By: Edward Leach, CFP®, MBA
As a dental practice owner, planning for your retirement is essential—not just for your future but for your practice's long-term success and your team's well-being. Choosing the right retirement plan can be overwhelming, with options like SEP IRA, Simple IRA, 401(k), and Defined Benefit Cash Balance Plans. Each of these plans offers unique benefits and challenges, so it's crucial to understand which option best aligns with your financial goals and practice needs. In this guide, we'll break down the most popular retirement plans for dental practice owners to help you make an informed decision for your future.
Financial Planning for Dental Practice Owners: Understanding Retirement Plans
Hi, everyone. Welcome back to our video series on financial planning for dental practice owners. Today, we will discuss different types of retirement plans, why they are essential for your practice, and key terms you need to know.
Your retirement plan options are vast—it's usually an alphabet soup. More often than not, the easiest path isn't always the best, and we'll go into detail on why that's important. First, when deciding on a retirement plan, meeting with an advisor or CPA specializing in working with practice owners is essential. Making the right decision for your retirement plan can set you up to succeed—not only in your financial planning but also by providing tremendous benefits for your staff and team as you remain competitive in the marketplace.
There are four main plans I want to talk to you about today:
SEP IRA
Simple IRA
401(k) Plan
Defined Benefit Cash Balance Plan
Each of these plans offers different benefits and has various rules and limitations, and we'll discuss these details today to help you decide which plan is right for you.
1. SEP IRA (Simplified Employee Pension)
What is a SEP IRA?
The first plan I want to discuss is the SEP IRA, or Simplified Employee Pension Plan. It's an individual retirement account that is extremely easy to set up and administer, making it one of the most popular plans recommended. One reason it's so popular is because there are almost no administrative costs.
Key Features of a SEP IRA
When setting up a SEP IRA for your practice, only the employer (your practice) can contribute to the plan—employees cannot. You can contribute up to 25% of your compensation to the plan, with a maximum contribution of $69,000 for 2024.
SEP IRA Considerations
However, one downside is that whatever percentage of your compensation you contribute, you must also contribute that percentage of your employees' compensation if they are eligible. Most full-time employees in a SEP IRA are eligible, so this can lead to higher contributions than your practice may afford.
2. Simple IRA
What is a Simple IRA?
The second plan I want to talk about is the Simple IRA, which is great for practices just starting that may not have the profitability to put large sums of money away.
Key Features of a Simple IRA
Both the employer and employees can defer money into this plan, and it is easy to set up with little to no administrative costs. In 2024, you can contribute up to $16,000, plus an additional $3,500 catch-up contribution if you are over 50.
Employer Responsibilities in a Simple IRA
Employers, however, must contribute at least 2% of their employees' compensation as a fixed contribution or provide a match of up to 3%. Budgeting for these contributions is essential when setting up a Simple IRA plan.
3. 401(k) Plan
What is a 401(k) Plan?
The 401(k) plan is likely one you've heard of, and it is the most common employer-sponsored retirement plan. Though it can be more expensive and complex to administer than a Simple IRA, it has higher contribution limits and other benefits.
Key Features of a 401(k) Plan
In 2024, you can contribute up to $23,000, plus an additional $7,500 if you are over 50. Employees and employers can contribute to a 401(k) plan. As a practice owner, you can contribute up to $69,000 or $76,500 in 2024, depending on your plan design.
Customizing a 401(k) Plan
Working with professionals such as financial advisors, CPAs, and technologically advanced 401(k) providers is critical to help streamline administration and ensure everything runs smoothly. You can customize a 401(k) plan to suit your practice's specific needs, demographics, and budget.
4. Defined Benefit Cash Balance Plan
What is a Defined Benefit Cash Balance Plan?
The last plan I want to discuss is the Defined Benefit Cash Balance Plan. Although more complex and expensive to administer, this plan allows you to shelter hundreds of thousands of dollars, providing the highest contribution limits.
Key Features of a Cash Balance Plan
Most practice owners who adopt this plan do so after age 50 when they've saved significantly and want to maximize their retirement savings. Contributions are made solely by the employer, and the plan guarantees a fixed payout in retirement.
Cash Balance Plan Considerations
This type of plan often involves significant tax planning, so working with a professional advisor is crucial to ensure the plan aligns with your retirement goals.
Summary of Retirement Plans
In summary, we've discussed four types of retirement plans today:
SEP IRA – Not ideal for most practice owners due to the mandatory employee contributions.
Simple IRA – Great for new practices or owners not looking to contribute large sums.
401(k) Plan – The most popular and common plan, offering higher contribution limits.
Defined Benefit Cash Balance Plan – Best for advanced retirement planning, especially after age 50.
If you're interested in a free analysis of your current retirement plan or are considering implementing one for your practice, please head to our website and set up a free initial consultation. We provide this as a complimentary service for all practice owners.
Ed Leach, CFP®, MBA, is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ, and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their businesses while creating efficiencies in their business and personal financial plans. He is also a member of NAPFA, which is dedicated to serving fee-only advisors.