Written By Caitlin See
Dentists generally earn high salaries and have a unique industry where owning a practice is the norm. They also report moderate-to-high job satisfaction overall, particularly for specialists. But just because you enjoy your job doesn’t necessarily mean you want to grind away well into your 70s.
Making intentional dentist retirement planning decisions can lower your tax bill and reduce your student loan payments — all while shaving off years from your retirement timeline.
Smart dentist retirement planning options for a better future
Whether you’re an associate dentist just starting out or a practice owner with years under your belt, a strategic approach to retirement saving can give you the freedom to define what your 50s, 60s and 70s will look like. Let’s look at which tax-advantaged retirement savings accounts make the most sense.
Standard options don’t mean boring retirement: How W-2 employee dentists can create a winning retirement
If you’re an associate dentist with regular W-2 income, you’ll have more standard retirement options comparable to what you’ll find in other industries.
For example, your employer might offer a 401(k) plan. This type of defined contribution plan allows you to contribute up to $23,000 annually — no matter your income level. Even if you make more than the maximum annual compensation limit ($345,000 for 2024), it only impacts the portion of salary deferrals that are eligible for an employer match.
On that note, if your dental practice offers an employer match, be sure to maximize it, as it’s essentially free money. When accounting for combined employee and employer contributions, a 401(k) can allow you to sock away up to $69,000 per year for retirement.
Additionally, you can choose to contribute to an individual retirement account (IRA), which allows for an annual contribution limit of $7,000. However, IRAs are more restrictive by nature.
For example, you can only contribute to a Roth IRA (after-tax dollars) if your income is below $161,000 for single taxpayers and $240,000 for married filing jointly (MFJ). However, if you’re phased out, you can opt to complete a backdoor Roth IRA. This will allow you to still take advantage of the benefits of a Roth account, such as tax-free withdrawals during retirement.
Even if you use a Traditional IRA, your contributions won’t be tax deductible if you’re covered by a retirement plan at work and your income exceeds a certain amount (e.g., $87,000 for single and $143,000 MFJ).
Therefore, for most wage-earning dentists, a 401(k) is typically the only tax-sheltered retirement account option. This is important because deductible retirement contributions will reduce your adjusted gross income (AGI), which will lower your income-driven student loan payments.
Running a dental practice? Let’s unpack 3 retirement plan options for you and your team
If you’re a dental practice owner and have W-2 employees on your payroll, you have the opportunity to choose from a variety of retirement options that can benefit you and your team.
1. Establishing a 401(k) plan
As a practice owner, you get to choose what your 401(k) retirement plan will be for the whole practice. But with great power comes great responsibility.
401(k) plans are subject to annual nondiscrimination tests (NDT) to ensure the plan benefits all employees, not just highly compensated employees (i.e., you and your partners). Therefore, a safe harbor 401(k) plan is generally the best option for dental practice owners to minimize testing and administrative costs.
With a safe harbor 401(k), you, as the employer, are required to make either:
- A flat 3% employer contribution to each participant’s 401(k).
- Match 100% of the first 3% of employee contributions and 50% of the next 2%.
Although the contributions may seem restrictive, you’re not subject to nondiscrimination testing, which minimizes administrative burden and costs. In turn, you’ll be able to make a $23,000 employee contribution to your own retirement account, plus the 3% (or 4%) employer contribution.
Additionally, the newly passed SECURE Act 2.0 provides a tax credit equal to 100% of the plan’s administrative costs (up to $5,000 per year). It also offers a tax credit equal to a percent of employer contributions on behalf of employees making less than $100,000, over the plan’s first five years.
2. Choosing a defined benefit plan
Defined benefit plans are the most advantageous retirement savings option available to practice owners. But they require a lot of costs and overall administrative burden, so they aren’t the right fit for every dental practice.
Here are a few key components of using a defined benefit plan:
- You can make tax-deferred contributions of up to $275,000 per year versus only $69,000 with a 401(k).
- Employer contributions are made based on a defined formula, which might account for years of service, employee compensation amounts, or a set dollar amount per employee.
- This defined benefit formula must be followed precisely to comply with nondiscrimination testing.
- The most common types of defined benefit plans are cash-balance pension plans and money-purchase pension plans.
A defined benefit plan can lead to massive tax savings for dental practice owners who are making a significantly high income. But it’s best to work with a financial planner, such as SLP Wealth, to implement this advanced tax saving strategy.
