SEP IRA vs 401k plans for business owners

[jamesonh]

Currently, I am a young orthodontist who is currently buying an existing orthodontic practice. The orthodontic practice is a two doctor office with two locations and 14 employees with a wide age range. This practice has a SEP-IRA account in place as part of the benefits package. After reading the WCI book, blogs, and this web forum, would it be more advantageous to have a 401-K profit sharing plan instead of the SEP-IRA? Would I still be able to put away the maximum of $54,000 in a 401-K plan as I can currently in my SEP-IRA account?

 

My goal is to be able to maximize my annual contributions and to start re-contributing to my Roth-IRA that I have not been able to since I left my residency and my practice offers a SEP-IRA account. Words cannot describe how helpful this community has been as a young Orthodontist coming out of school with zero business background. I appreciate it, thank you!

[jfoxcpacfp]

The problem with the SEP is that you must contribute the same % to the employees' accounts as you do for your own. So, if you want to maximize to the $54k limit, you are going to have to contribute up to 25% for each qualified employee.

otoh, it's going to be difficult for you to get a full $54k into a business 401k with 14 employees. You'll probably want a safe harbor plan + you'll also have to pay for setup and annual compliance.

You need to work with your CPA or financial planner (fee-only) along with a TPA to compare your options and weigh the advantages versus the disadvantages. You won't be able to get enough actionable information out of the forum without a lot more information, the kind you don't post in public.

[spiritrider]

As Johanna pointed out, a lot will have to do with the actual census of the employees, including what salary you pay yourself.

You should definitely check with a TPA. For example, you could max your $54K with an $18K employee deferral and a 15% non-elective employer contribution on a $240K salary = $36K.

With a "New Comparability" method for non-elective contributions, you might only have to pay other employees about a 5% non-elective employer contribution. This will entirely depend on the cross testing.

[jamesonh]

Thank you for the responses!

[litovskyassetmanagement]

jamesonh wrote:

Currently, I am a young orthodontist who is currently buying an existing orthodontic practice. The orthodontic practice is a two doctor office with two locations and 14 employees with a wide age range. This practice has a SEP-IRA account in place as part of the benefits package. After reading the WCI book, blogs, and this web forum, would it be more advantageous to have a 401-K profit sharing plan instead of the SEP-IRA? Would I still be able to put away the maximum of $54,000 in a 401-K plan as I can currently in my SEP-IRA account?

 

My goal is to be able to maximize my annual contributions and to start re-contributing to my Roth-IRA that I have not been able to since I left my residency and my practice offers a SEP-IRA account. Words cannot describe how helpful this community has been as a young Orthodontist coming out of school with zero business background. I appreciate it, thank you!

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You have to be very careful because if you take over a practice with a SEP, you will take responsibility for this plan, which is something I don't recommend.  You should have the other doctor terminate the SEP prior to the purchase.  It is always better to terminate the older plan because otherwise you take full responsibility for all of this plans' potential issues that you don't know about.

As others said, SEP won't work for a practice with employees (more than a handful will already break the bank).  As far as whether a 401k with profit sharing will work, it will depend on your age and on the ages of your staff.  Those who work less than 1000 hours will be excluded from the plan, however if you have older and highly compensated staff, the cost of doing profit sharing can be prohibitive.

So the first step is to perform design studies to make sure that at full participation you can afford profit sharing.  Even a Safe Harbor plan can get expensive if you have high level of participation, so when doing design studies all of these considerations have to be taken into account.  TPAs typically will not do full design studies because they will never find out about your actual financial and business situation - rather they will simply do an illustration based on what you give them.

Also, you might want to make sure that if you can't do a 401k that you consider an alternative, which might be a SIMPLE IRA to start.  While this won't be ideal, the cost of doing a 401k might not be worth it for you at least in the beginning.

Here are some articles that will give you more ideas as to how you should go about selecting the best plan for your practice:

http://www.dentaltown.com/blog/post/3376/small-practice-retirement-plans-how-they-are-different  (what you need to know about starting a 401k plan for a small practice)

https://www.whitecoatinvestor.com/the-ideal-retirement-plan-for-your-practice (Includes 401k vs. SIMPLE discussion)

http://whitecoatinvestor.com/how-to-reduce-your-practice-retirement-plan-cost/