As a small business owner running a private practice, you’re responsible for all of your employee benefits. You don’t have a human resources department to set up a 401(k) plan for you, but you still need some kind of plan to save for your retirement. Fortunately, it’s not too difficult to establish your plan using low-cost—and relatively painless—solutions.
There are at least three ways to proceed. And you can choose the approach, or a combination of these options, that works best for you. In general, your options as a private practitioner are an individual retirement account, a small business retirement plan for solo practices, or a small business plan for group practices that includes your employees.
Retirement Plan Basics
We’ll start with the strategies that are easiest to manage, which will allow you to make progress on your finances without taking too much time away from your clients. But before we dive in, it’s worth noting that this stuff is complicated! If your eyes glaze over as you read through complex tax rules, you’re not alone. And if all of this information is a bit overwhelming, there are two simple tips for getting started on the most important things.
Start with something simple—like an IRA or no-frills 401(k). We’ll get into the specifics of what those entail, but simply getting started is the biggest and most important step.
You don’t have to do it alone. Customer service representatives can be super helpful, and you can engage with a financial advisor if you need more specific guidance. You can also consider finding a “fee-only” advisor, who can’t earn any commission from selling products, if you’d like professional help.
IRAs: Simple Accounts for Smaller Amounts
One of the first questions to ask yourself is how much you’d like to save each year. The answer depends on your budget and retirement goals, and the number is different for everybody. If your answer is $6,000 or less, per year an IRA might be all you need.
Almost anybody with income can contribute to an IRA, whether you’re an employee at a clinic or you run your own practice. IRAs are easy to set up at most financial institutions, and they’re easy to deal with at tax time.
You can typically choose how to invest your IRA account, whether you prefer high-risk strategies or government-guaranteed bank deposits. Most people invest for potential growth in mutual funds, ETFs, and stocks, and they dial down the risk by adding conservative investments like cash and fixed-income vehicles. Whether or not you invest your IRA, and where, is entirely up to you and your comfort level. If you need more guidance on what your options are, I recommend speaking to a financial advisor.
Pre-Tax or After-Tax?
Depending on your household finances, you might have several options (or restrictions) for how you save. Traditional IRAs allow you to make pre-tax contributions that reduce your taxable income. Roth IRAs allow you to make after-tax contributions, which gives you the option to make tax-free withdrawals in your retirement, as long as you meet the IRS requirements.
To decide whether a traditional or Roth IRA is right for you, you need to make some assumptions about your income and tax rates in the future—but things can quickly get complicated. For example, any income you take from a pre-tax, or traditional, IRA in retirement can cause your Social Security benefits to become taxable. Likewise, those withdrawals may impact the amount you pay for healthcare during retirement. If those things concern you, you can potentially minimize your taxable income in retirement by choosing Roth contributions.
If you’re just beginning your career or your income is relatively low right now, Roth contributions might make sense. You can effectively prepay your taxes, and the money you contribute is available for withdrawal at any time (but you may owe taxes if you withdraw any of the growth in your account). Ideally, you’ll leave the funds to grow for your future, but sometimes emergencies arise.
Solo 401(k) Plans for Solo Practices
If you want to save more than you can in an IRA—or if you want other features like the ability to borrow from your retirement savings—a small business retirement plan may make sense.
The most robust and inexpensive option currently available is an individual 401(k). Also known as a Solo 401(k) or Solo-k, these plans are similar to retirement plans that large companies offer. But when you are the only participant, the costs and administrative duties are significantly reduced. Your spouse is allowed as well, if they also work in your practice.
A Solo-k is an excellent option for most solo practices. These plans are available to sole proprietors, LLCs, and other types of businesses.
Solo-k plans make it easy to save by allowing you to make contributions of your eligible income through “salary deferral” contributions. You can choose to make these contributions with pre-tax or Roth money, which enables you to manage how the money gets taxed in retirement. Pre-tax contributions reduce your taxable income in the current year, and grow tax-deferred, while after-tax Roth contributions can potentially provide you tax-free income in retirement.
