After spending years in school to become a dentist and settling up a practice, you may finally have time to start thinking about your future and eventually your retirement plan. Unfortunately, in all the classes you were required to take in college, retirement planning was probably not included. If you are like most people, you're probably wondering how to make sure that your retirement plan is foolproof and won't leave you struggling when you retire. Having a dentist CPA who understands not only your business but your future needs is important.
Like most Americans, you are eligible to set up a 401(k) or an IRA account. These are the basic components of your retirement plan. Which of these will be the best option for you is dependent on where you are in your dental career and if you are an employer. If you are not the owner of a dental practice with employees, you will make different decisions than if you do open your own office.
A traditional IRA is one of the basic building blocks of a retirement plan. With a traditional IRA, the yearly contribution you are allowed to make is regulated and based on your adjusted annual income. In 2020 if your adjusted income is less than $124,000 for single filers or $196,000 for married filing jointly, the maximum contribution for those under 50 years of age is $6000. Those aged over 50 are allowed to catch-up and contribute an additional $1000 per year. While this is a great option when you are starting out, many dentists will have too much income to be eligible for an IRA as time goes on. A 401(k) or Roth 401 (k) is a viable option.
With a Roth IRA, the contributions are made after the income is taxed thus reducing the tax burden on you when you retire. The income limit on a Roth IRA is slightly higher, $139,000 maximum for a single filer and $203,000 for married filing jointly
Once your earnings have risen over the limits allowed with a traditional or Roth IRA, a traditional or Roth 401(k) allows you to grow your retirement savings. A 401(k) has no restrictions on income. The contribution limit for 2020 is $19.5000.
When you are starting out, you won't have as high an income as you will as your career develops. At this time a SIMPLE (Savings Incentive Match Plan for Employees) IRA can be the best option for you and your employees. You can contribute 3% of your net self-employment income up to $13,500 if you are under 50 and an additional $3,000 catch up for those over 50. You are not required to include your employees in your retirement planning but when it comes to hiring and retaining the best people for your practice, it is something that potential employees will consider. It also provides you with tax benefits that you need to discuss with your dentist CPA.
A SEP IRA is designed for small businesses and is an easy way for you and your employees to save for retirement. In a SEP IRA, as the employer, you contribute to your employees' retirement savings account but you can also contribute for yourself. You are allowed to save up to 25% of your net self-employment income with a max of $57,000 for 2020. The limit is generous for yourself and the tax credit benefits are also worth investigating.
When you are a dentist, setting up a retirement plan may be pretty far down on your list of priorities. It shouldn't be. There earlier you set up your strategy the easier it will be to reach your ultimate goal. Having a dentist CPA can help you to get on the right track and stay there. At Chandler & Knowles CPA, we specialize in helping our clients make sure that their retirement plan fits their life and their business. Contact us today to set up an appointment to discuss your financial future.