Avoiding early withdrawal penalties

Dec. 1, 2003
I retired from practice at the end of last year and stopped contributing to my retirement plan. I plan to terminate it this year, but some plan assets are invested in Certificates of Deposits that don't mature for another year.

Charles Blair, DDS and John McGill, MBA, CPA

I retired from practice at the end of last year and stopped contributing to my retirement plan. I plan to terminate it this year, but some plan assets are invested in Certificates of Deposits that don't mature for another year. Cashing them in early would result in significant penalties. Is there any way that I can avoid an early withdrawal penalty from this plan termination?

Quite possibly, says Jason Arnold, East Coast district manager of PenSys Inc., a retirement-plan consulting firm specializing in dental clients nationwide. The IRS has ruled that after a plan's termination, its assets must be distributed as soon as "administratively feasible." A plan generally will meet that standard if it completes distribution within a year following the date of termination. Otherwise, the plan may be considered ongoing. As a result, you should be able to avoid penalties on all CDs maturing within the next year. Doctors should note that if the plan remains open, they will have to file a Form 5500 tax return for each year that the plan continues.

Recently, I read an asset-protection article recommending the transfer of an IRA account into a qualified retirement plan. Is this legal in Ohio?

Yes, there is no prohibition in state law on transferring assets from an IRA account into a qualified retirement plan, since federal law (ERISA) governs. Doctors should note, however, that not all amounts in IRA accounts can be transferred. As a general rule, only taxable amounts in IRA accounts can be rolled into a qualified plan. Accordingly, amounts contributed to an IRA through either nondeductible contributions —or through Roth contributions — cannot be transferred into a qualified plan for asset-protection purposes.

Furthermore, doctors should note that some states do afford limited and/or full creditor protection to IRA accounts. As a result, this move may not be necessary in order to protect these assets from the claims of creditors. For a state-by-state listing of IRA protection laws, send a stamped ($0.66), self-addressed envelope to Blair/McGill & Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, and request "State Laws Regarding IRA Creditor Protection."

I am a 32-year-old dentist who has been working with a financial planner to maximize my retirement savings. My financial planner says that because most of my employees are older than me that age-weighting my retirement plan would not be cost-effective. Moreover, he says that by using a 401(k) profit-sharing plan to receive the maximum annual allocation of $40,000, I would have to give my employees around $32,000. He recommends that I forgo funding a 401(k) plan and take out a variable life insurance policy from a major insurance company. I have attended several investing courses, and each of them indicated that whole life insurance was not a good investment. These courses recommended buying term insurance and investing the difference. What do you think of my financial planner's advice?

Not much ... especially since he may be paid through the commissions from the life insurance products that he is trying to sell! Your first priority should be to fund some type of retirement plan to the maximum. The 401(k) contribution-allocation numbers that you provided involve unusually high employee costs. You should get a second opinion from a reputable tax advisor who has no products to sell. Even if you sponsored a 401(k) profit-sharing plan, and the practice made only a "safe harbor" matching contribution (but not a profit-sharing contribution), you could end up with around $20,000 allocated to your account. Employee costs would be in the 2 to 4 percent of pay range. If, for any reason, the 401(k) profit-sharing plan could not produce the desired result, you should then fall back to the SIMPLE-IRA plan, which would allow slightly smaller contributions on your behalf, but also would somewhat lower staff funding and administrative costs.

Once you have selected the appropriate retirement plan for your situation — and have funded it to the maximum — your next best strategy would be to invest in individual stocks or tax-free municipal bonds on a personal basis. Purchasing stocks individually would allow you to take advantage of the new tax law's 15 percent maximum rate on capital gains and dividends, providing for much higher after-tax rates of return. You should avoid investing through a variable insurance policy due to the higher fees and commissions and higher insurance costs involved.

Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration. Mr. McGill is a tax attorney, CPA, and MBA, and is the editor of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($195 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, or call (704) 424-9780.

Sponsored Recommendations

Clinical Study: OraCare Reduced Probing Depths 4450% Better than Brushing Alone

Good oral hygiene is essential to preserving gum health. In this study the improvements seen were statistically superior at reducing pocket depth than brushing alone (control ...

Clincial Study: OraCare Proven to Improve Gingival Health by 604% in just a 6 Week Period

A new clinical study reveals how OraCare showed improvement in the whole mouth as bleeding, plaque reduction, interproximal sites, and probing depths were all evaluated. All areas...

Chlorine Dioxide Efficacy Against Pathogens and How it Compares to Chlorhexidine

Explore our library of studies to learn about the historical application of chlorine dioxide, efficacy against pathogens, how it compares to chlorhexidine and more.

Enhancing Your Practice Growth with Chairside Milling

When practice growth and predictability matter...Get more output with less input discover chairside milling.