John K. McGill, MBA, CPA, JD, and Jason Arnold, QKA
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Due to lower than expected investment returns over the past decade, MANY DOCTORS SPONSORING A DEFINED CONTRIBUTION RETIREMENT PLAN ARE NOT SAVING ENOUGH TO ASSURE THEIR FINANCIAL SECURITY IN RETIREMENT.All Defined Contribution plans - which include Profit Sharing, 401(k) Profit Sharing, Money Purchase, and Target Benefit - limit the doctor's contribution to $49,000 (plus an additional $5,500 for 401(k) doctors age 50 or older).
Defined Benefit retirement plan
As a result, many doctors over age 40 are adopting a Defined Benefit (DB) retirement plan, in addition to their existing Defined Contribution plan, to boost retirement savings. Annual contributions to a DB are designed to achieve a specific goal at retirement and are not subject to the contribution limits outlined above. Retirement benefits are calculated based on the plan formula, participant age, and compensation. The older the participant and the higher the salary, the larger the retirement benefit and required employer contribution.
Cash Balance Pension plan
A Cash Balance Pension plan is a hybrid type retirement plan that looks, acts, and feels like a Defined Contribution plan, but is actually treated as a Defined Benefit plan under the law. The Cash Balance plan specifies both the contribution to be credited to each participant, as well as the investment earnings to be credited based on those contributions.
Each participant has an account similar to what he or she would have in a Defined Contribution plan. The participant's account grows each year through a combination of employer contribution (based on the formula) and an annual interest credit, which is guaranteed and independent of a plan's investment performance. The rate changes each year, but is usually equal to the yield on 30-year Treasury bonds.
Illustration
The table below illustrates the effect of adding a Cash Balance plan to an existing 401(k) in which the doctor and spouse were receiving a total contribution of $76,500 ($54,500 for the doctor + $22,000 for the spouse). In a combined 401(k) + Cash Balance retirement plan, the total contribution for the doctor and spouse could be as much as $169,750 ($144,500 for the doctor + $25,250 for the spouse), or 86% of the total.
| Considered | Cash | 401(k) | 3% Safe | Profit Sharing | TOTALS | ||
| Earnings | Balance | Deferral | Harbor | Amount | Amount | % | |
| Principals | 295,000 | 90,000 | 44,000 | 8,850 | 26,900 | 169,750 | 86.3% |
| Non-Principals | 316,000 | 6,320 | 0 | 9,480 | 11,060 | 26,860 | 13.7% |
| Grand Totals | 611,000 | 96,320 | 44,000 | 18,330 | 37,960 | 196,610 | 100.0% |
Jason Arnold provides retirement plan design and administration through PenSys, Inc., (888) 440-6401, an affiliate of McGill & Hill Group, a one-stop resource for tax/business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. John McGill provides tax and business planning exclusively for the dental profession and also publishes "The McGill Advisory" newsletter through John K. McGill & Company, Inc., member of The McGill & Hill Group, LLC. For information on webinars presented by the firm, visit www.mcgillhillgroup.com/webinars.asp.
