Dental office 401k advice

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thad42
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Joined: Thu Aug 27, 2020 3:37 pm

Dental office 401k advice

Post by thad42 »

Setting up a 401k plan for my office where my wife and I are both dentists. Through all the scenarios that have been ran (new comparative, pro rata, etc.) it seems that the demographics of our office and our age (mid 30's) are working against us. The best case scenario for my wife and I to max out at $57k we have to give 31% of the contributions to our employees to satisfy all the testing. Our accountant doesn't think this is the best thing for us at this time due to the large amount that would need to be dedicated to employees as well as increased FICA taxes to adjust our w2's. Our accountant is suggesting a safe harbor plan until the demographics change more in our favor but our financial advisor is suggesting maxing out our plans whatever the cost in order to access the compounding effect of investing early.

My wife are wondering what alternatives do we have for investing for our retirement that will be advantageous if we don't max out our 401k plans and go with the smaller safe harbor option.

Thanks in advance
retiredjg
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Re: Dental office 401k advice

Post by retiredjg »

Bump, for the evening crowd
Impatience
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Re: Dental office 401k advice

Post by Impatience »

Fire up your favorite spreadsheet software and run a few scenarios.

There’s no limit to how much you can invest in a taxable account. Compare the result of investing in the safe harbor option + putting the excess into taxable accounts, with the result of following the other plan.
Topic Author
thad42
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Joined: Thu Aug 27, 2020 3:37 pm

Re: Dental office 401k advice

Post by thad42 »

bumpp
000
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Re: Dental office 401k advice

Post by 000 »

It seems you aren't considering how the 401(k) might (or might not) be an advantage for the business, i.e. employee recruitment and retention.
niceguy7376
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Re: Dental office 401k advice

Post by niceguy7376 »

Wouldnt a simple safe harbor 401k with an after tax option (not roth 401k) be good enough? Give 3% match for the 19.5K.
Should employer match the after tax part too? Even in that scenario, how many of the staff plan on doing that?

What is the size of the office people ?
Vanguard Fan 1367
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Re: Dental office 401k advice

Post by Vanguard Fan 1367 »

You mention a financial advisor. I don’t know how involved you are with the teachings of John Bogle. If you invest taxable money in something like Vanguard’s Total Stock Market ETF that is pretty low expense and tax friendly if you buy and hold it.

I am a retired dentist who tried different plans and finally settled on the Safe Harbour. If you set aside the 39 thousand a year that added up nicely for my wife and me. If the stock market continues its upward march that amount will add up for you.
Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it."
SubPar
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Location: MN

Re: Dental office 401k advice

Post by SubPar »

niceguy7376 wrote: Thu Aug 27, 2020 9:36 pm Wouldnt a simple safe harbor 401k with an after tax option (not roth 401k) be good enough? Give 3% match for the 19.5K.
Should employer match the after tax part too? Even in that scenario, how many of the staff plan on doing that?

What is the size of the office people ?
Safe Harbor plans are “un-exempted“ from top heavy testing when voluntary after-tax contributions are made. This is likely to result in failure of that test if it’s the owners making the after-tax deferrals.
Starfish
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Re: Dental office 401k advice

Post by Starfish »

thad42 wrote: Thu Aug 27, 2020 3:53 pm Setting up a 401k plan for my office where my wife and I are both dentists. Through all the scenarios that have been ran (new comparative, pro rata, etc.) it seems that the demographics of our office and our age (mid 30's) are working against us. The best case scenario for my wife and I to max out at $57k we have to give 31% of the contributions to our employees to satisfy all the testing. Our accountant doesn't think this is the best thing for us at this time due to the large amount that would need to be dedicated to employees as well as increased FICA taxes to adjust our w2's. Our accountant is suggesting a safe harbor plan until the demographics change more in our favor but our financial advisor is suggesting maxing out our plans whatever the cost in order to access the compounding effect of investing early.

My wife are wondering what alternatives do we have for investing for our retirement that will be advantageous if we don't max out our 401k plans and go with the smaller safe harbor option.

