A Primer on Retirement Plans for your Professional Practice

Offering the right plan for your professional practice can be a worthwhile investment with benefits for both you and your employees. Here’s a break down of the benefits, as well as several unique retirement plan structures you can choose from.

Benefits of Having a Retirement Plan for Your Professional Practice

Having a retirement plan set up is not only good for your employees—it offers a host of benefits for you, the owner, as well. 

First, you can reap the benefit of a small business tax credit, up to 50%, by putting a SIMPLE, SEP, or qualified retirement plan in place. This credit can be used for things such as administrative costs, employee education, initial set up and more, up to a maximum of $500 per year for the first three years. On an ongoing basis, you will also be able to deduct retirement plan-related expenses including contributions, set up fees, and maintenance from your annual tax burden.

In addition to the tax perks, offering retirement benefits to employees will also help your practice attract and retain the best talent. Top-performers in today’s competitive job market expect to see generous benefits from any business they seriously consider working for, so having the right plan in place will put you in the running to hire high-quality employees. That can make a huge difference as you build or grow your professional practice.

Types of Plans

There are several retirement plan structures you can choose from for your professional practice. The biggest considerations involve how much you want to invest and the administrative burden. Here’s a description of the various types of retirement plans you can choose to offer.

1. SIMPLE IRA

SIMPLE stands for Savings Incentive Match Plan for Employees. As its name suggests, a SIMPLE IRA can be a good option for dental practice owners who want to minimize their administrative burden. In this type of plan, you can match 3% of each employee’s pay up to a $13,500 limit, or elect to contribute a 2% fixed rate with no matching and a limit of $5,400. 

2. SEP IRA

With a SEP IRA, you contribute up to 25% of your employees’ compensation up to $57,000 and employees make no contribution of their own. Whatever contribution percentage you choose must be a flat rate for all employees. Similar to a SIMPLE IRA, this plan has the administrative benefit of being less work to manage than a traditional 401(k). 

3. 401(k)

A 401(k) plan combines both employer and employee contributions up to a limit of $57,000. As the employer, you can contribute up to 25% of your employees’ compensation and they may add up to an additional $19,500 each year.

4. Roth 401(k)

A Roth 401(k) enjoys the same tax treatment as a personal Roth IRA. Your employees will pay tax up-front on the money they contribute, but it can grow tax-free over the lifetime of the account and they will not have to pay any tax when they choose to take qualified withdrawals. The employee contribution limit for a designated Roth 401(k) 2021 is $19,500, with a combined

employer and employee contribution limit of $57,000 (excludes catch-up contribution). Account-holders who are age 50 or older may make catch-up contributions of up to $6,500, for a potential total annual contribution of $26,000.

5. Safe Harbor 401(k)

This 401(k) structure is geared toward practices with small staffs. Due to its lower complexity, a Safe Harbor 401(k) is easier and less costly to administer than its traditional counterpart. Offices who elect to use this plan will not be required to undergo many compliance tests that are standard with other retirement plan options. The basic employee deferral limits for a Safe Harbor plan are the same as any employer-sponsored 401(k): $19,500 per year for participants under 50, and $26,000 when you include catch-up contributions for employees over 50. With a total combined employer and employee contribution limit of $57,000 (excludes catch-up contribution).

Getting Started

Now that we’ve laid out the major types of plans to choose from, let’s discuss the ways you can go about getting a great plan set up for your practice. 

As a general rule, most professional practices qualify for small business retirement plan options. You can choose to set yours up with either a discount broker or a payroll provider or small business bank. With the first option, you will likely get a much cheaper price for your retirement plan than what you could attain in the standard market. However, in exchange for this low price, discount brokers tend to not offer very robust contribution calculations or recordkeeping for tax purposes, meaning much of that burden will fall on you. 

An alternative to this would be to hire a payroll provider or small business bank. While these sources usually cost more, they warrant this higher price with done-for-you contribution calculations and recordkeeping so you have less work on your plate. The correct option for you will depend largely on your budget and capacity to handle administrative tasks in-house.

Once your plan is set up, contributions will be rolled in with standard payroll. This makes the process easier for both you and your employees. If you typically pay using direct deposit, you will make retirement contributions using that method as well, except you will send retirement contributions to your employees’ investment accounts instead of their checking accounts. 

While setting up a retirement plan can be confusing and a bit overwhelming at first, the benefits once everything is in place are immense. Before getting started with structuring a plan for your professional practice, it is always best to consult a financial planning professional for guidance as you decide which option(s) are best for you.

It’s a lot to think about but I’d be happy to help you walk through the options and guide you to choosing the right retirement plan structure for your practice. Give us a call at 847-468-0439 to start the conversation. 

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.