What ARE Retirement Plans Anyway? 🤔

Let's start by defining what Retirement Plans are exactly – and equally importantly what they aren't.

Retirement Plans are Containers 🫙

Retirement Plans provide each plan "participant" a container in which to hold investments. These investments are intended to be used later in life – regardless of whether that's a traditional retirement or not.

🔖  In general, you can't access investments held within Retirement Plans until you're about 60 years old.

The container which a Retirement Plan offers is a certain type of account: a Retirement Account, naturally.

A Retirement Account is just one of the handful of different account types you can use to hold investments.

👉  If that sounds confusing (or just interesting), check out this blog explaining the different types of investment accounts, including Retirement Plans.

Retirement Plans are NOT Investments 📈

As we just covered, Retirement Accounts are one type of account in which you can hold investments.

They aren't the actual investments themselves. 

First, you have to first pick the right Retirement Plan.

 THEN you have to pick the right investment to go inside it.

You'll often need to choose what investments to put in your Retirement Plan when setting it up. I walk you through how to make that decision toward the bottom of this page. 👇

A Few Additional Things to Know about Retirement Plans 🎓

As you choose a Retirement Plan, you'll unavoidably encounter some jargon. To make it easier, you'll want to understand:

• The difference between Retirement Plans and Retirement Accounts;
• The distinction between Employer Contributions & Employee Contributions; and
• What Retirement Plan discrimination is – how to avoid it.

🔖  If any – or all – of those terms are unclear, click here to read The 7 Retirement Plan Essentials for Therapists.

An IRA is Often the Best Way to Get Started 🚀

An Individual Retirement Arrangement (or "IRA") is the easiest way to get started saving for retirement.

An IRA is not “sponsored” by your practice.

Rather, it's an account available to employees whose employers don't offer a Retirement Plan.

This separation from your practice makes an IRA easier to set up and maintain.

And while IRAs offer the lowest annual contribution limits, you can, in fact, save quite a bit!

🔖 If you are under 50 years old you can save up to $7,000 in an IRA for 2024.

🔖 If you’re 50 years of age or older, you can save up to $8,000 in an IRA for 2024.

Note these limits are for 2024 – they typically increase a bit each year to adjust for inflation.

That maximum contribution is just that: a maximum. It's not an obligation! You can contribute just a few hundred dollars to your IRA if you want!

Rules & Restrictions to Know about IRAs

As with all Retirement Accounts, there are a lot of rules and restrictions to follow.

For IRAs, the primary rules relate to your personal household income – the income that shows up on your 1040 Individual Tax Return.

• For Roth IRAs, your income level dictates whether you're allowed to contribute to a Roth IRA at all. Once your household income is above a certain level, you CAN NOT contribute to a Roth IRA. (That's when a Backdoor Roth IRA might be a good option.)
• For Traditional IRAs your income level dictates whether your IRA contribution is tax deductible – or not. Even if you can't get the tax deduction, you are still allowed to contribute.

To understand those income levels and if they apply to your situation, see my blog post: 7 Facts Every Therapist Needs to Know about IRAs in 2024. 📚

🔖  And you do want to follow all those rules!

The financial penalties are pretty painful if you don’t! 😲

Do NOT use a SEP-IRA or SIMPLE IRA!! 🚨

Despite the fact that SEP-IRA and SIMPLE IRA have IRA right in the name, they are ENTIRELY different than the normal or ordinary IRA we're talking about in this section.

Be careful that if you intend to fund an IRA you are NOT funding a SEP-IRA or SIMPLE IRA. If you accidentally do so, it may well cost thousands of dollars to fix this mistake. 💸  Painful!

If in doubt, consult with a professional (like Turning Point)! 👋

The Best Retirement Plans for Group Practice Owners 👨‍💼

If you’re a Group Practice Owner with W-2 employees, figuring our the right Retirement Plan is a bit more complex.

Why? 🤔 

Because those non- discrimination regulations covered above ☝️ typically require that your employees are included in the plan.

These regulations prevent business owners from setting up Retirement Plans exclusively for their own benefit – leaving their "rank and file" employees out in the cold (without a Retirement Plan).

Including your employees in the Retirement Plan can be great employee benefit, improving recruiting and retention. But it does mean more complexity and cost for you as the business owner.

There is the administrative burden of managing the plan AND the additional compensation expense of mandatory employer contributions.

🔖   If you're not sure what some of these technical terms (like "discrimination" & "employer contributions") mean, click here to read The 7 Retirement Plan Essentials for Therapists.

