Three dentists ages 58, 58, and 51 own and run a successful practice with 8 employees. They are able to put $2,019,157 in year one into the plan with additional annual payments actuarially calculated. About 97% of the monies will go to the three dentists.
Dentists have many tools available to save for their retirement, from traditional 401(k)s to IRAs. However, even some of the most experienced financial advisors are unaware of all the options available to dentists. Some sophisticated options allow dentists to put much more money into their nest eggs and reduce their income tax obligations in the present significantly greater than even the most generous of the traditional options.
One such tool is a defined benefit retirement plan. It is a strategy that is vastly underutilized because many financial advisors either do not know how it can work or they may have heard about it but do not have the experience with it to know when it might be a good option for their clients.
There are several different versions of defined retirement plans. One of the more sophisticated versions allows business owners with thirty-five or fewer employees to benefit the most, and dental practices rarely exceed those numbers. Thus, dentists are positioned to gain more from the plan than many other types of business owners.
These defined benefit plans require a relatively high free cash flow because they work best when they can be funded with significant contributions. Additionally, they work best for those dentists who are searching for additional ways to mitigate taxes.
“The sophisticated defined benefit plan aligns nicely with successful dental practices and high-earning dentists. First, dental practices typically employ the right number of people for these plans. Second, the dentist generally creates enough cash flow to benefit from the significant tax deductions that are possible. Third, both the practice and the dentist’s family can benefit from very attractive risk management and insurance portions of the plan,” says Dr. Glenn Vo, bestselling author and co-owner of Denton Smiles Dentistry in Denton, TX.
“A sophisticated defined retirement plan can materially reduce a dentist’s income tax bill while quickly and substantially growing their retirement savings,” says P. J. DiNuzzo, Founder and Lead Consultant of DiNuzzo Middle-Market Family Office and Wall Street Journal bestselling author of The DiNuzzo Middle-Market Family Office™ Breakthrough: Creating Strategic Tax, Risk Cash-Flow and Lifestyle Options for Successful Privately-Held Business Owners and Affluent Families. “In addition to the considerable income tax deductions and material retirement savings, these plans allow for the purchase of life insurance using pre-tax dollars to further protect the dentist and their family. Because of how well the triple benefit of tax reduction, retirement acceleration, and long-term risk protection fit into many dentists’ overall wealth plan, these plans may be a favorable option for high-income dentists and dental entrepreneurs.”
Common Mistakes with Sophisticated Defined Benefit Retirement Plans
Because these plans are highly specialized and require a lot more work, planning, and complex analysis in the initial planning phase, they are not commonly understood and recommended by most financial advisors. Thus, the biggest mistake many dentists make with sophisticated solutions like this and others is that they are not availing themselves of the required experts.
In many cases, dentists have outgrown their current advisors and fail to recognize the fact. Their advisor may have worked well for them when they were starting out but typically do not understand all of the available complex retirement options, including what is possible with sophisticated, multi-layer vehicles that can simultaneously save taxes, reduce risk, and grow their wealth.
“Sometimes, dentists and their advisors try to make sophisticated retirement plans work in a situation where it really won’t. They might get blinded by the attractiveness of the plan but don’t truly understand all the rules to determine whether it’s the right fit or if another solution is better. Of course, this can lead to unnecessary legal liabilities and headaches, as well as a net loss for the dentist, when another solution might have been a more appropriate fit from the start,” explained DiNuzzo.
Weighing Your Options and Making a Decision
“Sophisticated defined benefit plans offer three big benefits to dentists, including a combination of income tax savings, tax-deferred investments and growth, and pre-tax life insurance. Moreover, the investing limits are much higher than traditional retirement accounts, so high-earning dentists can fund the plan significantly to maximize their benefits, most commonly over a five-year period. During those five years, the dentist typically enjoys significant annual tax benefits over traditional retirement accounts. In many cases, the aggregate income tax benefit savings per principal per year can exceed $1 million,” concluded DiNuzzo.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.
