In an earlier article about retirement plans for dentists, “Retirement plans: Is a 401K the only option for dentists?” I outlined a few of the basic retirement plan options dentists can consider for their practices. Contribution limits have changed in 2020, and it serves as a good reminder to understand the limits for each option.
Remember to be sure to consult with your tax advisor and a qualified financial advisor before starting a retirement plan. The information in this article is summary in nature, and each plan has nuances that must be closely considered before choosing one for your practice.
Traditional and Roth IRA contribution and income limits
Both Traditional and Roth IRAs are limited to $6,000, with an additional $1,000 in catchup contributions available if a person is over age 50. IRAs and Roth IRAs have limits based on income that can become confusing. Here’s the breakdown from irs.gov.
• Single taxpayers making up to $65,000 a year can take a full deduction for an IRA contribution, or if they make less than $124,000, they can contribute the full amount into a Roth. If they make more than $75,000, they don’t get a deduction, and if they make more than $139,000, they cannot make a Roth contribution.
• Married couples filing jointly who make up to $104,000 can take the full deduction for an IRA contribution, but if they make more than $124,000, they get no deduction. For Roths, if they make up to $196,000, they can make the full Roth contribution, but if they make more than $206,000, they cannot.
There are some additional rules if someone is covered by a workplace retirement plan. For the most accurate and up-to-date information, visit the IRS website here. Remember this simple rule: traditional IRAs are taxed deferred, and taxes are paid later, while Roth IRAs are taxed now and are tax free for life.
401(k) limits and strategies
The 2020 contribution limit for a 401(k), not including matching funds, is $19,500. A person over the age of 50 can contribute an additional $6,500 in catch-up contributions.
A “plain old” 401(k) has several uses. If the highest wage earners in the practice want to contribute up to the limit, the capacity to contribute up to $19,500 to $26,000 a year is a good fit. But where a 401(k) really becomes exciting is with the addition of a Roth 401(k) component.
Many dentists have a personal income that’s too high to contribute to a Roth IRA. A Roth 401(k) does not have the income limits that are imposed on a Roth IRA, which can allow the dentists to save for some tax-free retirement income. While the doctor would not get a tax break today, this strategy allows the person to alleviate potential tax burdens in retirement.
Using a Safe Harbor 401(k) with profit sharing means doctors can really get some money out of the practice and into their (and their spouse’s) retirement account, up to $63,500 each!
Other options include SIMPLE IRAs (which I refer to as juvenile 401(k)s) that limit participants to $13,500, ($16,500 if you’re 50 or over), as well as SEP IRAs, which allow up to 25% of annual compensation or $57,000, whichever is less.
The key to choosing the right retirement plan for your practice is to design it from the beginning of your business to provide the outcome you want, starting with how much capacity you need for your contributions. If you budget $6,500 a year for your retirement, an IRA might work. If you can put away more, then getting help from a qualified professional can make all the difference.
Will Parrish is a founding partner of Slate, Disharoon, Parrish, & Associates LLC, located in Knoxville, Tennessee. Contact him with questions at [email protected] or (865) 357-7373. Visit the website, sdp-planning.com, or connect with Parrish on LinkedIn.
Securities is offered through registered representatives of Cambridge Investment Research Inc., a broker/dealer, member FINRA/SIPC. Advisory services are offered through Cambridge Investment Research Advisors Inc., a registered investment advisor. Slate, Disharoon, Parrish, & Associates LLC and Cambridge are not affiliated. Cambridge does not provide tax advice.