Thanks in advance
I looked at a similar problem for my wife's office. We have less of an incentive than you because I am not a dentist and have a 401k through my emplyer. It seemed that it was not worth it wen you add the matching with administrative fees, hassle, time, liability.
Starfish
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Re: Dental office 401k advice

Post by Starfish »

000 wrote: Thu Aug 27, 2020 9:17 pm It seems you aren't considering how the 401(k) might (or might not) be an advantage for the business, i.e. employee recruitment and retention.
My experience is that people care much less than you'd think.
000
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Re: Dental office 401k advice

Post by 000 »

Starfish wrote: Fri Aug 28, 2020 10:22 pm
000 wrote: Thu Aug 27, 2020 9:17 pm It seems you aren't considering how the 401(k) might (or might not) be an advantage for the business, i.e. employee recruitment and retention.
My experience is that people care much less than you'd think.
Have you actually tried to use it as a promotional?
softwaregeek
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Re: Dental office 401k advice

Post by softwaregeek »

We offer a plan and less than 30 pct sign up. No match but almost everyone is a highly compensated software engineer, many with advanced degrees. You would think people would run to sign up.
Starfish
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Re: Dental office 401k advice

Post by Starfish »

000 wrote: Fri Aug 28, 2020 10:34 pm
Starfish wrote: Fri Aug 28, 2020 10:22 pm
000 wrote: Thu Aug 27, 2020 9:17 pm It seems you aren't considering how the 401(k) might (or might not) be an advantage for the business, i.e. employee recruitment and retention.
My experience is that people care much less than you'd think.
Have you actually tried to use it as a promotional?
Not really, but had a questionnaire with the employees.
Pessimist55
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Re: Dental office 401k advice

Post by Pessimist55 »

What's in It for them to tie up the money w no match??

If you give them an incentive (not the IRS/govt) they would sign up
softwaregeek wrote: Fri Aug 28, 2020 10:47 pm We offer a plan and less than 30 pct sign up. No match but almost everyone is a highly compensated software engineer, many with advanced degrees. You would think people would run to sign up.
Northern Flicker
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Re: Dental office 401k advice

Post by Northern Flicker »

401Ks were never intended to allow highly compensated professionals to defer taxes on large amounts of income.
Risk is not a guarantor of return.
TaxingAccount
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Re: Dental office 401k advice

Post by TaxingAccount »

Couldn't you offset the cost by cutting your employees pay down to minimum wage? It's not like they are going to quit when there's 10% unemployment, thank you.
Rudedog
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Re: Dental office 401k advice

Post by Rudedog »

Your accountant should be giving you an "after-tax" analysis. I don't know what your tax bracket is, but the money put in the employees' accounts is a tax deduction for you, depending on what state you live in, that could be a 30% deduction for the amount contributed. Also, if you give the employees 31%, that means you keep 69%. That 69% sits in your 401K account and grows. You are keeping twice as much as you are giving the employees, and you get a tax deduction for the amount you put in the employees' 401K accounts. Sounds like a sweet deal to me.
Ed 2
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Re: Dental office 401k advice

Post by Ed 2 »

thad42 wrote: Thu Aug 27, 2020 3:53 pm Setting up a 401k plan for my office where my wife and I are both dentists. Through all the scenarios that have been ran (new comparative, pro rata, etc.) it seems that the demographics of our office and our age (mid 30's) are working against us. The best case scenario for my wife and I to max out at $57k we have to give 31% of the contributions to our employees to satisfy all the testing. Our accountant doesn't think this is the best thing for us at this time due to the large amount that would need to be dedicated to employees as well as increased FICA taxes to adjust our w2's. Our accountant is suggesting a safe harbor plan until the demographics change more in our favor but our financial advisor is suggesting maxing out our plans whatever the cost in order to access the compounding effect of investing early.

My wife are wondering what alternatives do we have for investing for our retirement that will be advantageous if we don't max out our 401k plans and go with the smaller safe harbor option.

Thanks in advance
Best alternative would be max out Roth IRAs for you and your wife . Why? Because you eventually will have more and earn more , as life goes tax’s are not staying still. Guess which way they more probably can go ? Up? Or down in next 20-30 years of your career? So, don’t loose opportunity to max out Roth IRA’s! When it comes to 401K you doing right things. Just don’t get cheap on looking 401k providers , get a good 401k provider. Your employees will be thankful to you if you get good 401k and not one of those scammy insurance annuity 401k companies with double fees. Hello colleagues, I am working at your field too! )
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
softwaregeek
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Re: Dental office 401k advice

Post by softwaregeek »

Pessimist55 wrote: Fri Aug 28, 2020 11:56 pm What's in It for them to tie up the money w no match??