Each year the IRS sets a maximum amount of your income that you’re able to contribute to your 401(k). In 2021 that contribution limit was $19,500 for people under 50. If you like the idea of a Roth IRA, which has a lower contribution limit, the Solo 401(k) allows you to save even more Roth money for potential tax-free withdrawals.
A discount brokerage, financial advisor, or mutual fund company can likely help you start an individual 401(k) plan. The applications are slightly more complicated than a standard IRA complication, but the extra functionality you get should be worth it. Don’t hesitate to speak to the customer service team or a financial advisor if you have questions during this process.
After you open your 401(k) and begin adding money to your account, you’ll need to track the types of contributions you make so you can provide that information when you file your taxes. It’s also smart to ask a tax expert to help you calculate the maximum contribution allowed each year. The rules are complicated, but your CPA has software to get the answers you need quickly so you can avoid costly mistakes down the line.
Retirement Plan Options for Group Practices
When you have employees, your practice’s retirement plan can become more complicated and expensive. That’s because you might need to contribute extra to employee accounts, and retirement plan providers typically charge additional administrative fees for multi-employee plans.
Offering a retirement plan is a valuable benefit that employees look for, so it could be worth the cost (and the IRS offers incentives to offset those costs, in some cases). But you need to be comfortable with the pros and cons before making a commitment.
Contributions to Employees
When you have eligible staff members, the retirement plan you choose must benefit everybody—not just practice owners. In many cases, that means you need to contribute to your employees’ accounts.
If you have 401(k) plans, you’ll ideally be able to contribute 3% of payroll to your employee’s accounts. Doing so can help satisfy nondiscrimination tests. If you want to contribute more than the law requires, you’re able to make additional contributions or offer other matching and profit-sharing strategies. Not only does this benefit your employees and help them save for their retirement, it makes your benefit package more competitive.
Another option available to you as an employee is an SEP IRA plan. With a SEP, you generally offer the same percentage contribution to everybody, with a maximum of 25%. If you decide on 15%, for example, everybody gets 15% of their compensation. That can get expensive, and there are no vesting rules to encourage employees to stay with your practice over the long term.
If you’re not in a position to set up an established plan for your practice, you can look into using a Savings Incentive Match Plan for Employees, or SIMPLE IRA plan. This allows employees and employers to contribute to traditional IRAs that are set up for your employees. SIMPLE plans allow employees to save a decent amount of their salary each year, and an employer contribution is typically required. You can either match up to 3% of the amount you employees contribute (if any), or you can contribute 2% of each employee’s compensation regardless of their savings level.
Establishing a retirement plan for a group practice can be a complex process, but numerous service providers are available to help. As an overview, SEP and SIMPLE plans tend to have the lowest fees, and they are among the least burdensome options available to employers. When you go with a 401(k), you get significantly more functionality, but you may need to pay for third-party administrators (TPAs) and other services.
The world of retirement plans can get extremely complicated, and the programs we’ve discussed here are just a few of the options. For most people, especially solo practitioners, an IRA or 401(k) can accomplish much of what you need. But if you have the time and interest to explore this world even more fully, there are lots of options and combinations you can explore.
Once you have an understanding of the landscape of retirement plans, you can start taking the next steps toward saving for your future.
Figure out how much you want to save each year.
Decide if you prefer pre-tax, after-tax, or a combination of contribution types.
Determine which type of plan allows you to do what you need to do.
Establish the plan and open an account.
Make your first deposit and invest the money in a way that’s aligned with your budget and financial needs.
Continue helping your clients live better lives without devoting excessive time and energy to your retirement plan.
All of this information can get overwhelming, especially when you’re a working practitioner. Make use of the customer service agents and resources that are available from financial institutions, and really do the research to find what works for you and your business. A fee-only financial advisor can also provide guidance (with or without investment management services included), and is another great resource to get professional guidance. With your financial affairs in order, you can be confident that you’re taking care of yourself as you help your clients do the same.
Note: This article is for educational purposes only and is not meant to be nor should it be considered financial advice. If you have questions about planning for retirement, consult with a financial professional.
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