Can I do a Solo401k ?

[Rb52dds]

I own a 3 dentist practice (2 full time associates). We have a Simple IRA at the office. Because of the number of employees and me being 38 it doesn't make sense to do a 401k with profit sharing. I have an opportunity to work as an independent contractor at a nursing home and am wondering if I can do a Solo401k with that money. This would be the only reason I would consider picking up a few days a month. Because of my practice it makes it hard to get anything into retirement accounts besides the little bit in the Simple IRA. My spouse has a 403b/457/hsa and a pension... and can do a backdoor Roth . We can save almost all of that income.
As a couple we are putting away about $65k. We got a late start investing since we have spent years investing in my practice. Any clever ideas? I'd like to be able to save as much as possible in retirement accounts. Our goal is to get above $100,000 annually by the time we turn 40..... thinking we may want to retire at 50 instead of 52.
Does being the sole owner of a large practice raise a flag on a Solo401k? Both jobs I'd be a practicing dentist.

[litovskyassetmanagement]

Rb52dds wrote:

I own a 3 dentist practice (2 full time associates). We have a Simple IRA at the office. Because of the number of employees and me being 38 it doesn’t make sense to do a 401k with profit sharing. I have an opportunity to work as an independent contractor at a nursing home and am wondering if I can do a Solo401k with that money. This would be the only reason I would consider picking up a few days a month. Because of my practice it makes it hard to get anything into retirement accounts besides the little bit in the Simple IRA. My spouse has a 403b/457/hsa and a pension… and can do a backdoor Roth . We can save almost all of that income.
As a couple we are putting away about $65k. We got a late start investing since we have spent years investing in my practice. Any clever ideas? I’d like to be able to save as much as possible in retirement accounts. Our goal is to get above $100,000 annually by the time we turn 40….. thinking we may want to retire at 50 instead of 52.
Does being the sole owner of a large practice raise a flag on a Solo401k? Both jobs I’d be a practicing dentist.

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That's a good question.  The answer is no because you have a controlled group.  If you owned less than 50% of your practice, the answer would be maybe.

However, the main question is, what specifically makes the 401k plan difficult for the practice?  Yes, if you are the youngest of the group the profit sharing cost would be high. You can exclude all of your associates from matching/profit sharing, and with the right type of design you might get a cost-effective profit sharing contribution if your demographics isn't too bad.

This article will give you some ideas as to how you can evaluate your situation (if you haven't done this already):

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

Also, (and again, this depends on your practice demographics) if you are serious about making $100k a year contribution just by yourself, you might consider doing a Cash Balance plan (though I wouldn't even attempt it until you are at least 40+, and this might never work unless you have favorable demographics).  The number of employees is not the issue, it is the mix of employees, specifically having many older and higher compensated ones that creates problems for plan design.

So if you've already had a TPA do a design study for you that shows that you can't have a 401k plan cost-effectively that's one thing.  This is the first step that has to be taken.  If you can have a 401k then Cash Balance plan might work later on, so that you can catch up on making contributions.

Don't worry about maxing out right away, you can easily wait until you are maybe 45, and a combo (401k plus Cash Balance) might make sense then (especially if you want to contribute ~$150k or so a year).

[Rb52dds]

So the only way to $100K appears to be putting $35K into a taxable account.  I guess that isn't the end of the world, but we have very low will power I prefer the money to be less accessible.  I'd like to be able to walk away in 10 years.  I'm not sure I'd have enough time in a cash balance plan if I didn't start until I'm 40. We have several older and highly compensated employees.  I'm in the middle somewhere age wise.  All of my full time employees participate in the Simple IRA, So i have very high participation unfortunately....lol.   I mainly offer it as a retention benefit.  Any other clever ideas?

[jfoxcpacfp]

A portfolio is not a plan. I strongly encourage you to consider hiring a fee-only financial planner to look beyond your retirement accounts to the bigger picture. You have several issues interacting here: cash flow, retirement, tax planning, investment allocation, business planning, probably estate planning and asset protection, too. Financial planning helps you understand the interaction of all of the financial areas of your life so that you can set appropriate goals and work out a plan to meet them on a realistic timetable. Your investments are just one of the tools that you will use to help you achieve your goals. I can sum up financial planning in just 2 words: financial clarity. Our expanded agenda will give you an idea of how planning works at FWM, but every firm does planning differently.

