Digging Into Employer Qualified Retirement Plan Options

Every clinician’s situation is unique and that is why it’s critical for them to understand the different types of retirement plans available.

The following article provides a summary of some of the various types of retirement plans including their flexibility, goals and the costs associated with each type of plan. These will all be based upon each plan being a qualified employer sponsored retirement plan, meaning their adoption by the employer are IRS approved and that the employer payments into the plan are tax deductible to the dental practice who is known as the plan sponsor.

There are basically 2 types of retirement plan designs, including one known as a defined contribution plan with various names associated with it. These plans have names such as a 401k, profit sharing plan, and any other qualified retirement plans where the annual contribution is defined by law. The other type of plan design is known as a defined benefit plan. This type of plan uses by definition the amount you will receive as your benefit when you have retired. It is a complex plan that can be described and written on your behalf based on your age, compensation and job description and the number of years you have worked with some exceptions. In essence, the benefit is defined compared to the defined contribution plan where the contribution is defined. You can imagine that this type of plan is much more expensive to draft than the defined contribution plan.

Let’s discuss employer qualified retirement plan flexibility:

With the types of qualified employer sponsored retirement plans available how does the dentist know which to choose? Since this decision will allow the dentist to substantially reduce his or her taxes on an annual basis and to accumulate a sum that creditors cannot attach, the choice is a momentous one for the dentist. A critical advisor to the dentist who can give a substantial boost to his or her client, is the dental CPA. The dental CPA understands how working with an actuary to assist in designing the employer qualified retirement plan can insulate the dentist for a lifetime against those attempting to take away his or her assets, and to allow the dentist to grow his or her estate.

A dental CPA will discuss the long- and short-term goals of the dentist and explain the options available, the time line to achieve this and the estimated cost to draft the adoption agreement. As an example, if the dentist is 50 years old or older, he or she may want to contribute as much as possible as quickly as possible to the retirement plan. This would probably have the dental CPA discuss the implementation and adoption of a defined benefit plan since the potential for a tax-deductible annual contribution from the dental practice to this type of retirement plan could exceed $150,000 per year. If you think of the power of this type of retirement plan contribution with the plan earnings being accumulated tax free until their withdrawal, how much do you think the retirement plan assets will be worth in 10 years?

Other types of qualified employer sponsored retirement plans and their impact on the dentist:

As discussed, the other type of employer sponsored qualified retirement plan is known as the defined contribution plan. The contribution is defined each year and the dentist cannot contribute and deduct more than a certain amount each year. This type of retirement plan is a good plan with good definitions of what the dentist can and can’t do. This plan does not allow the larger contributions that the defined benefit plan does but the amounts are still reasonably good.

This kind of retirement plan is typically adopted by those who are not yet 50 years old and want to have a reasonable tax-deductible contribution for their dental practice. The 401k defined contribution plan also allows the employee to contribute to his or her own plan. As of this writing, the employer and employee contributions cannot exceed $66,000 for the defined contribution plan. If the employee is 50 years old or older, they can contribute with the employer’s share, up to $73,500. As you can see, this is about one half of the defined benefit plan contribution of $150,000 or more.

What else does an employer sponsored qualified retirement plan offer as benefits for the dental practice as well as the owner and employees?

With the short summary described in the preceding paragraphs, one may wonder why every dental practice does not have either a defined benefit plan or a defined contribution plan. There are other types of retirement plans as well. The Simple IRA has much lesser amounts of annual tax-deductible contributions. Its maximum contribution this year is $16,000. If you are 50 or older, you can contribute an additional $3500. The Simple IRA, the SEP plan and others offer a way for a dental practice to make much smaller tax-deductible contributions and still accumulate a significant sum based on the number of years they must fund the plan.

Additionally, the earnings in the plan are not taxable until you withdraw them. The funds in the retirement plan are immune from creditors. That means that if you are in a lawsuit, the funds in the retirement account cannot be attached, even if you lose the lawsuit. Another advantage of an employer sponsored qualified retirement plan is that the assets in the plan can’t be pledged as collateral if you are trying to borrow money. All these things when accumulated, will give the owner a safe haven when he or she is ready to retire. The dentist should begin working with his or her dental CPA right now to take advantage of the current tax deductions as well as to build his or her nest egg for the future that no one can touch. If you don’t have a dental CPA who has experience with the different types of retirement plans, find one by asking your dental supply representative or your attorney.