Tax-Saving Retirement Planning Strategies for Dentists
Dentists want to avoid paying too much in taxes and save for retirement but may not know where to start. Perhaps that’s why the average age for Americans retiring was 63 in 2021, but for dentists retiring was age 68 according to the American Dental Association.
For dentists looking for tax-saving strategies to plan for retirement, here are eight strategies to consider:
Traditional IRA (Individual Retirement Plan Accounts)
- 2024 Contribution Limits
- $7,000 ($8,000 for 50+)
- Requirements To Be Aware Of
- For individuals (not sponsored by practice)
- Withdrawals are usually taxable
- The Why & The Tax Benefits
- Contributions can be tax-deductible
- Growth tax-deferred
Roth IRAs
- 2024 Contribution Limits
- $7,000 ($8,000 for 50+)
- Requirements To Be Aware Of
- For individuals (not sponsored by practice)
- Contributions are made with after-tax dollars
- Cannot contribute if your income is above IRS phase out limits
- The Why & The Tax Benefits
- Growth tax-free
- Withdrawals tax-free (for qualified withdrawals)
Health Savings Accounts (HSAs)
- 2024 Contribution Limits
- $4,150 for Single Coverage ($5,150 for 55+)
- $8,300 for Family Coverage ($9,300 for 55+)
- Requirements To Be Aware Of
- Must have a qualifying HSA medical insurance plan
- The Why & The Tax Benefits
- Contributions tax-deductible
- Growth tax-free
- Withdrawals tax-free (for qualified medical expenses)
- Contributions can be invested
- No limit on income to contribute
SIMPLE IRA Retirement Plan
- 2024 Contribution Limits
- Up to $16,000 ($19,500 for 50+)
- Requirements To Be Aware Of
- Often the first retirement plan a dentist will set up for their practice
- Withdrawals are usually taxable
- Employer contributions must be made for eligible employees
- Employer contributions are generally either 2% non-elective or 3% match
- Employees are immediately vested
- The Why & The Tax Benefits
- Contributions tax-deductible (for both employee & employer)
- Growth tax-deferred
- Investments are participant directed
- Participants receive their own monthly statements
- No administrative fees or additional tax returns
- A benefit to recruit & retain employees
Safe Harbor 401(k) Retirement Plan
- 2024 Contribution Limits
- $23,000 ($30,500 for 50+)
- Requirements To Be Aware Of
- There are annual administrative fees. (Roughly $1,500 initially & $1,600 annually)
- Employer contributions must be made for eligible employees
- Employer contributions are generally either 3% non-elective, 4% match, 100% match of first 3% & 50% of next 2%
- Employees are immediately vested
- The Why & The Tax Benefits
- Contributions tax-deductible (for both employee & employer)
- Growth tax-deferred
- Investments are participant directed
- Participants receive their own monthly statements
- Option for Roth deferrals
- Higher contribution limits than SIMPLE IRA
Safe Harbor 401(k) Profit-Sharing Plan
- 2024 Contribution Limits
- $69,000 ($76,500 for 50+)
- Requirements To Be Aware Of
- Employer contributions must be made for eligible employees
- Employer contributions & contributions must still be made (immediately vested)
- Profit-Sharing contribution is typically subject to a vesting schedule
- There are annual administrative fees of roughly $1,500 initially & $1,600 annually
- The Why & The Tax Benefits
- Same Tax benefits as Safe Harbor 401(k)
- Investments are participant directed
- Participants receive their own monthly statements
- Option for Roth deferrals
- In addition to Safe Harbor contributions, employers can make an additional Profit-Sharing contribution
Cash Balance Retirement Plan
- 2024 Contribution Limits
- Lesser of $275,000 or 100% of the participant’s highest consecutive three-year average
- Requirements To Be Aware Of
- Defined benefit plan & additional contributions required for staff
- Extra administrative costs (more expensive than a Profit-Sharing plan & actuaries are required to determine contribution amounts)
- Vesting schedule
- The Why & The Tax Benefits
- Contributions: tax-deductible (for both employee & employer)
- Growth: tax-deferred
- Investments are employer directed (pooled account)
- Contribution limits higher than Profit-Sharing plan
Backdoor Roth IRA
- 2024 Contribution Limits
- $7,000 ($8,000 for 50+)
- Requirements To Be Aware Of
- Strategy used by individuals and couples whose income is above the limits to contribute directly to a Roth IRA & involves following process:
- Ensure you have no IRA or SIMPLE IRA balances
- Make a non-deductible IRA contribution
- Perform a Roth conversion to immediately move that money into your Roth IRA
- Invest the new funds in your Roth IRA and make withdrawals for living expenses in retirement
- The Why & The Tax Benefits
- An additional avenue to provide retirement savings with tax-free growth (for qualified withdrawals)
Where to Start?
To start, we recommend dentists initially look at the top three strategies. Many may be aware of IRAs, but no other savings plan allows for the triple tax-benefits of HSA contributions! Some HSA providers, including companies such as Lively and HSA Bank, allow HSA account owners to invest their contributions providing greater return potential. Dentists who invest their HSA contributions can then withdraw this money for qualifying health care expenses in retirement tax-free. For example, if a 37-year-old dentist and spouse were to contribute the maximum of $8,300 (for 2024) to their HSA at the end of each year and then invest those funds, they would have $669,791 by age 65 (assuming a 7% rate of return). This would be more than the estimated total lifetime health care costs of $572,960 (in future dollars) for a healthy 65-yer-old couple according to HealthView Services in 2019.
Is Staffing a Challenge for your Practice?
Attracting and retaining employees can be a challenge in the current economy for many dentists, and we’ve found setting up retirement plans for employees to be a great benefit to differentiate a practice, attract talent and increase employee loyalty and satisfaction. According to the AARP, 48% of Americans do not have access to a retirement plan. This percentage is even higher in small businesses (with less than ten employees) where 78% of people do not have access to a retirement plan.
In summary, there are a variety of tax-saving strategies that dentists can use to save for retirement. If you would like to discuss the specific details of your situation to explore which options would work best for you, contact Nathan J. Ricks, CFP, MS of Financial Freedom for Dentists for a complimentary consultation at nate@freedom4dentists.com or (425) 888-1911.
