Retirement Plans for the Initiated and Uninitiated

Many of the dentists I work with are amazed at the sophistication in the design of retirement plans they never knew were available to them. Once they hear explanations about how much they can have allocated to them compared to the employee allocation, they are usually ready to sign up for a sophisticated retirement plan format. When a new client comes to my firm, I typically review the last 5 years' tax returns and financial statements to get a determination of income, taxes, and benefit programs within the dental practices. I am surprised at the lack of planning for these high-income professionals. Their previous knowledge of a good retirement plan was one in which the contribution on their individual behalf was low because they did not want their employees to have any contribution at all. When the dentists realize that because of discrimination laws, the employees had to get a contribution allocated to them and the cost would be borne by the dental practice, they balked at adopting a qualified retirement plan sponsored by their office.

Different Types of Retirement Plans

There are basically two types of retirement plans that are sponsored by the employer and qualified. The defined contribution plan, such as the 401k, profit sharing plan, and most other similar plans, and the defined benefit plan. There are fundamental differences between the two.

In a defined contribution plan, the amount contributed by the dental practice is discretionary. There are certain additions to this type of retirement plan that protect the dentist from discrimination tests where he or she may fail, but the underlying concept is that a contribution from the dental practice is primarily up to the dentist.

A defined benefit plan has a fixed amount due and is a dental practice liability. There is no discretion. The defined contribution plan is governed by mostly statutory amounts available for deductible contributions. The investment philosophy is conservative with mutual funds and that kind of asset. The gain or loss in the marketplace has no effect on next year's contribution. There is no guaranteed return. What is in the account upon retirement is what is available to distribute to the participant. The defined benefit plan comes with a guarantee to the participants. The annual deductible contribution is a complex formula, and if losses occur, those must be addressed by additional employer contributions or earnings gains in the plan.

Pros and Cons

Here are some examples of the up and down sides of the retirement plan types. To begin, they each have variables that may increase the contribution level. The defined contribution plan can allow for a generous deductible contribution in the event that each spouse works for the practice. Upwards of $70,000 can be contributed for a successful dentist and spouse. The defined benefit plan, which is more complex and designed specifically for the owner(s), is more costly to administer, but can provide for a deductible level in excess of $150,000. Losses are guaranteed by the employer, so if the stock market were to suddenly collapse, the employer is responsible to reach the guaranteed level in each participant's account by way of additional contributions or future market gains. This may sound like a bad thing, but considering that the government shares the loss by allowing the additional deductible contribution, it is actually a terrific tax-sheltered investment. The dentist should get the largest amount of the allocable contribution so that the funds are in the owner's account and not the employee's. I've seen dentists with after-tax money where they pay tax again on those earnings. The dentist may combine those funds with the dental practice under certain conditions, and initiate a retirement plan, write off the contributions to it, and save up to 50% or more in taxes while having the funds' earnings not taxable until withdrawn.

A Protected Asset

Another benefit to a retirement plan is that creditors have no access to it. A dentist may owe a bank $1,000,000 and have $1,000,000 in the retirement account. If business within the retirement plan was conducted according to its rules, the bank cannot touch the funds in the retirement plan. This is a wonderful asset protection device. Dentists who may be investors in projects such as shopping centers and real estate with large debt may want to think about protecting financial assets by using the retirement plan to its maximum potential.

For more information about this tax-deductible, investment-protected asset, visit with your dental CPA.

About the Author
Bruce Bryen is a certified public accountant with more than 40 years of experience. He is the principal in the firm of RKG Tax and Business Services, LLC, located in Fort Washington, Pennsylvania. Mr. Bryen specializes in retirement planning design, income and estate tax planning, determination of the proper organizational business structure, asset protection, and structuring loan packages for presentation to financial institutions. For more information, please visit www.rkgcpa.com.