It’s never too early to start planning for retirement. As dental practice transition specialists, we here at DDSmatch Southwest know that selling a dental practice is often not enough, on its own, to support a dentist and their family through the period of retirement. Proceeds from the sale are significant, indeed. But consider, if you are accustomed to earning $200,000 or more a year from your practice, selling it for $1m will only support your lifestyle for five years or less.
If your practice consistently reports high earnings, it’s a good time for you to start an employer-sponsored, qualified retirement plan. In addition to good planning for your future, you can do it in a way that will also save you money on your yearly tax bill through deferred compensation.
The Devil is in the Details
First, you will need a dental accountant. The ability to maximize your retirement savings and minimize your tax liability is going to require an accounting professional with an expertise in your business. Using a general CPA might seem like it will be cheaper, as they may have lower fees. However, in the long run, what you save—both in your retirement accounts and from lower tax bills—will make a dental CPA specialists worth the extra costs.
The reason for this is twofold. First, you need a CPA who understands your business in the most detailed way. If you are the only dentist in your accountant’s portfolio, then you are paying for their learning curve. And you can’t be confident that they are picking up on and correctly incorporating all of the details that are specific to dental practices.
Second, you need a CPA who has a functional understanding of the full panoply of retirement plans, not just the most common ones (such as the ones you, as a non-accountant, can think of off the top of your head). Do you know the difference between a defined contribution plan and a deferred benefit plan? That difference could mean savings in the amount of hundreds of thousands of dollars. The specialist is worth the extra expense.
Is Your Practice Right for a Defined Benefit Plan?
Do any of the following apply to you?
- Are you nearly 50 years old or older?
- Are your earnings consistently on the higher side?
- Do you have a relatively young staff?
- Do you employ a high number of specialty employees (i.e. hygienists)?
If any of these apply to you, a defined benefit plan might be a good fit. Consistent high earnings are important because these types of plans are based on formulas. With a deferred contribution plan, you have a maximum contribution, set by law, for your allowable deductible contribution. If you can save more, with higher tax savings, through a defined benefit plan, you should be making use of one. However, you need to review your financials with a dental CPA to be certain.
Also, if you are nearing 50 or older, you should be considering what position you want to be in when it comes to selling a dental practice. The better prepared you are now, the better prepared you are when that day comes (especially if it comes sooner than you think because of an unexpected life change).
Here’s How it Works
If you paid yourself $300,000 dollars in salary and paid your taxes on those wages, this can be essentially the same as claiming $150,000 in salary and your business organization contributing $150,000 to the defined benefit plan as a deductible contribution made on your behalf as an employee of your business. This would save you money on your state, federal, and Medicare taxes for the first year you claim it (even if you wait until the very end of the fiscal year) and every subsequent year, as you would only be taxed for the $150,000 claimed as salary.
If you are paying close to 50% in taxes, considering the double Medicare tax as the owner of the business, and the extra Medicare tax on earnings above $250,000 for a married couple filing jointly, this can translate into at least $75,000 each year that you will save in taxes. Instead of paying that to the government, you are paying it into your defined benefit plan for your retirement. This means that half of your $150,000 retirement plan contribution is being made of tax savings.
How this will play out for your specifically is dependant upon a number of factors, a major one being how you have organized your dental practice (as an S-corp, LLP, LLC, etc.). That factor, after consultation with your dental CPA, can be combined with other methods of savings to fund the balance of your retirement account.
Finally, a defined benefit plan, like most qualified employer-sponsored retirement plans, are immune from creditors. Regardless of what happens after you set it up, the contributions will appreciate without being taxed until the funds are disbursed, which will likely be after selling a dental practice.
What’s the Downside?
Of course there is a downside. An employer-sponsored defined benefit plan is different from other retirement funds because the employer knows the formula calculating the benefits ahead of time. This means that if there is a funding shortfall (due to either faulty assumptions or poor investment returns), the employer is legally obligated to make it up with a cash contribution. As the owner of your business, this would mean you would owe yourself the difference out of your business’s earnings.
Because of this potential liability, it is essential that your carefully consider your options after a thorough consultation with an experienced and reliable dental CPA.
Selling a Dental Practice? We Can Help
Ddsmatch Southwest are dental practice transition specialists committed to helping doctors meet their practice transition goals. If you are considering transitioning your practice in the next five years, we offer a free, no-obligation Practice Transition Assessment during which we will review with you the current, local dental practice transition market, best transition options for your practice, physical and image improvements to increase value, potential practice investments, and present and future staff integration. Contact us today and find out what we can do for you!