How about this for a kick in the pants….as soon as you’re out of dental school, it’s time to start thinking about retirement planning! Below briefly discusses the different types of retirement plans that a dentist should consider. Additionally, the article discusses the consequences of delaying contributions for retirement. Trust me, as a business owner, I understand the many expenditures competing for your hard earned dollars. In the same breath, we all need to start saving early and have a plan for our retirement!
First, begin by painting a retirement income picture. I have a client that originally had his heart set on retiring at age 65, with retirement income of $10,000 per month, inflation adjusted. During our bi-annual reviews, we review how his investment returns and his contributions have offset his retirement goals. Due to his aggressive savings and market appreciation, he is ahead of schedule. Consequently, instead of increasing his $10,000 per month income goal, he has moved his retirement age up to age 60. Knowing and reviewing the plan permits this dentist to tweak his retirement variables and provides him the ability to retire earlier than his original retirement goal. Start the planning early, and stick to that plan. Save first, and then spend what’s left over.
Once you have a retirement goal, consider the different plans available. Retirement plans fit into one of three categories. At the basic level, a younger dentist has the ability to put $4,000 dollars into a ROTH IRA or a Traditional IRA, and $10,500 (with an additional $10,500 available) into a SIMPLE IRA. The ROTH IRA availability is limited to couples earning less than $150,000 and single folks earning less than $99,000. With the ROTH IRA, a dentist contributes after tax dollars. The contributions grow tax deferred, and the entire balance comes out tax free at the age of 59 ½. Conversely, the Traditional IRA has similar contribution limits of $4,000 per year. One contributes pre tax dollars, the dollars grow tax deferred, and then the income distributions are taxable at age 59 ½. One should consult both a financial advisor and an accountant to decide if a ROTH IRA or Traditional IRA makes sense.
A dentist can also set up a SIMPLE IRA or a SEP IRA. A SIMPLE IRA requires the dentist to put some dollars away for all employees – a dollar-for-dollar match up to 3% of the employee’s compensation or 2% of the employee’s compensation regardless of how much the employee contributes. The SIMPLE IRA enables the dentist to contribute up to $10,500 per year, assuming the dentist’s income qualifies. The SIMPLE also enables an employer contribution, which permits a dentist another $10,500 per year of contributions as the employer. Alternatively, the SEP IRA enables the dentist to contribute as much as $45,000, assuming the dentist qualifies based on income. The contribution limit for a SEP IRA is subject to annual cost-of-living adjustments for later years.
Practices will quickly grow out of the IRA options. Consequently, we move into the defined contribution universe. The defined contribution universe consists of 401k plans, profit sharing plans, profit sharing plans with a 401k feature, and Safe Harbor 401k plans. Essentially, defined contributions define how much a dentist can contribute, with a maximum of $45,000 for 2007. The demographics of the practice determine what kind of defined contribution plan a dentist should choose. Again, we recommend speaking to a financial advisor in conjunction with an accountant.
Lastly, in terms of retirement plan design, we come to the defined benefit retirement plan. In the defined benefit plan, the IRS permits a dentist to define the retirement benefit, based on the income the dentist is earning. Consequently, defined benefit plans enable a dentist to put away as much as $180,000 on a pre tax basis. Defined benefit plans are excellent options for practices with great cash flow, and practices that may have started late in term of retirement planning.
Next month, we will discuss ‘how much is enough?’ We will also discuss how much one needs to save to reach the ‘how much is enough’ goal. Please feel free to email or call us with any questions or concerns.
