IF YOU ARE A DENTIST, here is a trend you should be pay attention to: financial advisors are reporting that dentists are not structuring their retirement plans properly, and dentists are waking up to this fact late in their careers. So how can dentists do better?
One option to accelerate retirement savings is through a cash balance plan, a type of defined benefit plan, which allows for more pre-tax retirement savings than 401(k) plans, along with additional benefits.
To learn more about cash balance plans, I interviewed Paul Danziger, a financial advisor and president of Freedom Financial Advisors of Maryland. As a fiduciary—meaning he is legally obligated to act in his clients' best interest—Paul is the perfect person to provide honest answers on this topic.
As someone who financially advises dentists on a regular basis, can you tell us more about cash balance plans and why dentists should know about them?
I want to let dentists know about cash balance plans, a type of defined benefit plan, because an increasing number of dental practice owners are finding that retirement planning based on a 401(k) or profit-sharing plan alone is not giving them enough savings for retirement.
Tell us more about how cash balance plans fit into your clients' portfolios. Why is it a smart investment product?
A cash balance plan can be a smart decision for a dental practice because it enables the owner or owners of the dental practice to significantly accelerate their retirement savings. The owners benefit from additional tax deductions, thereby keeping more money in their pockets.
A cash balance plan is a defined benefit plan, not defined contribution plan like a 401(k). It is set up to give participants in the plan a specific and targeted benefit at a certain age in the form of a lump sum or annuity. Working with an actuary, the plan is designed to achieve a steady, preset return between 5% and 6% per year.
Employees can also participate in cash balance plans (see your advisor for specifics). Therefore, a cash balance plan is a way to attract and keep key employees.
Compared to a 401(k) profit-sharing plan, in which the maximum contribution is $59,000 a year, contributions to cash balance plans can approach $250,000 a year for dentists who are near retirement. It should be noted that a practice can still keep its 401(k) plan while adding a cash balance plan.
Contributions to cash balance plans are above-the-line deductions, which allows the taxpayer to subtract the amount of the contribution from gross income prior to arriving at adjusted gross income. If the deduction for the cash balance plan is great enough, a taxpayer can actually fall into a lower tax bracket.
A "last-but-not-least" benefit of the cash balance plan is that it is possible to structure the plan so that the dental owner will have an annual stream of tax-free income when the plan terminates in the future years.
Now is an excellent time to get into a cash balance plan because the cash balance plan paperwork must be completed by December 31, 2017, in order to contribute to the plan for tax year 2017. The plan does not have to be funded until taxes are paid, although the plan sponsors have the option of funding the plan as soon as the paperwork is complete.
Talk about risk. Is there a danger that the benefits of this plan could change in the future?
If you mean whether it is possible the government will change the structure of allowable benefits in the future, no one can answer that question. However, since the IRS recently published rules in 2014 that created new investment options and clarified other issues regarding cash balance plans, one would think that these regulations will be in place for at least quite a while. If the regulations should change, it is logical to assume that any existing plans would be “grandfathered in,” meaning that new regulations would not apply to them.
Tell us about some common investment mistakes you're seeing dentists make these days.
Because many dentists begin their practices with significant educational debt, they are more concerned about paying off this debt than saving for retirement. This puts them behind in retirement planning, and they make the mistake thinking that a 401(k) plan will produce enough funds for retirement. As the years go by and dentists have families to support, find themselves with tuitions to pay, and want to lead an enjoyable lifestyle, they “suddenly” find themselves well into their careers having done inadequate retirement planning.
Can you give us other trends dentists should be paying attention to in terms of financial planning?
There are many factors that go into a complete and sustainable plan. One of the most important yet probably most overlooked factor is to set goals to have “x” amount of money saved at certain ages. This gives the dentist a compass, a road to follow that will help him or her adjust investments and spending habits.
In addition, make sure there is adequate life insurance—perhaps a combination of term and permanent insurance. Furthermore, have a solid disability policy in place and make sure you completely understand the insurance company’s definition of partial and total disability.
A dentist should be “on the same page” with his or her spouse regarding tolerance for risk. Some dentists want to have most of their money in the stock market even though they know the risk involved. Other dentists will not want to take this same risk, and they will adjust their investments accordingly. Above all, use a financial advisor who you absolutely trust.
When looking for a financial advisor, what should dentists look for?
When looking for a trusted financial advisor, dentists should look for someone who has extensive experience, the necessary certifications and licenses, and has a proven track record of acting in the client’s best interest. Also, I believe a dentist should use an advisor who is “independent,” meaning they do not work for a specific investment firm or insurance company. Independent advisors often have the “entire universe” of financial options to offer their clients, whereas advisors who work directly for insurance companies or investment firms sometimes receive greater compensation if they “sell” their own company’s products. As a fiduciary myself, I highly recommend that dentists look for financial advisors who are fiduciaries, meaning that they are legally obligated to act in the dentist’s best interest.
About Paul Danziger
Paul Danziger is the president of Freedom Financial Advisors of Maryland. Paul has been connected with the financial services industry for many years as a consultant, producer, and owner of his own firm. Prior to entering the financial services industry, Paul served as director and vice president of commercial real estate for Long & Foster Realtors. Paul is licensed in life, health, and property and casualty insurance, and is also securities licensed as an investment advisor representative. His firm utilizes its strategic partnership with Virtue Capital Management to assist FFA with investment advisory services. He is a firm believer in creating "raving fans," and strives to provide the highest degree of integrity, skill, and commitment to all of his clients. Paul may be reached at [email protected] or (301) 530-1399.
Disclaimer: Investment advisory services offered through Virtue Capital Management, LLC (VCM), a registered investment advisor. VCM and Freedom Financial Advisors of MD are independent of each other. Information provided is not intended as tax or legal advice, and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional. Fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a monthly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.
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Editor's note: This article first appeared in the Apex360 e-newsletter. Apex360 is a DentistryIQ partner publication for dental practitioners and members of the dental industry. Its goal is to provide timely dental information and present it in meaningful context, empowering those in the dental space to make better business decisions. Subscribe to the Apex360 e-newsletter here.