[Rb52dds]

Rb52dds wrote:

I can sum up financial planning in just 2 words: financial clarity.

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I think we have quite a lot of clarity already.  My spouse will get a significant pension ($6K a month is significant for us)......our monthly expenses if you subtract out house payment and childcare which will be gone.....are only about $6K.....so we just need enough assets so we can net the equivalent of taxes on $6K. Our goal is $2M in retirement accounts....and we will get some type of lump sum for the practice. Practice values are really high right now....we'll see if they hold. So....with this financial clarity.....we decided we'd feel better with more than $2M in retirement accounts.....but it likely isn't going to happen...so we will have a taxable account in addition.  Also we are going to try not to touch investments the first 10 years of retirement.....I will likely do some Locum work just for spending money---and just live off the pension.  I'm feeling the burnout from running this office (worse on mondays).  I'd really like to just work as a dentist and not run this beast......but the money is the golden handcuffs....

[litovskyassetmanagement]

Rb52dds wrote:

So the only way to $100K appears to be putting $35K into a taxable account.  I guess that isn’t the end of the world, but we have very low will power I prefer the money to be less accessible.  I’d like to be able to walk away in 10 years.  I’m not sure I’d have enough time in a cash balance plan if I didn’t start until I’m 40. We have several older and highly compensated employees.  I’m in the middle somewhere age wise.  All of my full time employees participate in the Simple IRA, So i have very high participation unfortunately….lol.   I mainly offer it as a retention benefit.  Any other clever ideas?

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It is difficult to know whether there is a possibility to design a 401k plan to be better than a SIMPLE without doing an actual illustration.  After all, by leaving money after-tax, you are paying full taxes on it, so in some cases, having a 401k plan (even if it results in a higher contribution to the employees) might be preferable if you also can benefit. This is what the above article was discussing.  But to have a side by side comparison it would be necessary to run an illustration for you.  One benefit of having a 401k plan is that the employer contribution (profit sharing part) is subject to a 6-year vesting schedule.  So you can give your employees a 3% non-elective contribution and profit sharing, and if any leave prior to 6 years, they won't get all of the profit sharing contribution, which can be used to pay profit sharing contribution to everyone else in the plan (including you).

By the way, if you work as an IC, you might be able to have that money go through your practice (if your net profit isn't high enough to give yourself a W2 of $270k, which is probably what has to happen if you want to max out your contribution and minimize employer contribution with a 401k).

Also, the benefit you get with a 401k vs. SIMPLE depends on other factors such as your marginal tax rate (fed + state), and will be different for those in high tax states such as CA vs. low tax states such as Tx.  So with the same % to owner, because employer contribution is tax deductible, the benefit would be higher for those in CA vs. Tx.  That said, if the cost of employer contribution is way too high, then you might just stick with a SIMPLE.  The downside of a SIMPLE is that you can't do backdoor Roth, but you can always do after-tax, and wait for your chance to catch up.

Even if a Cash Balance plan starts making sense when you are say 45 and you want to retire at 50, so be it.  This is exactly the type of plan that allows you to make final adjustments to beef up your tax-deferred contribution during your highest tax years.  The key is to make sure that you start this plan at just the right age so that your employer contribution is reasonable.

[jfoxcpacfp]

Rb52dds wrote:

Rb52dds wrote:

I can sum up financial planning in just 2 words: financial clarity.

Click to expand…

I think we have quite a lot of clarity already.  My spouse will get a significant pension ($6K a month is significant for us)……our monthly expenses if you subtract out house payment and childcare which will be gone…..are only about $6K…..so we just need enough assets so we can net the equivalent of taxes on $6K. Our goal is $2M in retirement accounts….and we will get some type of lump sum for the practice. Practice values are really high right now….we’ll see if they hold. So….with this financial clarity…..we decided we’d feel better with more than $2M in retirement accounts…..but it likely isn’t going to happen…so we will have a taxable account in addition.  Also we are going to try not to touch investments the first 10 years of retirement…..I will likely do some Locum work just for spending money—and just live off the pension.  I’m feeling the burnout from running this office (worse on mondays).  I’d really like to just work as a dentist and not run this beast……but the money is the golden handcuffs….

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Sometimes I think I hit a home run and realize I tripped on the way to first base :-)