Remember that this requirement to include your employees applies only to W-2 employees – and not to 1099 Independent Contractors. 

If you don't have any W-2 employees in your practice, you can use any of the Retirement Plans for Solo Practitioners discussed above. ☝️  In general those are more flexible, easier and less expensive – so use them if you can!

Remember, you can always start with an IRA.

If you're looking to save $7,000 ($8,000 if you're 50+) or less each year, an IRA is going to be the easiest option.

Especially if you're just getting started saving into a Retirement Plan, the IRA is going to be a great place to start.

But before you run off and contribute to an IRA, be sure you understand the rules & restrictions! See my blog post for everything you need to know: 7 Facts Every Therapist Needs to Know about IRAs. 📚

If you’re looking to save a bit more than an IRA allows, you'll want to consider the SIMPLE IRA or Safe Harbor 401(k). Keep reading! 👇 

Payroll Deduction IRA 🫤

The employee IRA account attached to a payroll deduction IRA plan isn't any different from the "ordinary" IRA we just talked about.

The only difference is that as the employer, you automate the transfer of funds from your employees' paychecks into their IRAs.

This is not a Retirement Plan "sponsored" by your practice and there are no filing or regulatory requirements to speak of. Your only obligation as an employer is to accurately complete the money transfers in a timely manner.

I give this plan a meh because it doesn't allow you as the business owner (or your employees) to save more than if everyone just went out and opened their own IRA.

That said, most people DON'T go out and open their own IRA. So the Payroll Deduction IRA can be a nice perk to offer. And you can truthfully say you offer a Retirement Plan – without having to deal with a lot of expense and administrative work.

The Payroll Deduction IRA is, by the way, usually the default state-mandated Retirement Plan in those states that have such a law. More and more states are requiring employers offer at least a Payroll Deduction IRA. (If you offer one of the other Retirement Plans discussed here, you're typically exempt from having to do anything else.) Check this helpful post from payroll processing company ADP to see if your state is on the list. 

Just Say No: SEP-IRA 👎

While the SEP-IRA is an easy Retirement Plan with low administrative costs, it usually doesn't work well for group practice owners. (It can work just fine for Solo Practitioners, although I still favor the individual 401(k).

Why? Because the SEP-IRA only allows employer contributions – employees are not allowed to contribute from their paycheck into their SEP-IRA account.

Because every employee must receive an equal percentage of compensation contribution, it's difficult for you as the business owner to make a meaningful contribution to your Retirement Account without incurring a BIG expense in the form of a mandatory employer contribution into the accounts of all your employees.

So while the SEP-IRA might work ok... there are better options. 👇

SIMPLE IRA: A Great Starter Plan for Group Practice Owners 🌟

The SIMPLE IRA is great because it's just that: simple!

Plus, it allows employee contributions. That means both you and your employees can take money from your paycheck and contribute it to your SIMPLE IRA account.

🔖  For 2024, the amount each employee can contribute to a SIMPLE IRA is $16,000. If they're 50 or older, that $16,000 becomes $19,500. (That's known as a 'catchup' contribution for those of us of a certain age. 😬)

An important point is that annual employer contributions are required. The employer contributions will be 2-3% of each employee’s compensation, although it can be reduced to 1% in up to two years of any 5 year period. 

The annual contribution limits, administrative costs and required employer contributions are all lower than those of the Safe Harbor 401(k). We'll cover that next!

👀  Watch for an upcoming blog post about the SIMPLE IRA for Group Practice Owners!

The Safe Harbor 401(k): Allowing GPOs to Save More 🚀

When you're looking for annual contributions higher than those allowed by the SIMPLE IRA, it's time to consider a 401(k).

🔖  For 2024, the amount each employee can contribute to a 401(k) is $23,000. If they're 50 or older, that $23,000 becomes $30,500. (That's that 'catchup' contribution again.)

An important point is that – just like the SIMPLE IRA – annual employer contributions are required. The employer contributions will be 3-4% of each employee’s compensation. Note that range is 1% higher than the range for the SIMPLE IRA.

These mandatory employer contributions are a feature of the Safe Harbor 401(k). Technically, a "traditional' 401(k) is also an option – and in that traditional 401(k), employer contributions are NOT mandatory. 

HOWEVER a traditional 401(k) must pass complex discrimination tests – tests from which the Safe Harbor 401(k) is exempt. Many (although not all) small businesses will fail these discrimination tests, creating a mess for the business owner. Traditional 401(k)'s CAN work for Group Practice Owners, but you'll want to work closely with financial professionals to make sure it doesn't go south.

