Dental careers either pay well… or extremely well! Even so, there are salary differences between dentists, oral surgeons, orthodontists, and endodontists, so each occupation may need to plan differently for retirement.
Retirement planning can involve several complex financial calculations. We are here to streamline the options for dentists’ retirement planning and help you better understand them.
6 Points To Consider When Retirement Planning For Dentists
If you are fresh out of medical school, you might not understand how much planning goes into preparing for a good retirement.
- Planning now allows you a chance to live out your golden years with less stress about your financial situation.
- It can be valuable to start as soon as you can. You may be just starting to make payments on your student loans or in the middle of your prime practice years. Either way, you might want to start putting even a little bit away each month.The power of compound interest is real. For example, if you were to establish your retirement savings at age 40, by investing $500 per month in a 401(k) with an average return of 7%, by age 65, your return would be around $380,000. However, if you started at age 24 with the same investment, you could have close to $1.5 million saved for retirement. (See fn.1)
- Another aspect of retirement planning for dentists is the presence of special financial challenges. These can include:
- dentists usually have more employees than other medical practices, so that could reduce the money you have to allocate to your retirement;
- if you have your own practice, you will likely start with lower profits due to student loans, employee expenses, and paying off necessary equipment; and
- the cost of your education can be a hindrance when you are trying to start your practice and pay down your student loans.
- Knowing how much you want and might need for retirement is valuable, and multiple factors can influence it. One thing to establish is what you would like to do after retirement. More options exist now than ever before. One nice aspect of retirement planning for dentists is that you can change your end game as your passions change. You could:
- traditionally retire and spend your time at home and with family;
- travel throughout the country or abroad;
- work in your field part-time or in another country, helping those with little access to your services;
- go back to school; or even
- take on a new career.
- We recommend mulling over when you’d like to retire. Deciding to retire may be based on your personal preferences, financial readiness, and overall physical health. There is no mandatory retirement age for dental professionals, and many work into their 60s and 70s. However, a number of dentists start to reduce their workload when they are in their late 50s or early 60s.
- We would advise you to account for taxes on your retirement investments. Knowing when your investment products are taxable and when you need to pay the taxes can help you plan accordingly.This can involve a lot of research, so you might want to consider working with a Retirement Income Certified Professionals (RICP®) or a Certified Financial Planner (CFP®). They understand retirement needs for various professions, as well as the challenges you are likely to face. They can guide you through the planning and execution stages of retirement planning for dentists.
Investment Products To Research When Retirement Planning For Dentists
We will divide this section into two categories based on how much you can put into your retirement accounts per year. The magic number here is $75,000. First, we will look at products that allow you to put up to $75,000 a year into them, then ones that allow you to put more than $75,000 in.
Options For Contributions Under $75,000 Yearly
401(k)
If you are looking for a 401(k), you can either open one for yourself if you work alone or look into a Safe Harbor 401(k) for yourself and your employees.* 401(k)s are one of the best-known retirement plans. They are available to private practice dentists. Some benefits of a 401(k) include 1) the ability to make pre-tax contributions, 2) employer-matching programs (where they have opted in), and 3) high contribution limits.
As a private practice dentist, it might be helpful to know that under federal law, assets in 401(k) plans are generally protected from claims from creditors, including malpractice suits.* This could safeguard at least some of your assets if you end up in a lawsuit.
*(See fn. 2)/(See fn. 3)
Traditional IRA
As long as you are a dentist with earned income, you can use a traditional IRA, in addition to other retirement savings plans. Traditional IRAs benefit from tax-deferred growth, which delays the need to pay taxes until withdrawals from the account are disbursed.
One downside to using this as a dentist is that some dentists earn too much to deduct contributions effectively. However, as discussed below, they can still be used strategically, in the form of a Backdoor Roth IRA.SEP-IRA
An SEP-IRA is a Simplified Employee Pension, Individual Retirement Account.* It is a plan designed primarily for self-employed dentists or those in a small practice. As of 2024, you could put in up to 25% of your compensation for this kind of plan, or up to $69,000 annually (whichever is lower). SEP-IRAS’ advantages include being easy to set up and maintain, making them an excellent option for high-income earners who do not have employees.
*(See fn. 4)
SIMPLE IRA
As with the SEP-IRA above, a Simple IRA (Savings Incentive Match Plan for Employees) is an option for dental practices with multiple employees. This plan allows both employees and employers to contribute.
Some advantages of a Simple IRA are that it has low startup costs, encourages employee participation, and has no discrimination requirements. A few disadvantages are lower contribution limits, high early withdrawal penalties, and the fact that you cannot take out a loan from the account.*(See fn. 5)
Options For Contributions Over $75,000 Yearly
Traditional Defined Benefit Plan
A defined benefit plan is an employer-sponsored benefit with either a lump-sum payment or a series of payments awarded after retirement.* The amount is based on your salary (as an employee) and length of service, among other factors, and is basically a pension plan.
