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!
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/
Leave a comment: