Tax-Efficient Retirement Planning Tips for Dental Practice Owners

May 5, 2021

At a glance:

  • Plan Today for Tomorrow: Though your business is your true passion and life’s work, it’s also important to develop a plan for what life after dentistry looks like.
  • Slash Your Tax Bill: Not only will saving for retirement help you achieve your bucket-list goals, but it will also help reduce your business’s tax burden and put more money back into your bottom line.
  • Partner with Professionals: Contact Aprio today for help with identifying areas of improvement with your existing plan or creating a solid retirement plan for your business.

The full story:

You likely decided to enter dentistry because you want to help others and live to serve. You may find it difficult imagining what life would be like if you weren’t providing patient care every day.

However, you may also have big goals for life after work, whether it’s traveling the world with your spouse or spending more time with your children and grandchildren. To make those dreams a reality, you need a solid, comprehensive retirement plan — and if you haven’t started one yet, there’s no better time than the present to plan ahead.

Here are some important factors you should consider as you embark on the process.

Grow your nest egg, build tax benefits

As a business owner, you have a unique opportunity to make large, tax-deductible company contributions to your retirement account. In fact, many owners achieve a net economic benefit from making a retirement plan contribution versus paying that tax to Uncle Sam. Beyond the tangible financial impact on your business, a retirement plan can also help with reducing employee turnover in your dental practice.

Retirement plan contributions — whether they’re matching or profit-share contributions — can actually reduce your business’s taxable revenue, which means you’re decreasing your tax burden while also helping your employees save for the future. What’s more, you can contribute your earned income to your plan (such as your W-2 earnings or Schedule K-1 earnings) and decrease your own tax bill.

If you opt to contribute to a singular plan, you can reap tax benefits there, too. For 2021, the amount owners can save in a qualified retirement plan is up to $58,000. Plus, additional retirement plan structures can be added to allow business owners up to $230,000 (for the 2021 plan year) in qualified plan contributions.

It’s important to remember that the sale of your dental practice cannot and should not be your retirement plan in full, which is a mistake many dentists make. Your retirement plan should be an extension of your investment portfolio and a critical component of a well-defined, personal financial plan.

Understand your individual situation before deploying saving strategies

First, make sure that your retirement planning objectives are primarily handled by a dental CPA. It’s a bonus if you partner with a CPA also frequently collaborates with other helpful professionals, such as a 401(k) advisor or third-party administrator. Ideally, your 401(k) advisor should work hand-in-hand with your CPA to help you proactively make strategic decisions, so that they can help you pay yourself first by maximizing company tax deductions to beef up your account.

Second, your advisory team needs to be on the same page about where you stand in your current retirement planning journey. Most dentists fall into one of two groups: those who have an existing retirement plan that they can enhance, and those who don’t yet have a retirement plan in place and need to set one up.

Legislative updates and considerations

If your office doesn’t have a company-sponsored 401(k) plan in place, then you may decide to start one now because you’re eligible to benefit from recent legislative changes.

The SECURE Act, which was enacted on January 1, 2020, provides businesses with tax deductions and credits to start 401(k) plans. These deductions and credits are meant to incentivize business owners to start a retirement plan for themselves and their employees.

If you already have a retirement plan in place, then now is the time to take another look at your plan document. Every six years, the IRS requires owners who sponsor 401(k) plans to restate their plan documents. The plan document restatement period is currently in effect and ends July 31, 2022.

Speak with an Aprio Dental advisor to ensure your plan document’s provisions align with your business goals. By adjusting your plan’s provisions under the IRS’s required restatement, you can save amendment fee costs and save time as well. Note that many 401(k) vendors will only take care of what’s necessary to meet the IRS’s requirement and may not look “under the hood” of your plan to identify further areas of improvement. Therefore, it’s up to you to take advantage of this opportunity, review your plan’s current provisions and request adjustments as needed.

Key considerations for dental offices with owners approaching retirement age

Now is the time to review your retirement readiness. Bringing in a team of experienced retirement professionals to evaluate your individual needs, investments, potential contributions and tax savings will help you determine your future course of action. In addition, you can use a cash balance or defined benefit plan in conjunction with a new or existing 401(k) plan, which will help you supercharge your retirement savings while reducing current taxes.

Related Resources:

To schedule a meeting with Aprio’s dental experts and retirement plan advisors and discuss your individual needs, contact us today.

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About the Author

Brad McKeiver

As partner-in-charge of Aprio’s National Dental Industry Practice, Brad McKeiver arms dentists with real-time financial data about their practices. He has helped numerous dental practitioners make informed business decisions that focus on driving increased practice profitability, growth and value.