A Dentist Dilemma: Should I Have a Retirement Plan Through My Office?
Today, it’s not uncommon for owner doctors to ponder the best ways to save for their retirement. During this process many wonder if they should have a 401(k) or other retirement plan through their office. The answer comes down to one question. Does the tax saving exceed the cost of what is contributed to the employees? A good rule of thumb is if 65 percent or more of the contribution goes to the owner doctor it pays to have a plan. Although this rule of thumb may make economic sense, there is always the intangible benefit of what you need to do to keep employees. More often than not, most employees of a dental office would rather see a check in their hand as opposed to money toward their retirement. Keeping this in mind and the best interest of your staff, you need to weigh the pros and cons of making a long-term commitment to setting up an office retirement plan. To help aid you in your decision, Doeren Mayhew’s dental CPAs and advisors have summarized the common retirement planning issues below.
Experts estimate that Americans will need 70 to 90 percent of their preretirement income to maintain their current standard of living when they stop working. So now is the time to look into retirement plan programs. As an employer, you have an important role in helping America’s workers save. By starting a retirement savings plan, you will help your employees save for the future. Retirement plans may also help you attract and retain qualified employees, and they offer tax savings to your practice. You will help secure your own retirement as well. You can establish a plan even if you are self-employed.
Any Tax Advantages?
A retirement plan has significant tax advantages:
- Employer contributions are deductible from the employer’s income
- Employee contributions (other than Roth contributions) are not taxed until distributed to the employee
- Money in the plan grows tax-free.
Any Other Incentives?
In addition to helping your practice, your employees and yourself, it’s easy to establish a retirement plan, and there are additional reasons for doing so:
- High contribution limits so you and your employees can set aside large amounts for retirement.
- “Catch-up” rules that allow employees age 50 and over to set aside additional contributions. The “catch-up” amount varies, depending on the type of plan.
- A tax credit for small employers enabling them to claim a credit for part of the ordinary and necessary costs of starting a simplified employee pension (SEP), SIMPLE or certain other types of retirement plans. The credit equals 50 percent of the cost to set up and administer the plan, up to a maximum of $500 per year for each of the first 3 years of the plan.
- A tax credit, known as the Saver’s Credit, for certain low- and moderate-income individuals who make contributions to their plans. The amount of the credit is based on the contributions participants make and their credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate can be as low as 10 percent or as high as 50 percent, depending on the participant’s adjusted gross income.
- A Roth program can be added to a 401(k) plan to allow participants to make after-tax contributions into separate accounts, providing an additional way to save for retirement. Distributions upon death or disability or after age 59 1/2 from Roth accounts held for 5 years, including earnings, are generally tax-free.
A Few Retirement Facts
Most private-sector retirement vehicles are either Individual Retirement Arrangements (IRAs), defined contribution plans or defined benefit plans. People tend to think of an IRA as something that individuals establish on their own, but an employer can help its employees set up and fund their IRAs. With an IRA, the amount that an individual receives at retirement depends on the funding of the IRA and the earnings (or losses) on those funds. Defined contribution plans are employer-established plans that do not promise a specific amount of benefit at retirement. Instead, employees or their employer (or both) contribute to employees’ individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). At retirement, an employee receives the accumulated contributions plus earnings (or minus losses) on the invested contributions. Defined benefit plans, on the other hand, promise a specified benefit at retirement; for example, $1,000 a month. The amount of the benefit is often based on a set percentage of pay multiplied by the number of years the employee worked for the employer offering the plan. Employer contributions must be sufficient to fund promised benefits. Small businesses may choose to offer IRAs, defined contribution plans or defined benefit plans. Many financial institutions and retirement plan practitioners make available one or more of these retirement plans that have been pre-approved by the Internal Revenue Service.
Payroll Deduction IRAs
Even if an employer doesn’t want to adopt a retirement plan, the employer can allow its employees to contribute to an IRA through payroll deductions, providing a simple and direct way for employees to save. In this type of arrangement, the employee always makes the decisions about whether, when and how much to contribute to the IRA. Some individuals eligible to contribute to an IRA wait until the end of the year to set aside the money and then find that they don’t have sufficient funds to do so. Payroll deductions allow employees to plan ahead and save smaller amounts each pay period. Payroll deduction contributions are tax-deductible by the employee, to the same extent as other IRA contributions.
Simplified Employee Pensions (SEPs)
A SEP plan allows employers to set up SEP IRAs for themselves and each of their employees. Employers generally must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year. Employer contributions are limited to the lesser of 25 percent of pay or $54,000 for 2017. Most employers, including those who are self-employed, can establish a SEP. SEPs have low start-up and operating costs, and can be established using a two-page form. Also, you can decide how much to put into a SEP each year – offering you some flexibility when business conditions vary.
SIMPLE IRA Plans
A SIMPLE IRA plan is a savings option for employers with 100 or fewer employees. This plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions. Under SIMPLE IRA plans, employees can set aside up to $12,500 in 2017 by payroll deduction. Employers must either match employee contributions dollar for dollar – up to 3 percent of an employee’s compensation – or make a fixed contribution of 2 percent of compensation for all eligible employees, even if the employees choose not to contribute. If your plan provides for it, you can choose to automatically enroll employees in SIMPLE IRA plans as long as the employees are allowed to choose not to have salary reduction contributions made to their SIMPLE IRAs or to have salary reduction contributions made in a different amount. SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs (to hold contributions made under the SIMPLE IRA plan) are established for each employee. A financial institution can do much of the paperwork. Additionally, administrative costs are low. You may have your employees set up their own SIMPLE IRAs at a financial institution of their choice or have all SIMPLE IRAs maintained at one financial institution you choose. Employees can decide how and where the money will be invested, and keep their SIMPLE IRAs even when they change jobs.
Employer contributions to a profit-sharing plan can be discretionary. Depending on the plan terms, there is often no set amount that an employer needs to contribute each year. If you do make contributions, you will need to have a set formula for determining how the contributions are allocated among plan participants. The funds are accounted separately for each employee. Profit-sharing plans can vary greatly in their complexity. Many financial institutions offer prototype profit-sharing plans that can reduce the administrative burden on individual employers.
Making the Decision
To help you make the best decision for your practice, download our IRA-Based Plan Comparison matrix which outlines the advantages of the most common options. If you’re still not sure which option to choose, rely on our dental CPAs to help talk through your choices and the potential impacts on your practice. Contact us today. Source: United States Department of Labor