Types of Retirement Plans

By: Bruce Bryen

As a dental school graduate, you probably know a lot about retirement plans from talking to your peers and asking about coverage with your employer. You may already have a retirement plan in place, which is great! But, this does not necessarily mean that you are up to date with an understanding of how these plans work and what benefits they have to offer.

This article will explain the different types of retirement plans and when it may be time to switch to a more sophisticated complex plan.

As a younger dentist, you will probably want a retirement plan that is not too expensive or complex at first. As you progress in your clinical and financial development, you will probably want to switch to a more complex plan that will offer higher deductions as well as larger investment opportunities in your portfolio.

There does not have to be a keeping up with the “Joneses,” but a solid plan based on how much can be written off and how much can be saved will serve you well over the rest of your lifetime of working and saving for retirement. 

Types of Employer-Sponsored Retirement Plans

First of all, there are really only two types of employer-sponsored retirement plans by definition. 

Defined Contribution Plan

One is the defined contribution plan which measures the limit of the amount of money you are allowed to put into a retirement plan on an annual basis.

These plans have names such as 401k, profit sharing plan, and Simple IRA among others.

The concept of the defined contribution retirement plan is that each of these plans is governed by how much you are allowed to allocate to your deductible contributions each year. Thus the name, defined contribution. The contribution is defined by government law.

With the defined contribution plan, when your distribution is ready to be taken, it is based on how much has been left in the pot based on the annual contributions and the earnings or losses in the plan.

Defined Benefit Plan

The other plan is known as the defined benefit plan which allows much higher annual tax-deductible contributions.

This type of plan is also much more complex and much more expensive to adopt and fund the annual contributions.

When you are ready to retire, this plan distributes what has been guaranteed by the plan sponsor, who is the employer. If there are losses in the plan as with the marketplace today, the employer has to make up the difference.

Effectively, the distribution benefit is defined in the formula that was originally put into the plan document when it was adopted by the dentist.

Annual deductible contributions are made and the amount in the plan should grow, although, for the last two years, the marketplace has caused a lot of misery as it has fallen. Because of the decrease in the value of the retirement plan, many of those hoping for a large distribution at retirement are not going to get it. Many of these dentists are pushing back their plans to retire. 

Should You Change Your Retirement Plan?

Things change and the retirement plan is allowed to be changed to keep up to date with the owner’s wishes and strategies for controlling the costs of the retirement plan allocated to the participants as well as making sure that the discrimination testing is sound so that the plan is not disqualified.

Sometimes this is not an easy thing to do based on the age, compensation, and job description of the employees.

An expert is needed to design the adoption papers for the owner and employees of the dental office so the owner feels comfortable making the contributions and guaranteeing that the participants each get the amount of the contribution each year and finally the distribution that they are entitled to receive.

What To Watch Out For

Many dental practice owners try to take the cheapest way out and don’t want to give their employees anything.

This result because of discrimination testing often leaves the owner either not adopting a retirement plan at all or only authorizing one that affords a small contribution for the owner’s employees and then a smaller contribution for himself or herself.

As this occurs over many years, an advisor may say, you gave up $1,000,000 that would have been allocated to you because you didn’t want to give your employee $30,000.

As each person is different that may be fine with the owner but it is difficult for me to understand how someone can “cut off his nose to spite his face.”

These sophisticated plans are designed by sophisticated people who know how to do things and understand loopholes in the law and contribution levels for retirement plans. It certainly pays to retain someone who can get you the $1,000,000, in my opinion. You will be happy, especially at retirement age.

This doesn’t even count the amounts of money each year that are saved from your tax bite. It is certainly time to think about another retirement plan when the marketplace has suffered so much recently and the dentist’s portfolio has decreased so substantially that he or she is discussing working another five years or more to make up for the losses that were incurred. 

Photo by Anna Shvets

Bruce Bryen

Bruce Bryen

Bruce Bryen, CPA/CVA Dental Practice Valuation Analyst, Baratz & Associates, PA