Retirement Plans and your Dental Practice – Weighing the Options

A retirement plan for your practice is essential to the long-term retirement goals for you and your employees. Those practices that have a plan in place and contribute on a consistent basis give the best opportunity for retirement success.

A practice’s retirement plan should maximize the benefit to the dentist owner and provide a tax efficient way to build wealth over the long-term. The plan type should also be monitored periodically, and adjusted according to where your practice is in its life cycle.  Whether your practice is a new start-up, an established practice, or you’re beginning to consider the transition to retirement, choosing the right option can ensure you are moving toward your future retirement goals.

Keeping it SIMPLE – a SIMPLE IRA plan is a good option starting out. SIMPLE plans have:

• No annual regulatory reporting and minimum administration easily done in-house
• Employee Deferrals up to
  • $16,000 under age 50
  • $19,500 age 50 and over
• Employer contribution:
  • 3% match or
  • 2% flat contribution to all eligible employees
• Recent tax law changes will allow higher deferral limit of $17,600 and catch-up deferral of $3,850 if match is 4% or 3% flat contribution. This is available when the practice has 25 or fewer employees receiving at least $5,000 of compensation.

Reaching Higher – Practices that have a handle on their cash flow and are looking for higher contribution rates can benefit from a 401(k) Profit Sharing Plan with Safe Harbor provisions. 401(k) plans have:

• Auto-Enrollment is a required feature for new plans
• Employee Deferrals up to
  • $23,000 under age 50
  • $30,500 age 50 and over
• Employer contribution:
  • 4% match
  • 3% flat contribution to all eligible employees

• By having one of the Safe Harbor contributions listed above, one of the required plan tests passes automatically so you can safely defer the maximum Employee Deferral amount even if the rank and file employees don’t defer
• Employer Profit Sharing contributions are allowed up to the annual individual participant allocation limit. The 2024 annual allocation limit is $69,000 if under age 50 and $76,500 if age 50 or older (that amount includes the Employee Deferrals).

Sprinting to the Finish – When your practice has consistent high cash flow and profitability, a Cash Balance plan combined with a 401(k) Profit Sharing plan will allow significantly higher retirement contributions in a relatively shorter timeframe. For Owners age 55 and over, the annual contributions could well exceed an additional $100,000 per year in contributions based on your individual situation. Some key attributes of a cash balance plan are as follows:

• Annual required contributions as determined by an actuary
• All eligible employees receive a contribution credit for their portion of contribution
• Flexible for multiple owners
• Must cover lesser 40% of eligible employees or 50 employees
• Must be established and maintain required funding for a minimum of 3-5 years
• Annual regulatory reporting, actuarial valuation, compliance testing, and other administration requirements

If keeping the funding at this high level may be in question, this plan design may not be right for you. However, if you can, you can make significant contributions while minimizing your taxes at the same time. Cash balance plans allow for design flexibility if there is more than one owner and different structures based on your desired outcome.

No matter the size of your practice, there is a retirement plan for your organization.  Finding the right one and following up with periodic assessments to determine necessary adjustments will help position you for success through every stage of your practice’s life cycle.