One of the questions we field from clients is whether to have a retirement plan for the practice, and if so, which type of plan. Let’s explore the best retirement plan options for medical and dental practices. We’ll also look at other aspects of retirement planning, such as who your plan should cover and how to choose the best plan for you.
Top Retirement Plan Options For Medical and Dental Practices
Part of what’s so confusing about choosing the right retirement plan for your practice is that there are seemingly endless options. Here are the five best retirement plans we typically recommend to our clients.
The Roth 401k is one of the newest 401k options available for retirement planning. With this type of plan, you and your employees set aside a predetermined amount of your income and put it into individual 401k accounts. What sets the Roth 401k apart from other types of 401k retirement plans is that you make contributions from your salary after paying taxes. The balance grows tax free, and withdrawals are also tax free. This is very beneficial if you believe your income will go up (you will be in a higher tax bracket) and/or if you believe that tax brackets will change, effectively putting you in a higher tax bracket when you retire. Now, we have no way of predicting the future, but by hedging your bets, this is a great option. The employee limit is $22,500 for 2023 ($66,000 for combined employee/employer contribution).
Conversely, you can also opt for a traditional 401k. With a traditional 401k, you contribute money from salary before paying taxes. One benefit of this is that taxable income is reduced, which saves on income taxes you’ll have to pay. The balance of the traditional 401k grows tax deferred. Every time you withdraw after retirement, you must pay taxes on each withdrawal. The benefit of this is that if you are in a high tax bracket now, you are saving tax dollars at the highest possible rate.The employee limit is $22,500 for 2023 ($66,000 for combined employee/employer contribution).
Cash Balance Plan
Cash balance plans are another type of retirement plan. The cash balance plan falls into the category of defined benefit pension plans, where a person receives a predetermined monthly pension after they retire.
Unlike traditional defined benefit pension plans, however, the monthly amount is based on the individual’s annual earnings throughout their career. As such, the cash balance plan can be a great way to motivate employees to work harder to earn raises and stay for the long term.
The main benefit of this type of plan as an owner of a practice, this allows you to put in a substantial amount away towards retirement. The closer you are towards retirement, the amount that you can put into this plan only increases. This is a great short term (5-10 year) plan to really save some retirement money. The contribution amounts are dictated based on the age and compensation of the participants.
The Simplified Employee Pension Plan, better known as a SEP IRA, is a simplified version of the traditional IRA that’s flexible and easy to understand. SEP IRAs are set up on an individual basis, which means that you, as the employer, would set up individual accounts for yourself and each of your employees and be responsible for putting money into the accounts.
SEP IRA holders can put up to 25% of their annual salary into their accounts while contributing to other retirement plans. The downside of this is that if you have employees, this plan would require you to put in 25% of their compensation into the plan as well. The maximum that can be put away is $66,000 for 2023, plus an additional $7,500 if over 50 years old.
The SIMPLE IRA is another great retirement plan option for dental and medical practices. With this plan, employees can make up to $15,500 in annual contributions to the plan for 2023, plus required employer compensation up to a certain percentage.
Who Should Your Retirement Plan Cover?
Apart from understanding your different retirement plan options, knowing who your retirement plan should cover is equally as confusing. However, deciding who to cover is one of the keys to choosing the right plan because some plans are designed for owners only, some for owners and employees, and some for employees only.
Having said that, it’s largely up to personal preference regarding who you choose to cover with your retirement plan. As with health insurance, retirement planning is a huge incentive for attracting potential employees, but it isn’t necessarily a requirement. If you have employees in your practice, you will likely need to have a plan that covers your staff to pass discrimination testing as required by the Department of Labor. Usually the tax benefits of being able to contribute to the plan offset the required funding needed for the staff anyways.
How to Choose the Best Retirement Plan For Your Practice
Now that you understand your retirement planning and coverage options, let’s look at how to choose the right retirement plan for your practice.
Who You Plan to Cover
If you are setting up a retirement plan for yourself and/or your spouse, a SEP IRA or solo Roth 401k. If you have employees, however, and want to incentivize them with retirement benefits and potential matching, a SIMPLE IRA, traditional 401k/Roth 401k, or cash balance plan is the way to go.
The Size of Your Practice
If you plan to cover your employees with a retirement plan, it’s important to consider the number of employees you have. Certain plans, such as the SIMPLE IRA, are only available to practices with fewer than 100 employees, so you can’t choose this type of retirement plan if your practice exceeds that amount.
Hire a Healthcare Accounting Firm
If you have questions about retirement plan options for your practice, please contact us at Professional Business Management. We have access to a wide range of retirement plan options for medical and dental practices. We can assist you with all your retirement planning needs, including helping you choose the right plan for your practice.