3. Using a SEP-IRA
Although it’s one of the least advantageous retirement plans for practice owners, a simplified employee pension (SEP-IRA) can come in handy if no other employees have more than three years of service.
Let’s say you’ve just opened your dental practice, then you can technically be the only SEP-IRA participant. In which case, you can contribute up to 25% of your compensation or $69,000 (whichever is less).
But once an employee has over three years of service with the practice, you’ll have to start contributing the same percentage of compensation to their account. If you’re contributing 25% of your compensation, then you have to contribute 25% of their compensation. Therefore, you start to lose the benefit of using a SEP-IRA once your employees cross the three-year threshold.
Note that with a SEP-IRA, no employee contributions are allowed.
Personalized retirement options for solo practice owners
If you’re a solo practice owner without W-2 employees — maybe your spouse is your only help or you work with 1099 contractors — then you might consider using a Solo 401(k) or a SEP-IRA.
Solo 401(k)
This is a great option if you don’t have employees because you won’t be subject to the nondiscrimination rules that come with a traditional 401(k). You can make a $23,000 employee deferral contribution plus a $46,000 employer profit-sharing contribution — giving you a combined $69,000 of tax-deferred contributions.
Additionally, Solo 401(k)s have an advantage over IRAs as you won’t be subject to the IRS’ pro-rata rule that can limit the backdoor Roth IRA contribution.
SEP-IRA
Since SEP-IRA contributions are limited to the lesser of 25% of compensation or $69,000, you won’t be able to contribute as many tax-deferred dollars to a SEP-IRA as you can with a Solo 401(k) unless your compensation is over $276,000. Additionally, you won’t be able to complete a backdoor Roth IRA since you’ll have a tax-deferred IRA balance.
To be clear, you can’t contribute to a solo 401(k) if you have employees other than your spouse.
The most important question dentists need to ask about retirement planning
There’s no such thing as a one-size-fits-all dentist retirement plan. To find the right strategy, you need to consider how long you plan to work and how other important financial planning decisions, such as student loan repayment, factor in.
How long do you plan to work?
According to the American Dental Association, the average dentist's retirement age is rising. In 2001, the typical dentist would retire at about age 65, but as of 2024, the average dentist's retirement age is 68.
If you’re just entering the workforce, the thought of working until nearly 70 might scare you. You might want to explore other passions or spend your later years traveling or prioritizing family time. If that sounds like you, traditional retirement age isn’t going to cut it.
Dental professionals who are pursuing FIRE (Financial Independence, Retire Early) will want to contribute a higher percentage of their annual income to a low-cost, taxable brokerage account. You’ll lose out on tax-sheltered growth. But you won’t need to worry about having to pay a penalty on your withdrawals in your 50s.
SLP Wealth can help with investment options that center around your retirement goals.
Beyond retirement planning: Other financial planning considerations for dentists
Smart dentist retirement planning goes well beyond saving for the future. You need to look at the whole financial picture and make intentional moves that benefit you in multiple ways, including:
Lowering student loan payments
Not only do these retirement plans offer the ability to lower taxes when you could be at a high marginal tax bracket (especially in high tax states like California), but they also lower your adjusted gross income (AGI).
This, in turn, reduces your student loan payment typically by 10% of the amount of the contribution, depending on which income-driven repayment plan you’re on.
If your AGI is high enough to calculate a large enough IDR payment that’ll eventually pay off the loans (even after maximizing your tax-deferred retirement options), consider refinancing if you can find a rate at least 1% lower than your current rate.
Building practice equity
A dental practice gives you the opportunity to build up an asset that you can sell at retirement. Strategic retirement planning includes planning around the sale, knowing that it’ll be taxable at a capital gains rate of 15% to 20%.
Saving on taxes
If you’re a dental practice owner or have 1099 income, you can further maximize savings by taking full advantage of tax deductions and other tax strategies that are often overlooked (e.g., tax-loss harvesting, section 179 deductions, bonus depreciation).
Whether you’re saving for retirement or looking to get out from under six-figure student loan debt, smart financial moves early in your career can have ripple effects for a long time to come.
Get expert financial help at all stages of your dental career
Financial planning for dentists can feel like a web of complicated choices, especially when your focus is on helping your patients and ensuring the livelihood of your staff.
Let SLP Wealth simplify your finances and retirement planning, so you can devote your energy to what matters most to you. Reach out to SLP Wealth and speak to a dental-specific fiduciary financial advisor today.
