Retirement Planning for Dentists: Top Strategies [+ Pitfalls to Avoid❌]

The vast majority of our clients are healthcare professionals. So, we know a little about retirement planning for dentists. This is also true for orthodontists, endodontists and oral surgeons.

Based on our retirement structuring with over 2,000 clients, we’re going to show you the #1 strategy!

But before we start, we will review some dental office retirement plans you might want to consider. By understanding the unique challenges dentists face, we can highlight the benefits of proactive retirement planning. Let’s get started!

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Retirement Planning for Dentists

I am one of the few people who actually feel comfortable in a dental office. This is because my father was a dentist and I spent my childhood hanging out at his office.

Dentists, orthodontists, endodontists and oral surgeons often start their careers with substantial student loan debt and may face the challenge of establishing their own practices. However, once they overcome these initial hurdles, they have the potential to build prosperous careers.

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Dentists have some specific challenges when it comes to retirement planning. One of which is that they have more employees compared to the average medical practice. This presents challenges when structuring retirement plans.

But as a result of their higher income, most basic retirement structures, like SEPs, 401(k) plans, and SIMPLE IRAs, just won’t do much. When business profit gets above $300,000, you will typically need to consider advanced strategies.

Obviously, incomes can fluctuate for dental professionals. In the early years, when you have equipment purchases and start-up expenses, your income might be lower. But as your business matures, you might find yourself with a substantially higher income.

In addition, orthodontists, endodontists and oral surgeons will typically have a higher income than your average dentist. For example, there may be a dentist who has only been in practice for a few years and makes around $300,000 a year.

High-income retirement planning

But we have seen oral surgeons and endodontists make well over $1 million a year. It just depends on their business, their specialty, and their experience.

So, the question becomes: what is the best way to structure your retirement planning to deal with the cash flow differences?

The following table spells out some basic retirement structures and some advanced strategies. Take a look through them and then we can discuss them in detail.

Basic PlanningAdvanced Planning
Solo 401kSafe Harbor 401(k)
SIMPLE IRATraditional Defined Benefit Plan
Traditional or Roth IRACash Balance Plan
SEP IRAMoney Purchase Plan

But before you implement any retirement plan, make sure you discuss your structure with your CPA in a financial advisor. Each client’s situation is different, and these plans come with a lot of complexity.

Retirement Structures for Lower Income Dentists

In this post, when I discuss lower income, I am referring to business profit below $300,000. This, of course, is a considerable amount of money for the average person. But not so much for a dentist.

Remember that with this income, you still must pay taxes and put food on the table. As such, you would want to use basic plans that allow you to get smaller contributions without too much plan complexity.

But many of our advanced retirement plans work well for lower-income or part-time dentists. In fact, they can work well for dentists in the following situations:

  • Age 60+. When you reach age 60, you typically are looking to maximize retirement plan contributions. You have likely paid off many of your debts, including your student loans and possibly your mortgage. You are now focused on saving as much money as possible so you can retire in the next few years.
  • Your spouse has a substantial income. If your dental practice is your family’s only source of income, you might be limited when it comes to retirement planning. But if your spouse has a high income (perhaps another dentist), you might be able to live off of one income and shelter the other. We see this situation a lot. Even though your earnings may be marginal, you have the ability to put away as much of it as possible in tax-favored retirement accounts.
  • You live in a high-tax state. We all know that taxes play an important role in retirement structuring. Living in a high-tax state will give you more incentive to make larger contributions. We have many California clients who find themselves with a marginal federal and state tax rate in excess of 50%. But if you live in a state with no personal income tax (like Texas or Florida), it makes less sense to make higher contributions.

The #1 question you should ask yourself is how much you want to contribute annually to retirement. If you want to contribute less than $75,000, there are certain preferred options. But if you want to contribute $75,000+, you have to consider other advanced options.

Basic retirement plans

Dentists certainly have their fair share of retirement options. Here are a few plans when your practice is just starting out or if you have lower income:

  1. Individual Retirement Account (IRA)
  2. 401(k) Plan
  3. Profit-Sharing Plan
  4. Savings Incentive Match Plan for Employees (SIMPLE) IRA
  5. Simplified Employee Pension (SEP) IRA
  6. Roth IRA

Most of these plans are simple to establish and have minimal annual administration costs. In addition, many large investment custodians like Vanguard, Fidelity, and Schwab will set the plans up for at no cost. As long as you are on their platform, they will earn a small income on your assets, and they are fine with that.

I recommend you consider these plans first. But ensure that you address the combination rules and your expected future income. If you consider the next several years and you think your income will significantly increase, it could make sense to look at a few advanced strategies now.

Retirement Planning for Dentists

There can be some issues when combining certain basic strategies with other advanced plans. Ensure you do your homework upfront before you find yourself stuck in a plan that does not allow you the large contributions you might be looking for in the future.

Best Starter Plan – Safe Harbor 401(k)

A 401(k) plan is a popular retirement savings vehicle offered by employers to their employees. It allows individuals to set aside a portion of their income for retirement, typically through automatic payroll deductions. The contributions are made on a pre-tax basis, meaning that the money is deducted from the employee’s salary before taxes are applied, resulting in potential tax savings.

