Posted by Amy Carbone on Jun 3, 2016 9:53:01 AM
In our line of work, we find that when it comes to understanding their retirement planning options, people are confused by the differences between defined contribution and defined benefit plans. If you’re going to be tax-smart about retirement planning, we will need to start with a few quick definitions.
What is a defined benefit plan? A defined benefit plan is a special type of retirement plan. The benefit you will derive in the future from this plan is calculated ( or “defined”) today based on your earnings, age, and tenure. Pension plans are a good example of defined benefit plans.
A 401(k), on the other hand, is an example of a defined contribution plan. Your contributions to your 401(k) are defined today, while the benefit to be reaped in the future is unknown at this time.
In the world of dentistry and specialty dentistry, defined benefit plans are exclusively funded by the employer and can provide significant tax savings to the practice owner.
Who is a good candidate for this kind of plan?
High earning dental professionals with relatively small practices should consider defined benefit plans to ease their tax pain. When you invest in a defined contribution plan like a 401(k), the IRS limits how much you can contribute to it every year. By implementing a defined benefit plan in addition to your 401(k) plan, you can easily increase your tax-deductible retirement savings.
Keep in mind, these plans aren’t right for everyone; the demographics of your practice need to line up. The optimal practice size is around 5-6 employees, and it generally works better when the doctor is older than the staff members. You do not necessarily have to continue contributions until funded, but you should plan to commit to at least 4 to 5 years of contributions.
What is your commitment?
Once you commit to a plan like this, you will need to follow through. In order to benefit from the plan, you must make contributions for everyone on your team, but your tax savings should far exceed the cost of contributions for staff. This is also a great retention tool for staffers in your office, especially if they are young.
What are the expenses and rewards?
Though there are some costs associated with setting up such a plan, the tax savings are significant. If the tax savings do not exceed the costs of your contributions and your set-up fees, then clearly you should not do this.
Defined benefit plans are truly nuanced. Should you decide to adopt such a plan, work with an advisor experienced in retirement planning for dental professionals.
About Treloar & Heisel
Treloar & Heisel is a premier financial services provider to dental and medical professionals across the country. We assist thousands of clients from residency to practice and through retirement with a comprehensive suite of financial services, custom-tailored advice, and a strong national network focused on delivering the highest level of service.
