Four Tips for Accumulating Retirement Assets
Dental professionals face several unique challenges when it comes to planning for retirement. On the bright side, you tend to enjoy high incomes (yay!). On the dark side, the path to achieving that income tends to result in much higher levels of student loan debt (boo!). Also, the duration of your education and clinical training – while quite valuable and indeed necessary to pursue your calling – tends to result in a delayed start to your savings plan, reducing your ability to compound those savings. And, finally, for dentists who own their own practices, if you’re looking to save in an employer-sponsored retirement plan, well, that employer is you, so in your abundant free time you get to create your own plan. These are just a few of the reasons it’s important to take retirement planning into your own hands, save early and often, and develop a consistent strategy for simultaneously paying down student loan debt while still prudently investing in the growth of your practice. Easy peasy, right? Thankfully, the following tips can help.
Tip #1 – Consider establishing a defined contribution (DC) plan for yourself and your employees.
There are several types of DC plans that are appropriate for dental practice owners.
- Simplified Employee Pension Plan (SEP IRA) – A SEP IRA is a type of retirement plan that allows small business owners to defer up to $61,000 in 2022 (up from $58,000 in 2021) or 25% of an employee’s compensation to retirement savings. Contributions can only be made to a SEP IRA by the employer. To be eligible, an employee must be at least 21 years old, work full time for the dental practice, have worked at the practice for three of the last five years, and receive at least $650 in annual compensation.
- Savings Incentive Match Plan for Employees (SIMPLE IRA) – Another employer-sponsored retirement plan frequently offered by dental practices is a SIMPLE IRA. In contrast to a SEP IRA, employees are eligible to make tax-deductible contributions to the plan. The employer can match up to 3% of an employee’s salary or make nonelective contributions of 2% to every eligible participant, regardless of his or her participation. The 2022 annual employee deferral limit to a SIMPLE IRA is $14,000. Those age 50 and older can make a catch-up contribution of $3,000, raising their annual deferral limit to $16,500. To be eligible, the dental practice must have 100 or fewer employees. Each employee must have earned at least $5,000 in eligible compensation in any two previous calendar years and be on track to earn at least $5,000 in the current year in order to participate. The employer can exclude employees who receive benefits from a union and can also choose less-restrictive participation parameters.
- Savings Incentive Match Plan for Employees (SIMPLE 401(k)) – A SIMPLE 401(k) shares characteristics of both a SIMPLE IRA and a traditional 401(k). Similar to a SIMPLE IRA, a SIMPLE 401(k) can be used by practices with no more than 100 employees. To be eligible, each employee must receive at least $5,000 in compensation. Similar to a 401(k), an employer may choose to allow its employees to borrow from the account. Unlike a 401(k), employers are required to make contributions to their employees’ SIMPLE 401(k) accounts. The employer can either make a matching contribution of up to 3% of the employee’s pay or a non-elective contribution of 2% of pay.
- 401(k) Profit-Sharing Plan – As your dental practice grows and you hire more employees, you may wish to consider upgrading to a 401(k) profit-sharing plan. 401(k)s are highly regarded by employees, who are increasingly looking for employers that provide comprehensive benefit plans. This can make a 401(k) profit-sharing offering a great differentiator for your business when hiring. In 2022, employees can contribute up to $20,500 to a 401(k), plus an additional $6,500 catch-up contribution for those age 50 and older. Employers can make additional contributions not to exceed $61,000 total for both employee and employer deferrals (for workers age 50 and older, the maximum amount increases to $67,500 total). 401(k)s can also be customized to allow Roth contributions, employee loans, larger matching contributions and profit-sharing contributions.
Tip #2 – Save in an individual retirement account (IRA).
You can contribute to an IRA, and your contribution may be tax deductible if your income doesn’t exceed certain thresholds. If you expect your income in retirement to be higher than it is now, a Roth IRA may be the best strategy for you — but note your income level may preclude you from making direct contributions to this account type. Also, a traditional IRA may be a better solution if you’re on an income-driven student loan repayment plan.
Tip #3 – Open an investment account.
While not technically a retirement savings vehicle, a taxable brokerage account provides an opportunity to continue saving once you’ve maxed out your contributions to tax-advantaged accounts. If you decide to open an investment account, be sure to consider the management fees and expense ratios of any investments. Your wealth manager will work with you to ensure your investments make sense given your long-term goals and overall financial plan and that you maintain the most appropriate investments within each account type.
Tip #4 – Consider a health savings account (HSA).
Healthcare is one of the biggest expenses most retired people face. In fact, a recent study by Fidelity found that a 65-year-old couple in 2021 will likely spend $300,000 on medical expenses in retirement.1 Interestingly, a separate study indicated a 16% chance that this same couple will eventually wear matching sweaters on the golf course — but more on topic, HSAs provide an extremely tax-efficient way to save for medical expenses in retirement because they help cover qualified medical costs and high deductibles. In 2022, the IRS allows individuals to contribute up to $3,650 to an HSA ($7,300 for families). Those age 55 and older are eligible to make an additional $1,000 catch-up contribution. If used to pay eligible medical expenses (which isn’t particularly difficult), the HSA is unique in that both contributions and distributions are tax exempt, making this account type a powerful savings vehicle if used appropriately.
At Creative Planning Dental, we specialize in helping dentists plan for their financial futures. As a specialty practice of Creative Planning, our experienced teams are supported by attorneys, CPAs and CERTIFIED FINANCIAL PLANNER™ practitioners. Regardless of your specific situation, we’re here to help you evaluate your options and develop a plan to guide you toward a successful retirement. If you’d like help evaluating your retirement planning strategy, or with any other financial matter, please schedule a call with a member of our team.