Closing Costs: Selling A Practice to Supplement Retirement

Are you counting on your practice sale to fund your retirement?

If so, you may need a backup plan. Typically, after taxes and closing expenses, the profit from selling your practice is roughly equivalent to what you would take home from the practice after working an additional 1.5 – 2 years. As a result, many dentists fail to plan their finances for retirement.If you are considering retirement in the next ten to fifteen years, now is the time to start planning.

To start, ask yourself: How much will it cost to live once I retire? If you can’t answer that question, it is time to start calculating. Use your credit card statements and check register. You will need to include taxes, health insurance, medications, mortgage, travel, gas, insurance, repairs, maintenance, phone, clothes, gifts, entertainment, hobbies, food, utilities, and cable. Then, determine a monthly and annual cost of living.

Now is the time to get totally out of debt. Banks place liens on your practice when you borrow money or open a business line of credit. If you have borrowed money, the debt will have to be paid off before, or at the sale of your practice.

What investments and other assets do you own? Do you own stocks, bonds, fixed assets, cash, or money market accounts? How much income will these assets provide after retirement — and is it enough? Currently, social security is still viable, but will likely only fund a small portion of your retirement needs.

Determine whether your future total income from investments, social security, disability insurance, and any other sources will be enough to cover your future budget. If not, then you will either need to reduce your current and future standard of living, or lengthen your timeline for retirement.

The most common solution dentists see as the answer to retirement income is to sell their practice. If that’s your plan, you should probably be looking at other options to supplement your retirement.

If you haven’t started planning yet, now is the time.

• Jennifer Furey, CPA

Self-Employed Retirement Savings

When you’re self-employed, you need to prepare for your future. You don’t have an employer providing any backup. But you can save for your future financial needs through a tax-favored retirement plan.

If you’re self-employed or the owner of a small company, you should be able to find a plan that fits your needs. Some possibilities follow.

Flying Solo

If it’s just you and your business, a solo 401(k) plan may be an attractive choice. For 2014, the tax law lets you defer up to $17,500 of your compensation as a regular 401(k) deferral and make additional contributions to the plan up to 25% of compensation (or 20% of net self-employment income). Total 2014 contributions generally can’t exceed $52,000 or 100% of compensation, whichever is less.

If you are age 50 or older, you can also make an additional “catch-up” contribution. You choose how much to contribute to the plan each year, within tax law limits. When profits are down, you don’t have to make any contribution at all.

A SIMPLE Solution

With a SIMPLE retirement plan, you — and your eligible employees — can defer up to $12,000 of compensation in 2014. The plan may allow participants age 50 or older to make additional catch-up contributions of up to $2,500 (in 2014). And you are required to contribute in one of two ways: by matching employee contributions dollar for dollar, up to 3% of compensation, or by making a contribution of 2% of compensation for each employee who’s eligible to participate in the plan.

SEP to the Future

A simplified employee pension (SEP) plan may be ideal if your business has mostly lower paid employees and high turnover. Plan fees are generally low, and you can contribute 25% of your compensation — or 20% of net self-employment income — up to a maximum of $52,000 in 2014.

If you do have employees, you must contribute for each one who meets the plan eligibility criteria at the same percentage of compensation as yourself. However, you can vary the contribution amount from year to year and forgo making any contributions in years when profits drop.

Kudos for Keoghs

A Keogh plan for the self-employed may be structured as a defined contribution plan (e.g., a profit sharing plan) or a defined benefit plan. Annual contributions to a profit sharing plan may vary, but are limited in 2014 to 20% of net self-employment income or $52,000, whichever is less.

With a defined benefit plan, an actuary determines how much must be contributed each year to fund the pension benefits promised under the plan. Tax law limits apply.

Note, if you are establishing a new plan, a tax credit may be available for half of the first $1,000 in administrative and retirement-related education expenses for each of the first three plan years.

Set-up for some plans can be complicated, so you’ll probably want help from your financial professional.

Choosing a Retirement Plan That Maximizes Benefits for Owners and Key Employees

With the various restrictions and limitations on retirement plan contributions and benefits, small business owners and professionals may wonder whether it is possible to fund adequate retirement benefits for themselves using a tax-qualified plan. In many cases, it is — if the most appropriate plan design is chosen.

Why has Congress imposed so many restrictions on plans?

Many of the restrictions and limitations added to the federal tax code in the pension area have been aimed at making plans nondiscriminatory — i.e., making sure that the plan does not discriminate in favor of a firm’s highly paid employees. In some cases, the perhaps unintended effect of the restrictions has been to dampen enthusiasm for retirement plans because business owners question whether the benefits they will receive justify the expense of maintaining a plan.

What plans should a business owner who is concerned about funding his or her own retirement consider?

Several possibilities are discussed below.

Age-based Profit-sharing Plan

One type of plan that may be appropriate for many small business owners and professionals is the age-based profit sharing plan. The plan combines the traditional benefits of a profit-sharing plan with the ability to allocate employer contributions to participant accounts using factors that consider both compensation and age. In contrast, traditional profit-sharing plans allocate contributions based only on compensation, with each participant receiving a flat percentage of pay.

If employee demographics favor the age-based approach, more of the annual profit-sharing plan contribution is shifted to the accounts of the older owner(s) and key employees participating in the plan. In some instances, the total plan contribution can be lowered while allocations to the owner and the key employees remain at the same levels — or even increase.

Target Benefit Plan

This type of plan is a cross between a defined benefit pension plan and a money purchase plan. It uses actuarial assumptions — including assumptions about remaining years to retirement — in determining the amount to be contributed for each participant. As with an age-based plan, no more than $51,000 a year (in 2013) can be added to each employee’s account, regardless of compensation or age. However, the plan is not as flexible as an age-based plan in that an annual employer contribution is generally required.

Defined Benefit Pension Plan

If the per-employee cap on additions to a plan account is a source of concern, a traditional defined benefit pension plan can often provide more lucrative benefits. With this type of plan, the closer a participant is to retirement age and the larger the promised retirement benefit, the higher the plan contribution, all else being equal.

What else should a business owner consider?

Before deciding to implement any of these plans, the effect of the tax law’s top-heavy rules should be analyzed. These rules generally are triggered when key employees hold more than 60% of the account balances or accrued benefits in all plans sponsored by the employer. When a plan is top heavy, every active participant must receive a minimum contribution or benefit (3% of pay for a defined contribution plan).

Where can business owners find out more about retirement plan options?

We are always willing to assist employers in any way we can. If you would like to find out more about our services and how they can benefit you and your employees, please call us soon.