January 5, 2022

Savvy Retirement Savings Plans for Self-Employed Dentists

By Taylor Richardson, CRPS ®, AIF ®, Financial Advisor

There are a lot of benefits to being self-employed, but don’t forget the onus will be on you to save for retirement – you won’t have anyone to fall back on. Starting early will help, but the plan you choose will also make a difference.

For self-employed dentists, Solo 401(k) plans are a great option. While they function just like the 401(k) plans used by large corporations, to be eligible for the Solo plan you must either be self-employed or a business owner without employees. Just like its corporate cousin, a Solo 401(k) is protected from creditors, bankruptcy proceedings and civil lawsuits. Solo 401(k)’s are easy to set up and offer many advantages:

Higher Contribution Limit

For 2021, you can contribute $58,000 in your Solo 401(k), a figure which will increase to $61,000 in 2022. If you’re over 50, you can contribute an additional $6,500. By comparison, a SEP IRA maxes out at 25% of net earnings, which means you’d need to show much higher income to contribute the same amount, and SIMPLE IRA contributions in 2022 are capped at $14,000.

Benefits to Couples

While the Solo 401(k) doesn’t apply if you have employees, it does make an exception for spouses. If your spouse is an employee or plays a role in helping to run your business, they can also participate. In 2022, the deferral limit spouses can contribute will go up to $20,500 for those under 50 years old, and $27,000 for spouses over 50.

Contribute as Both an Employer and an Employee

In the same way your spouse can participate, if you function as both a business owner and an employee, you can make contributions in both roles.

Flexibility to Choose Traditional or Roth Contributions

With a traditional 401K contribution, you invest pre-tax dollars and then pay income tax as you withdraw funds during retirement. Roth plans are funded with after-tax dollars, making your retirement withdrawals tax free, including the investment returns you earned over the years.

Deciding which contribution type to choose is based on factors such as your age and income. If you’re a self-employed dentist in your mid 30’s, you’re probably paying for a house, a car, student loans and there’s a good chance you’re starting a family. Those expenses add up, all at a time when you’re still building your business. At this stage, your priority should be maintaining positive cash flow. Pretax contributions which are tax deductible can help your dollars go further.

The bottom line is that a Solo 401K(k) plan gives self-employed dentists a powerful tool to ensure a financially secure retirement. To learn more about how we can help you maximize your retirement savings, schedule a call with our team at Engage Advisors.