I know, this stuff is confusing. That's why I'm working on a comprehensive guide on 401(k)'s for Group Practice Owners. Keep a look out for that!  👀

Cash Balance Plans: Saving TONS & Slashing Your Tax Bill 💸

Are you already maxing out your 401(k) and still despairing at your sky-high tax bill? A cash balance plan may be just the right Retirement Plan for you!

Most folks believe that once they've put a 401(k) in place, they've done all they can when it comes to retirement plans and tax deductions. But that's not the case!

A cash balance plan is a great option if you currently have – or expect to soon have – a significant amount of free cashflow.  

🔖  If you're thinking of selling your practice in the next few years, the time is now to start smart tax planning – including evaluating the benefit of a cash balance plan!

The cash balance plan can be a very effective tool to reduce the HUGE tax bill when you sell. But you'll want to have the cash balance plan in place at least a few years BEFORE the sale (to make sure it qualifies as a non-discriminatory plan).

This is a VERY complex and technical maneuver, and you'll need a Retirement Plan professional (and actuary) to implement it. If this sounds like somethingfor you, contact me and I'll point you in the direction of some helpful resources.

👉  Confused? Want to know more?

Hear two financial experts explain everything about Retirement Plans for Therapists. Click here to get the free Retirement Plans recorded webinar!

PLUS: Watch for upcoming blog posts on the SIMPLE IRA and 401(k) for Group Practice Owners!  👀  

Taxes Reduce the Cost of Your Retirement Plan 💸

As a business owner, it can be discouraging to realize how expensive it is to sponsor a Retirement Plan. 

There is no argument that it's a meaningful business expense. 

But there are several ways taxes reduce the true cost of the plan.

Retirement Plan Expenses are Business Tax Deductions

That means the Retirement Plan expenses you incur will reduce your taxable income – and therefore the amount of tax you’ll pay. 

If your marginal tax rate (between Federal and state taxes) is 25%, each dollar you pay in Retirement Plan expenses will reduce your tax bill by 25 cents. 

That means the net, after-tax expense to you is “only” 75% of the total cost.

But wait there’s more! 😲

Retirement Plans Allow You to Increase Your Deductible Retirement Plan Contributions

One of the primary reasons the more complex Retirement Plans are worth the trouble is that they allow higher annual contribution amounts.

If those increased Retirement Plan contributions are into  a traditional retirement account, that will reduce your tax this year!

Even if you use a Roth account – and therefore don't get a tax deduction this year – you'll still get the amazing tax-free benefits of the Roth in the future! 

When it comes to smart tax management, it isn't all about reducing your tax bill this year. Rather, it's about reducing your lifetime taxes paid.

Both Roth and Traditional Retirement Accounts are powerful tools to reduce that lifetime tax burden. 👍

Tax Credits Further Reduce Retirement Plan Costs

In recent years, the Federal government has gone to great lengths to encourage small businesses to offer their employees Retirement Plans. One tool they've used is offering pretty darn attractive tax credits! 💸

One tax credit program is for establishing a new Retirement Plan. The second is for establishing a Retirement Plan with an auto-enrollment feature.

🔗  Read more about the details of these Retirement Plan tax credits on this page of the IRS website.

A tax credit is literally a dollar-for-dollar reduction in the tax you owe. It’s like a coupon for “$500 off” your tax bill.

These credits are likely to be a limited time offer though! You might want to consider adding that Retirement Plan a little bit sooner than you otherwise might.

Standard Not Advice Disclaimer 😬

Just a friendly reminder that none of the information included in these articles is financial, legal or accounting advice.

I don't know the specific financial circumstances of your life (or your private practice), so there's no way I can make blanket statements about what's right for you.

What I offer in these articles is a suggestion on how you might think things through and then decide (for yourself) what's right. 

For some topics, I've also included what I've learned works well for most people. But you're not most people, you're you. You might be in that minority where the general suggestions are the wrong approach. 

Take everything said here (and anywhere else online) with a grain of salt, and seek out professional advice if you suspect you need it. Of course, I'm always happy to have a no cost introductory conversation with you to see if I can help.

I don't want you to do anything that ends up causing you harm. I don't want that for you, and you don't want that for you. Take your time, think things through, be deliberate and seek out professional advice if you suspect you need it.

Turning Point is a registered investment advisor in the state of California. Please visit turningpointhq.com for important information and additional disclosures. This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes financial, legal or tax advice; a recommendation for purchase or sale of any security; or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Read the full Disclaimer here.