lender could not go into the retirement plan to take any money owed to the lender. If the dentist filed a bankruptcy petition, the funds in the retirement plan could not be attached by the creditors to pay the dentist’s personal bills.

The shifting of the dentist’s personal assets which are basically all attachable by creditors, to the retirement plan where none are attachable, is a major benefit for the dentist. The retirement plan effectively removes the need for the dentist to worry about saving any amount of substantial money personally. The benefit of having the funds and other investments held by the retirement plan eliminates any tax on the interest or gain from any investments while they are in the retirement plan. They are taxed on the withdrawal.

An innovative approach to the use of the defined benefit plan or the cash balance plan:

One of the last matters that a dentist considers is usually his or her exit strategy. The dentist owner should consider hiring a dental practice broker to list the dental practice for sale. The broker spends the time and due diligence to market the practice and may eventually find a buyer, whether a dental service organization (DSO) or an individual or group practice.

Once a potential buyer is found, the advisors to the buyer and to the seller get very involved attempting to allocate the assets of the dental practice to give each of their clients the best tax advantage. These negotiations create a lot of movement back and forth between the brokerage agents, the accountants and attorneys and the potential buyer and seller of the dental practice. The tax is usually substantial for the seller and the buyer even though the buyer, especially does not realize the extent of his or her potential tax. The seller hopes to receive capital gains treatment on his or her share. A really smart and innovative advisor will know that if the retirement plan is part of the transaction the buyer and the seller can save or at least defer for many years a large portion of the protected tax for each. The following projects show how the arrangement would work:

How to accomplish an acquisition using the retirement plan:

The seller must be willing to wait for most of the money from his or her payout. In essence, this is somewhat similar to an installment sale. The exception is that the seller receives funds indirectly by having them accepted fully into the retirement plan. As described earlier, this keeps the funds safe from creditors and the tax to a minimum. The seller must be willing to continue to work for a while and receive a modest salary while deferring the largest part into the retirement plan. The dentist should contact his or her dental CPA for the balance of this model.