Which retirement plan is right for you?

Excerpted from page 42 of the March/April 2022 edition of AOA Focus.

It’s never too early or too late for doctors of optometry to start saving for retirement, and choosing the right retirement plan doesn’t need to be confusing. Nathanael Kelley, senior retirement specialist for Equitable Financial, an AOAExcel®-endorsed business partner, shares key details about the retirement plans most utilized by doctors.

What retirement plan options are available to employed doctors of a practice?

There are a few great options for employed doctors:

1. Employer-offered 401(k) plan. Some doctors may be offered a 401(k) plan by their employer. Participating in an employer’s 401(k) plan allows a doctor to choose their contribution amount, up to the federal maximum, with the freedom to change their contribution at any time. Contributions are deducted from the doctor’s salary before income taxes, so the taxes are deferred until the doctor withdraws the money, which typically does not occur until retirement when the doctor may be in a lower tax bracket.

2. Traditional Individual Retiring Arrangement (IRA). An IRA can be a good choice if an employer does not offer a retirement savings plan, or if a doctor is concerned that the contribution limits of a 401(k) will not meet their savings goals. Contributions may lower the doctor’s taxable income, and earnings grow tax-deferred until withdrawn.

3. Roth IRA. With a Roth IRA, the doctor makes contributions with money they’ve already paid taxes on. While there are annual contribution limits, a Roth IRA allows their savings to grow tax-free, so they can make tax-free withdrawals in retirement, provided the stipulated conditions are met.

What retirement plan options are available to practice owners with eligible employees?

Practice owners have several retirement plan options that they can put in place for their employees or for themselves:

1. Safe Harbor 401(k). For 2022, Safe Harbor 401(k) plans offer a deferral of up to $19,500, regardless of employee participation levels, and $26,000 for those age 50 or older. Employers are required to contribute yearly but can bypass discrimination testing.

2. Traditional 401(k). Offering flexibility and higher contribution limits, these plans require greater administration than a SIMPLE or Safe Harbor 401(k). A traditional 401(k) can incentivize long-term employment by adding allocation conditions and/or a vesting schedule to match contributions.

3. SIMPLE 401(k). A SIMPLE 401(k) gives small practices an affordable way to offer retirement benefits to employees. Employee participation is not required, giving the owner more control over contribution amounts.

4. New Comparability 401(k). A New Comparability 401(k) plan helps small practices maximize owner contributions up to the legal limit by allowing employers to allocate contribution rates to different employee groups.

5. Simplified Employee Pension (SEP IRA). With flexible annual contributions, employer-funded SEP IRAs provide employers with a simpler way to make retirement contributions for themselves and their employees.

6. Cash Balance. While traditional defined benefit plans provide for a specific benefit at retirement, a cash balance plan provides the benefit at retirement in the form of an account balance.

Are there any options for doctors who work as independent contractors or for practice owners with no qualifying employees?

Yes! The plans most utilized by these doctors are:

1. Owners 401(k) plan. Owners 401(k) plans can be inexpensive to set up and provide doctors the flexibility to decide each year whether to contribute, as they are not limited by employee contribution restrictions as they would be by traditional 401(k) plans.

2. Cash Balance. While traditional defined benefit plans provide for a specific benefit at retirement, a cash balance plan provides the benefit at retirement in the form of an account balance.