By: Dr. James Pitts
Most people think of retirement planning or wealth accumulation as a “nest egg.” It is a common misconception that wealth is built in one pile. The reality of Dentists is more complicated.
Typically, Dentists build their wealth in four different buckets.
1. Qualified Retirement Plan Savings
The first bucket is qualified retirement plan savings. Most Dentists do a decent job saving money in their office retirement plans.
These types of plans include:
- 401k
- SIMPLE
- SEP
- Cash Balance Plans
- IRAs
Typically, this money is saved pre-tax. The contributions can produce significant income tax savings. By funding their office retirement plan every year, Dentists can save on taxes and build up large amounts for retirement. However, once this bucket is accessed during retirement, the proceeds are taxable. This, of course, means the net amount is reduced by the taxes on any distribution. The distribution of qualified retirement savings can create tax issues for Dentists in retirement.
2. After-Tax Savings
The second bucket of wealth accumulation for Dentists is their after-tax savings. This bucket is not typically focused on. This is because most Dentists do not understand the importance of this type of account. Money saved in these accounts has already been taxed. Every year, the account holder receives a 1099 form that states how much interest, dividends, and capital gains they accrued for the year. This adds to the taxable income for the year.
When it is time to retire, normally this bucket contains the first money to be spent. The assets contained in this type of account are considered tax advantaged. The principle has already been taxed, and only the growth is taxable. The amount saved in after-tax accounts should be similar to the amount saved in qualified plan accounts for Dentists.
3. Commercial Real Estate
The third bucket is commercial real estate. The best commercial real estate a Dentist can own is their own office building. The reasons are many.
First, you have a tenant that pays your mortgage, and that tenant is your dental practice.
Second, over time, most commercial real estate will increase in value.
Third, a Dentist can depreciate the value of the office building and significantly save on income tax.
Fourth and maybe the best reason of all, the Dentist will one day sell their dental practice and will become a landlord to the buyer of the practice. The buyer will pay rent to the seller for many years. This rent produces a good monthly income for Dentists in retirement years. After the lease term has ended, the seller may eventually sell the building and reap more financial rewards.
4. Value of the Dental Practice
The fourth and final bucket is the value of the dental practice. As Dentists, we are very fortunate that our practices still have good value. Unlike our brethren in Medicine, we can sell our practices to a strong market.
Although most dental practices sell anywhere from 70% to 100% of collections, this amount should not be the only thing a Dentist counts on for retirement. The reason is the effect of taxes as well as the sales costs. The net amount after sales costs and taxes is significantly lower than the actual sales price.
However, this net amount is important in securing a successful retirement as part of a whole retirement plan.
In Conclusion
All four of these buckets are essential to building wealth for Dentists. By working on building and improving each bucket during your career, a Dentist can create a solid financial foundation. As part of a comprehensive plan, each bucket will play a critical role in the successful retirement of a Dentist.
For more information, contact Dr. Pitts at 727-686-4068 or james.pitts@jwcemail.com
Keep Reading: Do You Have the Right Retirement Plan for your Dental Practice?
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