By Adam Cmejla, CMFC
SYNOPSIS
A financial planner spells out the top questions to ask yourself as you plan for a secure retirement.
ACTION POINTS
KNOW THEOPTIONS. Study the wide range of wealth investment options.
SHARE INFORMATION.Share retirement planning tools with partners and staff.
CHOOSE BEST OPTIONS. Select whatmakes the most sense for you and your practice.
Nearly every optometrist I’ve met has said that their practice is their biggest financial asset, yet many of these same ODs have not taken full advantage of the multiple ways to use their practice as a retirement planning vehicle for themselves and their family, as well as for their practice staff. Here is a summary of the key wealth management tools that will enable you to plan for a secure retirement. My wife is an associate optometrist, and I have many optometrist clients. Here are some of the lessons I try to pass on to the OD practices I work with.
KNOW THE OPTIONS
IRA. These plans are very easy to create, and they have very low administrative costs and no annual IRS reporting requirements. You set up traditional IRAs for each eligible employee; they can contribute to the IRA on a tax-deferred basis (via payroll deductions, and you can either match the contributions of plan participants or contribute a fixed percentage of all eligible employees’ pay. The employees own the money in their IRAs. Click HERE to access the federal government’s IRA information page.
SEP. A Simplified Employee Pension plan lets you make contributions toward your retirement and your employees’ retirements. You can even have a SEP and another kind of retirement plan at your business simultaneously. A SEP allows practice owners annual tax-deductible contributions equal to 25 percent of your compensation (if you have a corporation) or 20 percent of self-employment income (for a sole proprietor).
Solo 401(k). Yes, you can have a 401(k) when you are self-employed. A practice owner may establish one and include their spouse in the plan, provided the spouse is an employee of the practice and on the payroll. It is even possible to have a solo Roth 401(k). These plans do require a TPA (third-party administrator) and are generally excluded if you have employees in your practice that are not family, however they do have higher contribution limits than a SEP.
401(k). The most common setup that we think of when we hear the words “retirement plan at work.” 401(k)’s generally have a lot of flexibility in the way that they are set up, but can also come with some additional costs depending on the structure and needs of the plan. Participants (including the optometrist/owner) are limited to the IRS annual contribution amount ($17,500 in 2014 with a $5,500 “catch up” provision for participants over the age of 50). In addition, the practice may contribute to the employees’ accounts through multiple options, such as matching contributions or more complex profit sharing options and strategies. If a practice has significant business income at the end of the year and files an 1120S tax return (“S-corp” tax return), this may be an attractive vehicle if the optometrist is looking to minimize taxation in the current year and increase retirement plan contributions for their own personal household.
SHARE INFORMATION
Profit-sharing plans. Here’s one way an independent practice can compete with larger, retail companies for prime employees while not obligating you as a business owner to make mandatory, annual contributions of a set amount. Contributions are usually deductible at both the federal and state level, with contribution limits equivalent to a SEP. If the practice has a bad year (from a profit point of view), you don’t have to make contributions. The assets placed within the plan grow tax-deferred. Again, annual tax-deductible contributions may be made according to the 25 percent/20 percent rule depending on your business entity structure.
New comparability plans. Basically, this is a form of profit-sharing plan that rewards senior or key employees more than others. The classic situation for this plan is when you have a practice whose multiple owners take home similar earnings, but are of different ages. The plan must be tested to meet Internal Revenue Code nondiscrimination requirements. It allows different levels of compensation to different groups within a practice.
CHOOSE BEST OPTIONS
What plan might work for you? If you are reading this, you are probably thinking about putting a plan into place or switching to a retirement program more aligned with your current needs than the one you have now. With as many options as there are and the variables involved in each plan, make sure you understand which one will be in your practice’s best interest, both for your team, as well as for you and your family.
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Adam Cmejla, CMFC is president of Integrated Planning & Wealth Management, LLC, a financial planning and investment management firm “focused on working with optometrists to help them achieve their true financial potential, build financial confidence and clarity, and delivering kindness and compassion to every relationship they’re privileged to serve.” For more information: Contact Adam at 317-853-6777 or adam@integratedpwm.com.