This plan could be perfect for practice owners as it can provide considerable, tax-deferred savings and a guaranteed income stream in retirement. However, it does require ongoing contributions and actuarial support, so you would likely need a stable, high-income platform to consider it.*
*(See fn. 6/fn. 7)
Cash Balance Plan
Cash Balance Plans are hybrids of two types of plans.* One is a defined benefit plan, which was discussed above. The other is a defined contribution plan, which has some similarities to a 401(k). A cash balance plan is fully employer-funded, and the employee bears no risk but is guaranteed a payout at retirement.
The benefits of a cash balance plan are that the contributions are tax-deductible for the employer and that they provide retirement security and can be rolled over into another retirement account if the employees change jobs. The cash balance plan could be best for high-earning dentists because the employer is responsible for any downward fluctuation in the market. Managing the plan comes at a high cost, and they do not offer loans or hardship withdrawals.*(See fn. 8)
Money Purchase
A money purchase plan may also be appropriate for high-earning dentists because the employer is required to contribute yearly for each employee.* The plan you choose will dictate how much you need to contribute. Employees can also contribute, and the payout will be based on how much was put into the account, as well as the gains or losses when the employee retires.
Some of the benefits of this plan include the ability to grow large balances, the fact that loans can be taken out, and the fact that you can have additional retirement plans. A few downsides are high administration costs, an excise tax if the minimum contribution is not met, and the fact that the plan must pass the “benefit discrimination test.”*
*(See fn. 9/fn. 10)
Backdoor Roth IRA
A Backdoor Roth IRA allows high-income earners to fund a Roth IRA while sidestepping its usual income limits.* You can do this by contributing to a non-deductible traditional IRA, and then converting that account to a Roth IRA shortly after. One thing to avoid when implementing a Backdoor Roth is having other pre-tax IRA balances, as that could result in a messy pro-rata tax calculation.*
*(See fn. 11/fn. 12)
2 Bonus Options For Retirement Planning For Dentists
Health Savings Accounts
As a dentist, you likely know about Health Savings Accounts (HSAs), but did you know they have benefits beyond paying for approved medical expenses?* One of their big benefits is often referred to as the “triple tax advantage”, whereby 1) your contributions are tax-deductible, 2) your money increases tax-free, and 3) withdrawals for qualified medical expenses are tax-free as well. Win-win-win!
*(See fn. 13)
HSAs are available for individuals enrolled in a high-deductible health plan (HDHP). Suppose you pay out of pocket for your medical expenses as you contribute to your HSA account. In that case, you have created a ‘stealth retirement account’ that you can use after you retire and are no longer generating as much income.Long-Term Care Insurance
Long-term care insurance reimburses a set daily amount to assist the policy holder with activities of daily living, such as bathing, eating, and dressing. It could be wise to buy this policy before you start needing help with these tasks.
It may also be wise to research the policies you are looking at, specifically checking out the daily limits concerning what they will pay and how long the policy will last. Finally, long-term care insurance policies tend to raise their rates, so asking about the company’s premium rate history can be beneficial.
When Retirement Planning For Dentists Gets Overwhelming…
There are so many different ways to direct your retirement planning as a dentist, which can get confusing. That’s why Iron Point Financial has educated, qualified, and enthusiastic Retirement Income Certified Professionals (RICP®) and Certified Financial Planners (CFP®) ready to help you navigate those options.
We are here to learn what you need, what your goals are, and what you are passionate about. We will then work with you to map out a plan for retirement. In other words, you do not have to do this on your own. And if your circumstances or ambitions change over time, we can always offer you more options.
Your career is all about taking care of others’ dental needs, so why not consider letting us help you take care of your financial needs?
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Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have security registrations for 22 other states across the continental USA.
Further Reading
External Sources Required by Cetera Wealth Services LLC
(1) Understanding the Power of Compound Interest: Examples for Different Ages* (*cites specific example numbers)
(2) Is a Safe Harbor 401(k) Right for You?
(3) What Assets Are Protected In A Lawsuit?
(4) Simplified Employee Pension plan (SEP)
(7) What is an actuary? – A brief overview
(8) Fact Sheet: Cash Balance Pension Plans
(9) Choosing a retirement plan: Money purchase plan
(10) IRS Employee Plans CPE Technical Topics for 2002
Disclosures
Limitations and Early Withdrawals
- Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
Retirement Plans
- Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.
Roth IRA
- Converting from a traditional IRA to a Roth IRA is a taxable event.
- A Roth IRA offers tax free withdrawals on taxable contributions.
- To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum).
- Depending on state law, Roth IRA distributions may be subject to state taxes.
Annuities in an IRA
- If you are purchasing an annuity to fund any tax-qualified retirement plan (IRA), you should be aware that this tax-deferral feature is available with any investment vehicle and is not unique to an annuity.
- Carefully consider the features and benefits of the annuity before making the decision to purchase.
General Disclosures
- The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products.
- This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete.
- The individuals and situations depicted here are hypothetical only, and do not represent the actual performance of any particular investments or strategy.
- All investing involves risk, including the possible loss of principal.
- There is no assurance that any investment strategy will be successful.
