CFP, ChFC, CLU, CKA
Financial Wellness co-columnist Geoff Huber leads Triune Financial Partners’ retirement plan department. He’s been in the financial planning industry for three decades, focused solely on retirement plans for over 20 years. He and his team partner with credentialed third-party administrators to serve clients. Together, they work with small- to mid-sized business.Read Articles Written by Geoff Huber
Financial Wellness co-columnist Fritz Wood is a veterinary industry veteran with a special interest in finance. He works with Triune Financial Partners to connect veterinarians with experienced, independent financial planners. He is the former personal finance editor of Veterinary Economics and was a treasurer and board member at the American Veterinary Medical Foundation. He holds bachelor degrees in accounting and business administration from the University of Kansas.
Has your retirement savings and investment plan kept pace with your veterinary practice’s growth? Our experience shows and our professional opinion is that you need a second opinion to answer that question properly. Now is the time for an independent third party to conduct a rigorous review and benchmark of your plan for three foundational reasons: income tax savings, planning for your future, and attracting, rewarding and retaining key employees.
We’ll examine the importance of each key reason and present three case studies of how an improved retirement plan helps accomplish all three goals.
Income Tax Savings
Too many veterinary practice owners overpay their income taxes. Are you one of them? A properly designed 401(k) retirement plan enables you to contribute up to $61,000 in 2022, or $67,500 if you’re age 50 or over. Other retirement plan types (often referred to as cash balance plans) allow tax-deductible contributions of up to $245,000 this year.
Any contribution over and above what you’re currently doing will save you 25% to 35% of the amount, plus state income taxes if applicable. This option is too large to ignore.
If your practice is profitable and you’re fortunate to have the cash flow to support a larger contribution, discuss it with your CPA and a certified financial planner specializing in qualified retirement plans.
Planning for Your Future
Retirement is a goal of all working people, but its timing varies from person to person. Many hear that they’ll need 75% to 85% of their pre-retirement income during retirement years, but the best predictor is how much you spend now. Other factors to consider are:
- Do you have debt?
- Will your parents or children need financial support during your retirement?
- Will you have a mortgage in retirement? Will you maintain more than one residence?
- Are you and your spouse in good health? Reasonably speaking, how long do people in your families live?
An experienced and objective certified financial planner can help you answer those questions. There is no substitute for a goals-based financial life plan.
Attracting, Rewarding and Retaining Key Employees
In an uber-competitive labor market, one of the best employer strategies is to keep the good employees you have. A robust retirement plan helps you do that and attract new talent. Moreover, employees appreciate employer contributions to their retirement plan, which compound in a tax-deferred account over the years. It’s a significant and tangible way to demonstrate your appreciation and concern for your employees’ future.
Consider the perceived value of different retirement plan options. Compared to a SIMPLE IRA, a well-designed 401(k) plan offers higher contribution limits and a Roth feature. An optional profit-sharing component can further boost contributions. A vesting schedule ties employees to you even longer. Those are additional ways to attract and reward employees.
A final note: Younger associate veterinarians, many of them saddled with rising student debt, desperately need counsel to determine how best to prioritize their financial objectives and cash flow. The right fiduciary adviser firm can deliver it.
Three Case Studies
As we work with veterinary practices nationwide, we notice recurring scenarios in which an improved 401(k) plan helps the owners improve their tax savings, retirement planning and employee retention. The practices often maintain a SIMPLE IRA plan or a basic 401(k) plan using a Safe Harbor matching formula.
Scenario: The sole owner of a practice with five employees offered a SIMPLE IRA. Now, the owner can contribute $67,368 instead of a $17,000 maximum (including catch-up) under the SIMPLE IRA. The additional retirement savings and tax-deductible contributions require a small increase in contributions for employees, which is more than paid for by the owner’s personal income tax savings.
Scenario: The two owners of a practice with nine employees offered a SIMPLE IRA. Now, the owners can contribute a combined $135,000 instead of the $34,000 combined maximum (including catch-up) under the SIMPLE IRA.
Scenario: The sole owner of a practice with seven employees offered a 401(k) plan with a Safe Harbor match. By changing from a Safe Harbor matching formula to a 3% non-elective contribution, the owner could add a more efficient profit-sharing formula to the 401(k) plan. Making an additional contribution previously was cost-prohibitive, but now the personal income tax savings of the additional contribution on behalf of the owner exceeded the cost of required additional contributions for employees. It was a win-win for everyone.
Veterinary practices are thriving, so we recommend using that growth to your advantage. Obtain from a fiduciary adviser a second opinion of your retirement plan. You might reduce your taxes, invest more in your future, and improve your ability to attract, reward and retain employees.