As the stock market was rising recently, its effect on dentists' retirement plans made dental professionals feel very good about their choices.
Now, though, the stock market -- and retirement plans -- seem like they are sinking on many days. During these times, the dentist and his or her adviser (if there is one) should think about what they can do to increase the value of the portfolio.
Bruce Bryen, CPA, CVA.
What can dentists do to build up the asset value of their retirement plan when the stock market is slumping? Besides market divesification, what else is there?
An unconventional approach
In this article, I present an unconventional approach that protects the value of a dentist's retirement plan portfolio during bad times and saves the dentist money during good times.
Sometimes it takes a little thinking outside the box, as they say. A creative dental certified public accountant (CPA) who has experience with qualified employer-sponsored retirement plans may be the best professional to assist the dentist in getting their future on the right track.
Besides understanding the nuances of retirement plans, a dental CPA also understands the dental profession. A general business CPA doesn't completely understand that the value of the dentist's personal goodwill is most likely the main asset of the dental practice.
What about a 401(k) and profit-sharing plan? Is this a good strategy to insulate oneself against losses? A 401(k) retirement plan is insufficient with its maximum contribution level to support overcoming the current and potential future losses that may occur with market downswings.
An experienced dental CPA understands what a defined benefit plan is and its impact on the dentist, the dental practice, and the retirement plan itself. Below, I explain how this type of plan works. First, though, there is a material difference in the cost to design and adopt a defined benefit plan compared to a 401(k) and profit-sharing plan.
What you need to know
401(k) and profit-sharing plans have statutory amounts governing the maximum funding per participant. These are commonly known as boilerplate plans, and they are available to be designed by insurance companies, payroll services, actuaries, etc. Deductible contributions are limited by law. A defined benefit plan, however, is a complex document that is typically designed by attorneys, actuaries, and other highly skilled professionals with plenty of experience in this field.
Normally, a meeting with a dental CPA occurs when setting up a defined benefit plan to isolate a large (sometimes exceeding $150,000) tax-deductible contribution to the owner and his or her key people. This type of retirement plan -- just like all employer-sponsored qualified retirement plans -- is a legally enforceable agreement approved by the IRS. It requires a lot of input and participant designation by the retirement plan document.
The result is that if there is a retirement plan loss, the dental practice must put the defined benefit plan back to where it was projected to be as if the loss did not occur. This is one of the requirements of a defined benefit plan. It is one of the reasons why the deductible contribution can be so large.
During times when a retirement plan has large profits, the increase in the plan's value reduces the dental practice's deductible contributions. The reason for this is that the original plan design is to guarantee a percentage of return to the plan's participants. These objectives are resolved with a certain percentage of earnings, whether the year has been good or bad. Any losses are guaranteed by the employer, the dental practice. Any gains are to the benefit of the employer so that future contributions are lower.
There are many intricacies involved besides profits and losses in the retirement plan, such as vesting schedules, forfeitures for those leaving the practice before they are fully vested, and other points to consider. These points, and others, are part of a more in-depth discussion between the clinician and a dental CPA.
Summary
When the stock market is down and the value of the dentist's retirement plan is down as well, a defined benefit plan forces the employer, which is the dental practice, to add to the retirement plan account by paying tax-deductible contributions. When the stock market is rising and the retirement plan is also increasing in value, the dental practice may not need to make additional contributions, because its funding goal and the percentage of return guaranteed to the participants have been reached. Contact an experienced dental CPA who understands defined benefit retirement plans and the effect they can have on a dentist's financial future.
Bruce Bryen is a certified public accountant with over 45 years of experience. He specializes in providing litigation support services to dentists, with valuation and expert witness testimony in matrimonial and partnership dispute cases. Bryen assists dentists with financial decisions about their practice, practice sales, evaluating whether to join a dental service organization, practice evaluation during divorce proceedings, and questions about the future or financial health of dental practices. He can be reached at bryenb@baratzcpa.com.
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