The funds contributed to a 401(k) plan are then invested in a range of investment options, such as mutual funds, stocks, or bonds, depending on the choices provided by the plan. The investments have the potential to grow over time, generating returns and building a nest egg for retirement.

Dental Office Retirement Plans

One significant advantage of a 401(k) plan is that the investment gains within the account are tax-deferred, meaning that individuals do not have to pay taxes on the investment gains until they make withdrawals from the account during retirement.

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Another key feature of 401(k) plans is employer matching contributions. Some employers offer a matching contribution, meaning they will contribute a certain percentage of an employee’s salary to their 401(k) account, usually up to a specified limit. This matching contribution is essentially free money that can significantly boost an employee’s retirement savings.

However, the specific details of matching contributions can vary between employers and may be subject to certain vesting requirements, which determine how long an employee must work for the employer before the matching contributions become fully owned by the employee.

Our Recommendation

With lower business profit, I would stick with a 401(k). You can use a solo 401(k) when you have no other employees. But if you have other employees, consider a Safe Harbor 401(k) plan.

This structure will give you the highest contributions and allow you to layer on a more sophisticated retirement structure llike a cash balance plan) on top of the 401(k) plan down the road. It is a great starter option.

Many lower-income dentists will establish a SEP. These can be good plans. They function like a profit-sharing plan.

You may contribute 25% of your W-2 if you’re an S-corporation or 20% of your business profit if you’re a sole proprietorship (subject to the maximum limitation).

dental office retirement plans

But a 401(k) has a profit-sharing component that acts like a SEP. In addition, you can contribute annual employee deferrals. You have the ability to make larger contributions with a lower business income.

Approximately half the SEPs we see cannot be combined with more advanced retirement structures. This is why the 401(k) is often the best option.

Considering setting up a SIMPLE IRA? You should think twice. I usually recommend against it in most circumstances.

The reason is you cannot combine a SIMPLE IRA with any other plan. SIMPLEs are the most restrictive plans available.

You should only consider a SIMPLE when you believe your income will continue to be on the lower side and the SIMPLE contributions satisfy your retirement goals.

But if you think your income will increase, the SIMPLE can be a significant hinderance because you cannot easily move up to a more sophisticated overall retirement structure.

Advanced Planning for High Income Dentists

As mentioned, once your income is over $300k a year, you can find yourself in a more onerous tax situation. Higher business income means higher tax liability.

As a result, many of the basic plans won’t get you very far when it comes to retirement planning for dentists. What if you are an oral surgeon and your income is over $1 million? In that case, you will need an aggressive approach to reducing your tax bracket.

Advanced Planning Strategies

Here are a few advanced options you might consider when you have high income and are looking for large contributions of $75k+:

  1. 401(k) Plan
  2. Defined Benefit Plan
  3. Mega Backdoor Roth
  4. Cash Balance Plan
  5. Profit-Sharing Plan
  6. Deferred Compensation Plan
  7. Money Purchase Plan

Many of the above advanced plans will allow contributions of $50,000-$500,000, depending on your age and compensation. In addition, many of these structures can be combined to accelerate the tax deferred contributions. But be careful. The IRS has certain restrictions and limitations when combining plans.

Cash Balance Plans [#1 Dentist Strategy]

Cash balance plans can be so important for high-income dentists that I wanted to examine them separately. These plans allow for large tax-deductible contributions, often more than $300,000 annually. This is typically our favorite strategy when it comes to retirement planning for dentists.

They are typically our first option. In addition, they can be combined with 401(k) plans to provide an additional employee deferral and profit-sharing. The most a person can have in a cash balance plan is $3.4 million. That’s why we often call it our #1 tax and retirement deferral.

A cash balance plan can be an excellent retirement strategy for dentists seeking a predictable and secure source of retirement income. One of the key advantages of a cash balance plan is that it offers participants a guaranteed benefit, similar to a traditional pension plan.

The account balance in a cash balance plan grows over time based on employer contributions and an interest crediting rate. This predictability allows individuals to plan for their retirement with confidence, knowing the specific amount they can expect to receive upon retirement.

Plan Formula$ Amount
Beginning of Year (BOY)$100,000
Interest crediting rate5%
W2 salary$90,000
Annual Pay credit50% of W2
End of Year (EOY)$150,000

Advantages of cash balance plans

Another compelling reason why a cash balance plan is a great dental office retirement plan is its portability. Unlike traditional pension plans that typically tie retirement benefits to a specific employer, cash balance plans are more portable. Participants can take their account balances with them if they change jobs or leave the company before retirement.

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This portability offers individuals flexibility and control over their retirement savings. This allows them to consolidate their retirement funds and continue growing their investments, even when transitioning between employers. Additionally, portability provides peace of mind and reduces the risk of losing retirement benefits when career changes occur.

In summary, a cash balance plan offers the benefits of a predictable retirement income stream and portability. The combination of a guaranteed benefit and the ability to take the account balance with you provides individuals with greater control and flexibility.

