Dentists’ Retirement Plans Under Fire

Should Dentists’ retirement plan contributions be limited?  Here are two good articles on the subject:

Taking a Closer Look at a Proposal to Limit Tax-Deferred Savings

Don’t Break our Thriving 401(k) System

An internet search will render dozens of others.

I am not editorializing on the subject.  I am, however, pointing out a few facts.  Taxes are way up.  Deductions have been severely limited.  Wacky “alternative” investments rarely pan out.  Buying an expensive house gives one a big mortgage interest deduction but the high property taxes associated with it will likely trigger the Alternative Minimum Tax (AMT) – basically eliminating the deduction.  Rental property is subject to Passive Activity rules which means no deduction.  Shall I go on?

So what’s a dentist to do?  Other than collecting what you produce, minding the store to maximize practice profits, and living within one’s means, the best investment (deduction) a dentist can make is a retirement plan contribution – 401(k) Profit Sharing Plan.

Let’s say a dentist earns $255,000 (the maximum income eligible for this calculation in 2013) and has five employees – one of whom is a spouse.  The contributions could look like the amounts below. Sample Pension Contribution for Blog

In very round numbers, this doctor deposits $87,000 of which $71,000 (82% of the total) is for he and his spouse.  If we assume a federal tax rate of 36%, the tax savings is $31,000.  Subtract the staff contribution of $16,000 from the tax saved and the result is that the doctor is ahead $15,000 after tax and has $71,000 growing tax deferred.  Put another way, the owner’s (doctor & spouse) pension plan contribution of $71,000 cost $56,000 after tax ($71,000 + $16,000 staff contribution – $31,000 tax savings).  This does not include any state income taxes saved.

Retirement plans are one of the remaining tools dentists have to save for the future while saving on taxes.  We should figure out a way to ensure that contributions and account balances (your wealth) are not limited.

For more informaation, visit our pension firm’s website at The Doctors’ 401(k) Solution.  Then give me a call to receive a complimentary analysis of the best retirement plan options for you and your practice.

3 replies
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