Am I too early (or too late) to implement my retirement plan?

January 6, 2017

It's time to start implementing your retirement time now, and you can start by seeking expert opinions.

For those wise enough to spend time preparing for current income tax liabilities combined with planning for retirement, it is almost never too early or late to do so. Some will wait until December and others will begin as soon as possible to start the process.

Finding the right person with the background to guide the dentist will produce results that the practitioner may not have known existed. The type of retirement plan where legal discrimination is available for the purpose of affording the owner and key personnel large benefits is a reality. These plans are accepted by the IRS when the proper paper work is filed for the approval process.

What happens if you have procrastinated and a dental CPA has to let you know that taxes will be due in a large amount? With the entire year to prepare and without anything happening to affect a good result, is it too late near the end of December to get things processed and approved?

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What you may not know is that there are only two types of retirement plans: the defined benefit and defined contribution. However, formal documents can be drafted to have the weight of the contributions shifted to the desired personnel.

When can the plan(s) be implemented, and what must be included in them?

A retirement plan that can defer an incredible amount of income-and is appropriate for a dental practice with few people and in which the owner is older than other employees-is a defined benefit plan. One form of a defined benefit plan is known as a cash balance plan.

It takes a good advisor, typically a dental CPA, who knows what language needs to be included in the plan document and can articulate with the actuary so the plan will be effective in the current year if adopted by the dental practice late in the year.

Read more: 6 consultants you need to engage to plan your retirement

The actuary will prepare the retirement plan documents with input from the dental CPA. The dental CPA can explain what needs to be inserted, so the plan deductions assist the key people disproportionately from the other employees. Information needs to be processed quickly and it is not recommended to wait until the end of the year to do so, but it can be done.

With this kind of retirement plan, the dental practice can get a tax deduction in the preceding year when the actual cash payment to the plan is in the succeeding year. This is known as “accruing,” the contribution. The money is due to be deposited into the retirement plan when the tax return is due, including extensions of time to file the tax return.

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An example is a dental practice with four or five employees including the owner. The owner is the only key person. That dentist is in his or her sixties or late fifties. The other employees are about thirty years old or younger. The deductible retirement plan contribution can be over $175,000 with the owner receiving about 85 percent.

Read more: 3 non-financial ways to prepare for retirement

This is a sophisticated retirement plan and requires well thought, complex writing and implementation by those who understand how to do it. It can be combined with a 401k and profit sharing plan. In this way, the owner and other employees can each defer $18,000, if less than fifty years old, and $24,000 for the owner if fifty or older.

There is also an additional employer contribution available. Since the year is just beginning, it is a good time for a dental practice with consistent income to confer with an experienced dental CPA to begin to learn more about defined benefit plans and their attributes. The importance of the terminology included and experience of those involved with the input of the documents cannot be stressed enough.

Watch: The dentist's retirement number explained in 7 minutes

Other retirement plan options and their deductibility

For younger dentists, a 401k/profit sharing plan is an excellent choice. This year, $54,000 can be contributed on behalf of a younger dentist who would not qualify for the larger defined benefit plan contribution.

Other considerations are that older employees would receive large amounts in the defined benefit plan, so the younger dentist would not receive the best amount available as a percentage of the total practice contribution.

Talk to an expert, and use this time for analysis and discussion

Since it is the beginning of the year, there is plenty of time to discuss the attributes of a retirement plan with someone who understands what is best for the dentist. This is a good month for the dentist to plan for his or her future with plenty of time to decide what course to take.