Defined Benefit Plan ProsDefined Benefit Plan Cons
Eligible for QBID (Section 199A)Permanent Plan Design
Flexible Funding RangeHigher Admin Costs
Large Contributions of $100k+Conservative Investments
Tax-Deferred ContributionsMandatory Contributions

Take a look at the video and table below that spells out some of the characteristics of 401(k) plans and cash balance plans:

dental office retirement plans
401(k) Plan CharacteristicsCash Balance Plan Characteristics
Low Administration CostsHigher Administration & Actuary Fees
Optional ContributionsSignificant Contributions (up to $400k)
Employer Profit-SharingMandatory Contributions & Permanent Design
Employee Deferral OptionOnly Employer Contributions Allowed

How Dentists Can Effectively Form a Retirement Strategy

Here is a 5-step process for establishing a retirement strategy:

  1. Review your tax rate and funding requirements

    The first step is to discuss your income tax rate with your tax advisor and your retirement goals with your financial planner. If your tax bracket is above 40%, taking advantage of more aggressive strategies like defined benefit plans and cash balance plans might be advantageous.

    But if your income tax rate is below 40%, taking advantage of defined contribution plans might make more sense. Your team of professionals can help you address your options.

    Also, ensure that you can afford to maintain the desired funding amounts. You might be in a high-income tax bracket, but you still must put food on the table. You must be able to comfortably make your annual contributions.

  2. Develop comprehensive goals

    You should implement a retirement strategy customized to your tax bracket and desired funding level. Analyze how much you must save for retirement and implement a timeline to achieve your goal. Explore various retirement plans for dentists, such as SEPs, 401(k)s, and cash balance plans.

    Ensure your plan addresses any increased income you might be budgeting over the next few years. Your investment and retirement plans must be flexible enough to accommodate higher plan contributions while also maintaining your lifestyle.

  3. Determine your portfolio allocation

    Ensure that all your risky assets are in your Roth accounts. But your conservative investments like CDs and money market accounts should be in your cash balance or defined benefit plan. The moderate to aggressively positioned assets can be invested in the 401k plan or defined contribution plan.

    You should develop an investment allocation aligned with your risk profile and time horizon. But your allocation should be diversified across various asset classes, such as mutual funds, stocks, bonds, and even real estate. You can adjust and review your strategy as needed to ensure it remains on track.

  4. Obtain sign-off from CPA and financial advisor

    Your tax professional and financial advisor should review your plan strategy with you on an annual basis. The critical aspect is to identify any weaknesses or business changes that would increase or decrease your contributions.

    Remember, retirement planning is not just a financial obligation. It is an investment in a dentist’s own well-being, providing the freedom and peace of mind to enjoy the fruits of their hard work and dedication in the years to come.

  5. Monitor and revise as necessary

    Retirement planning is a comprehensive exercise and is not static. You might be decades from retirement, so you want to constantly review your situation and revise as necessary.

    Regularly reassess your plan structure to track your progress and make adjustments. Life might get in the way and financial markets can be volatile, so stay engaged with your plan design and adapt as necessary.

Tax-Free Fringe Benefits

Dentists also have several fringe benefit plans available to them:

  • Health Savings Accounts (HSAs)
  • Section 125 Cafeteria Plans
  • Higher Education Plans
  • Health Reimbursement Arrangement Plans
  • Contributions to accident or health insurance
  • Long-term care insurance
  • Dependent care reimbursements
  • Out-of-pocket healthcare expenses
  • Archer Medical Savings Accounts (MSAs)

What age do dentists retire?

The retirement age for dentists can vary depending on various factors, including personal preferences, financial readiness, and overall health. There is no fixed or mandatory retirement age for dentists, and some may choose to work well into their 60s, 70s, or even beyond.

However, it is common for dentists to start transitioning towards retirement in their late 50s or early 60s. At this stage, many dentists begin reducing their workload or transitioning to part-time practice to enjoy a more flexible schedule and gradually step away from the demands of a full-time dental practice. This gradual transition allows dentists to maintain patient relationships, mentor younger colleagues, or pursue other interests while still generating income.

Ultimately, the decision on when to retire is highly individualized and depends on factors such as personal financial goals, health considerations, satisfaction with the profession, and overall readiness for retirement. It is recommended that dentists engage in careful financial planning and consult with professionals to ensure they are adequately prepared for a comfortable and secure retirement when the time comes.

Final thoughts

Dentists have unique financial situations that are different from other healthcare professionals. As a result, retirement planning for dentists has been an important topic lately.

Retirement planning for dentists offers numerous tax benefits and saving opportunities. Dentists can take advantage of retirement plans specifically designed for small businesses and self-employed individuals.

Retirement planning also enables dentists to explore different practice transition options, such as selling the practice to a partner or associate, bringing in new partners, or even creating a succession plan to pass the practice to the next generation.

By implementing a retirement plan, dentists can strategically build retirement assets outside of their practice, ensuring they have a diversified financial portfolio. This allows them to reduce dependence on the practice’s value as their sole retirement asset, mitigating risks associated with practice valuation fluctuations or unforeseen circumstances.

Paul Sundin

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