If you give them an incentive (not the IRS/govt) they would sign up
softwaregeek wrote: Fri Aug 28, 2020 10:47 pm We offer a plan and less than 30 pct sign up. No match but almost everyone is a highly compensated software engineer, many with advanced degrees. You would think people would run to sign up.
Tax deduction of probably 40 percent if they are dual income. CA tax of 9.3% at 57k and goes up from there.
ZWorkLess
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Re: Dental office 401k advice

Post by ZWorkLess »

For our small business (about a dozen staff at any given time, about 8 of whom participate), we chose to do a SIMPLE IRA through Vanguard. The max contributions are significantly lower than a 401k, but the administrative expenses are pretty much zero (an hour or so per month for our office manager and a couple extra hours at year's end.) You have limited options for the match, always is 3%. A nice thing is you can limit it to employees who have been there at least 2 years and earned at least some $ value those years (I think 5k/yr is the highest you can limit it). This allows us to avoid having to add short-time or very-PT staff to the program, saving admin hassles.

Max employee contribution is 13.500/yr plus 3000/yr for catch up if you're 50+. The 3% match adds to that, of course. Most of our staff just do the 3%, but at least they're doing SOMETHING towards their retirement, which is a really nice thing for our lower paid support staff, most of whom have very little savings, so their 3+3% each year is adding up nicely for them.

Look hard at a SIMPLE IRA if you don't have 20+ participants, especially if the allowed contributions are reasonably close to your annual tax deferred savings goals. It can save you a lot of administrative expenses. For us, it made a lot more sense than a 401k. I'd do some serious spread-sheeting to compare your options and consider your overall costs.

For us, our staff appreciate that 3% and having SOME sort of retirement savings, but much beyond that, they'd prefer spendable raises and/or other benefits like more time off vs more retirement contributions from us. That's a serious consideration, too.
Vanguard Fan 1367
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Re: Dental office 401k advice

Post by Vanguard Fan 1367 »

Starfish wrote: Fri Aug 28, 2020 10:22 pm
000 wrote: Thu Aug 27, 2020 9:17 pm It seems you aren't considering how the 401(k) might (or might not) be an advantage for the business, i.e. employee recruitment and retention.
My experience is that people care much less than you'd think.
One source involved with multiple dental offices told me that 10% of the employees took advantage of the 401k match.
Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it."
Vanguard Fan 1367
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Re: Dental office 401k advice

Post by Vanguard Fan 1367 »

TaxingAccount wrote: Sat Aug 29, 2020 4:28 am Couldn't you offset the cost by cutting your employees pay down to minimum wage? It's not like they are going to quit when there's 10% unemployment, thank you.
I wouldn't want to do that to my employees. Great dental office employees are going to cost more than minimum wage, even in this time of 10% unemployment. If you pay peanuts you get monkeys.
Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it."
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drgenefish
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Re: Dental office 401k advice

Post by drgenefish »

I switched my office from SIMPLE to 401k this year.

It is “costing” me more due to higher employee matches. But at the end of the year it’s only a few thousand dollars.

But I am able to put away more for myself.

AND I’m happy to give my employees more $ And help them prepare for their futures. In a dental office you probably have like 5-15 employees or so working their tails off? I’d personally wanna take care of them as much as possible or else I’d question if they are the right employees for my office.

Not telling you what to do but it’s more than just a math equation.

Btw we are using guideline 401k and the administrative cost is super low. It was also extremely easy to set up.
petulant
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Re: Dental office 401k advice

Post by petulant »

Is the financial advisor compensated by AUM or any other measure? It is seriously a loser to take on this plan, and here's why.

You can certainly set up a safe harbor plan with little expense and make the employee deferral of $19,500 plus the change as a match. That means the question isn't whether to take on the 31% employee cost for 69% tax deferral, it's whether that contribution for employees is worth the extra benefit of the full $52,000 minus the $19,500 and change. Hint: it's almost certainly not. You might be paying $30,000 after taxes on the employee just to *defer* taxes on another $60,000, then turn around and pay 30% on that some day. You would do better just stuffing it in a taxable account!

Plus, most employee would probably feel better about modest raises than hefty 401(k) contributions. Most people aren't BH supersavers.

For two dentists working together, there are much better uses of your time thinking about these business/administrative issues. Get the safe harbor or other simple plan and max out the employee deferral. Then look at other things like buying your own office building in a separate LLC and leasing to the dental business, getting the S Corp salary/business % right, etc.
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