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How Closing Date on Practice impacts retirement plan

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  • How Closing Date on Practice impacts retirement plan

    About to buy into a practice and we are looking at setting the closing date at 12/31. Its not that far off, owner willing to give me a bump in pay until then, and mainly it will keep the books clean and make things a little easier starting with a fresh slate.

     

    My only concern is that this would allow me not to contribute into the defined benefit plan and office 401k because I wouldnt have any earned income in 2016. Is that correct? And how big a deal do you think that is?

    Essentially that would mean I can max my wifes work 401k, max our backdoor roths and then just wait for 2017 for me to have a retirement plan. Maybe its not a big deal...they have just been filing extensions so everything doesnt get put in till September so if I was able to contribute in 16 it would give me plenty of time to put a chunk in....

     

    Thoughts?

  • #2
    Also has anyone heard of the Nolan Company? They are the ones who have set up the profit sharing plan and 401k. Good things or bad things?

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    • #3




      About to buy into a practice and we are looking at setting the closing date at 12/31. Its not that far off, owner willing to give me a bump in pay until then, and mainly it will keep the books clean and make things a little easier starting with a fresh slate.

       

      My only concern is that this would allow me not to contribute into the defined benefit plan and office 401k because I wouldnt have any earned income in 2016. Is that correct? And how big a deal do you think that is?

      Essentially that would mean I can max my wifes work 401k, max our backdoor roths and then just wait for 2017 for me to have a retirement plan. Maybe its not a big deal…they have just been filing extensions so everything doesnt get put in till September so if I was able to contribute in 16 it would give me plenty of time to put a chunk in….

       

      Thoughts?
      Click to expand...


      There are many problems when buying a practice with an existing retirement plan.  If the previous owner did not close the plan they had in place you might be stuck with a lot more than you can handle, including the fact that when the owner leaves, your plan might not be optimal for you (too much of an employer contribution for example, especially if you are too young vs. the employees).  Also, the cost of closing a DB plan can be quite large.

      So my #1 priority would be to terminate any of the plans the previous owner had.  You can start your own plan (whether it is a 401k or a SIMPLE IRA should be a big decision):

      http://www.dentaltown.com//Dentaltown/Article.aspx?i=403&aid=5625

      Whether a DB plan would make sense is yet another question.  That's something that has to be analyzed based on your practice demographics and your ability to contribute.  If the owner sticks around, you can allow them to participate in your plan, but you should NOT keep the old plan for yourself as there could also be other issues with it (for example, any compliance issues overlooked by the plan's TPA will become your problem, and a costly one at that).

      So the steps are the following:

      1) Review the current retirement plan arrangement

      2) Close off all of the plans (with the previous owner doing this for you)

      3) Determine the best type of plan for your new practice (SIMPLE, 401k with profit sharing, combo 401k/DB plan, etc)

      4) Educate yourself on small practice retirement plans, different types of plans available and what's important when selecting a plan for your practice:

      http://www.dentaltown.com/Dentaltown/Blogs.aspx?action=VIEWPOST&b=143&bp=3376

      5) Select the best vendor/adviser to implement the plan that you want (this would involve a careful study of the costs/benefits, as well as a design study to make sure that a particular plan(s) are the best choice given your personal and business finances).

       
      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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      • #4




        About to buy into a practice and we are looking at setting the closing date at 12/31. Its not that far off, owner willing to give me a bump in pay until then, and mainly it will keep the books clean and make things a little easier starting with a fresh slate.

        My only concern is that this would allow me not to contribute into the defined benefit plan and office 401k because I wouldnt have any earned income in 2016. Is that correct? And how big a deal do you think that is?

        Essentially that would mean I can max my wifes work 401k, max our backdoor roths and then just wait for 2017 for me to have a retirement plan. Maybe its not a big deal…they have just been filing extensions so everything doesnt get put in till September so if I was able to contribute in 16 it would give me plenty of time to put a chunk in….

        Thoughts?
        Click to expand...


        I suppose understandable that he (they) wants a clean cutoff for the buy-in, but it's really not difficult to add a partner or shareholder during the year, so I wonder if this suggestion is coming from the owner or the owner's CPA. Possible to find out the reason for the 12/31 cutoff? Also, I need a bit of clarification:

        • Since you stated "buy into", you are implying that you will own a piece of the business, not all of the business. Is this correct?

        • You stated that the owner is willing to give you a bump in pay until then but also that you wouldn't have any earned income in 2016. If you are getting a bump in pay, wouldn't that be earned income for you?


        You have until the due date of the company's tax return, including extensions, to contribute to the retirement plan. Iow, as long as you have earned income in 2016, the contribution can be made in 2017 because you were on 2016 payroll. You could request a paycheck on 12/31 but the owner(s) might not want to pay you that amount (enough to allow you to get your $18k into the 401k). If so, and you don't have earned income from the "bump up", I have a couple of ideas:

        • Ask To receive your January "owner pay, on 12/31 or

        • Increase the buy-in by enough to offset.


        Of course, the best route imo would be to set the buy-in earlier. If you are buying in to an S-corporation, the current owner(s) will have to choose either to close the books at that date and re-open as of the date the new owner comes in (must make an election on tax return) or simply prorate the full year. Either way, the tax software handles it with a few keystrokes. If I were your CPA, I would probably negotiate for the election to close the books.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

        Comment


        • #5




          About to buy into a practice and we are looking at setting the closing date at 12/31. Its not that far off, owner willing to give me a bump in pay until then, and mainly it will keep the books clean and make things a little easier starting with a fresh slate.

           

          My only concern is that this would allow me not to contribute into the defined benefit plan and office 401k because I wouldnt have any earned income in 2016. Is that correct? And how big a deal do you think that is?

          Essentially that would mean I can max my wifes work 401k, max our backdoor roths and then just wait for 2017 for me to have a retirement plan. Maybe its not a big deal…they have just been filing extensions so everything doesnt get put in till September so if I was able to contribute in 16 it would give me plenty of time to put a chunk in….

           

          Thoughts?
          Click to expand...


          If you are the owner, the plan document can be amended to include you immediately into the plan.  And yes, if you did not have any earned income from that entity you can't contribute what you didn't earn.  Not a big deal.  A bigger deal is everything else I described above.  However, everything between now and Dec. 31st is what you can contribute into the plan (so you can have your entire paycheck go into the 401k pretty much).  If your wife is on the payroll, that's an even bigger contribution.  And if you are old enough, the DB contribution will still be something (though not substantial for 2016).  But you might be able to stuff $18k x 2 into the plan, and also have some profit sharing for 2016.  You will need to ask your TPA to get this done for you as well as to calculate how much you might be able to contribute so that you know for sure.
          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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