 |
||||
|
Issue #19 -5.08.07
|
Defined Benefit Plans:
Retirement $ You Can Count On
When considering the many options available in designing both your personal and your practice retirement plan, there are a multitude of potential arrangements to choose from. For example, recently in The Dentist's Network newsletter, we talked about profit sharing and 401k plans. In those plans, the Internal Revenue Service establishes a contribution limit every year. But also in the mix of retirement program options worth considering is what is known as a defined benefit plan.
In selecting a defined benefit plan you choose the level of benefits you will receive when you retire. In other words, you are promised a specific monthly amount at retirement. As Tom Burns, a senior consultant at San Diego Pension Consultants, further explains, “A defined benefit plan may state the promised benefit as an exact dollar amount, for example, $100 per month at retirement. Or it may specify a formula for calculating the benefit, for example, $10 per month for every year of service with the company, or a percent of a worker's salary times years of service. The annual employer contributions are based on what is needed to fund the retirement benefits.”
The defined benefit plan is different from the 401k and profit sharing plan in that those plans limit how much can be contributed to the plan each year. With a defined benefit plan there are no limits on how much a dentist or an employee can allocate for the plan annually.
Mr. Burns notes that a defined benefit plan may be an option to consider when reviewing retirement plans for a number of reasons, including:
- Dentists can generally contribute, and, therefore, deduct more than they can with other types of plans.
- Substantial benefits can be secured – even with early retirement.
- Vesting can be immediate or spread out over a seven-year period.
- Benefits are not dependent on asset returns. In other words, there are no investment risks for participants. Therefore, this plan provides a predictable benefit.
- The cost of administering the plan is tax deductible and the Internal Revenue Service provides a tax credit of $500 each year for the first three years.
“These types of plans tend to be most beneficial to older dentists who are closer to retirement age. Through defined benefit plans they can dramatically accelerate the amount of money they put away for retirement. For example, a dentist in his/her mid 40s to mid 50s could put as much as $165,000 into a defined benefit plan on a pretax basis,” explains Mr. Burns.
He notes that defined benefit plans work particularly well in small practices with just a few full-time employees and the dentist is between 45 and 65 years old. The dentist has his/her schooling and their practice paid off. Their children are raised and now they have substantial excess cash flow and will have that for at least the next three-to-five years.
On the downside, defined benefit plans are more difficult to understand and are much less flexible than other plans. Defined benefit plans have a required contribution, and once the plan is established, practice owners have to be prepared to fund it at approximately the same contribution level for at least three-to-five years. In order to reach the level of benefit that the dentist wants to receive at retirement age, she/he has to be prepared to put the required amount into the plan each year.
In addition, a defined benefit plan can be fairly costly for small practices with older employees. “An older group of employees will require a much larger contribution. So the ideal scenario would be a practice with a dentist closer to retirement who employs a team that is somewhat younger,” says Mr. Burns. In the right practice, a defined benefit plan can be tremendously beneficial to the doctor from both a tax savings and a retirement savings standpoint.
For further information on retirement planning contact Tom Burns at tomburns@sdpension.com.
Sally McKenzie is CEO of The McKenzie Company, Inc. a nationwide dental management, practice development and educational consulting firm. Working “on-site” with dentists since 1980, McKenzie Management provides knowledge, guidance and personalized systems that have propelled thousands of general and specialty practices to realize their potential. Sally can be reached directly at 1.877.777.6151
Interested in speaking to Sally McKenzie about your management concerns? Email her at Sally@thedentistsnetwork.net