Finances

Refract Your Finances to 20/20: Put More Money Away for Retirement

By Adam Cmejla, CMFC

SYNOPSIS

Securing your financial future takes careful preparation. Here is how an OD and his wife worked with a financial advisor to crunch the numbers, save money in practice operations, and get on track for a prosperous retirement.

ACTION POINTS

ASSESS PRACTICE’S FINANCIAL STATUS. Calculate gross receipts, net income and taxable dollars.

RECOGNIZE KEY CHALLENGES. Put away more money for retirement and reduce tax liability.

IMPLEMENT SIMPLE IRA. SIMPLE IRAs offer low cost, low administration requirements, and the ability to defer all of the additional business income into SIMPLE accounts for the owners.

The ideal time to start planning for your financial security is at the beginning of your career, not the end. But many ODs do put it off until their last years in practice. Fortunately, there is still hope for putting away money for your retirement, and enabling your staff to do the same, even if you don’t have much time left in practice. In my last article, “Wealth Management Tools: Secure Your Financial Future in the Present,” I laid out basic plans and options that an optometrist practice owner should consider to build wealth. In addition to having many OD clients in my wealth management firm, I have learned these financial lessons first-hand, as my wife is an optometrist.

Implementing a retirement plan in your business is not only a great way for you to save for your family’s financial future and provide an added benefit to your team, but you can also help reduce your ongoing tax liability on both the business and personal side of your tax returns. To best illustrate this, let’s work through one of my client cases much like you would work through a patient’s medical history.

ROB Bottom Line:
Retirement without Retirement Plan
vs. with SIMPLE IRA

Case History: Assess Current Financial Status of Practice

To honor confidentiality, we’ll call these OD clients John and Jane Doe. This particular client was referred to us by their CPA with a chief complaint and challenge of analyzing their situation to maximize their social security payments to him and his wife, as well as determine how else they can save for their retirement and eventual exit from optometry. This husband-wife team (John’s the OD, Jane’s the practice manager) wanted to continue to work for the next four to six years.

Their practice has a team of seven support staff members and two optometrists (owner and associate), however the associate is a 1099’ed optometrist, or independent contractor, and is therefore, not an employee of the practice. This excludes them from being eligible to participate in any retirement plan offered within the practice. Up until this point the practice had not implemented any type of retirement plan into their business.

Gross receipts of the practice over the years was approximately $939,000, with net income about $27,000 after all expenses, including owners’ W-2 compensation. The practice files their tax return as a Subchapter – S corporation (Form 1120S). Because of filing as Sub – S, the $27,000 of business income would ordinarily flow through to their personal tax return. They are comfortable with his current W-2 salary and do not necessarily need the additional $27,000 of business income to pass through to their personal returns as taxable income.

Key Challenge: Put More Money Away for Retirement

The client communicated to us that they are looking for additional ways to put away money for retirement, realizing that they are “late to the party” as it pertains to retirement savings. They are also looking for ways to reduce their current year tax liability.

Current Outcome: Manage Taxes More Effectively

Without changing anything, and assuming that they are in the 28 percent tax bracket, the additional $27,000 of income would be realized as ordinary business income on their tax return (Line 17 of Form 1040), therefore subjecting them to an additional potential tax liability of $7,560. In addition, this income pushes their AGI (Adjusted Gross Income) up even higher, thus potentially minimizing or eliminating potential deductions or exemptions while also making them subject to additional taxes, such as the new 3.8 percent Net Investment Income Tax. (Side note: this new 3.8 percent tax is an important planning piece that will be addressed in a future article as it can surprise many optometrists who own rental real estate or have other passive business or investment income).

Recommended Strategy: SIMPLE IRA

In this client’s situation, we found it best to offer and implement a SIMPLE IRA into the practice. The benefits of the SIMPLE IRA were low cost, low administration requirements, and the ability to defer all of the additional business income into SIMPLE IRA accounts for the owners. This was accomplished by doing the following:
• Increasing salary for the last pay period in the year for the amount of deferral for the owners. In each case we elected to contribute the full amount of $12,000 per person, though each of them could have put an additional $2,500 into their accounts due to being over the age of 50.

• An initial open enrollment meeting was held over lunch with the staff to introduce the plan to them, explain the benefits and take applications. A total of four out of the seven staff members decided to participate. This is an additional “value add” benefit that demonstrates that their employer cares about their financial well-being.

• The practice elected to match 3 percent of elective contributions; therefore the four that elected to participate will receive a dollar-for-dollar match on the first three percent of their compensation that they defer into the plan, of which the employee will be 100 percent vested.
• The practice matched the owners’ contributions, as well. Keep in mind that employer contributions can be made at any time, but must be made by the time the business files its tax returns, including extensions. Employee deferrals must be contributed to the plan within 30 days of the payroll run.

Conclusion: SIMPLE IRA Increased Retirement Savings

Because of implementing a SIMPLE IRA into this practice, the client went from owing the IRS a potential tax liability of $7,560 to creating a windfall retirement savings of over $28,000 ($24,000 of personal contributions plus the 3 percent employer match on their personal accounts).

Every practice and case is different and we encourage you to make sure that you are making the best decision for you, your family, and your practice. If you’re wondering what is needed to start that process and determine which plan may be best for you, don’t hesitate to get the help you need from a financial and wealth management advisor. Better to get the help you need to manage your finances so your retirement, and that of your staff, is not at risk, then to leave it to chance.

Related ROB Articles

Wealth Management Tools: Secure Your Financial Future in the Present

ABC Accounting: Track and Manage Finances for Profitability

Understand Relevant Costs to Make Better Decisions

Adam Cmejla, CMFC, based in Carmel, Ind.,is president of Integrated Planning & Wealth Management, LLC, a financial planning and investment management firm “focused on working with optometrists to help them achieve their true financial potential, build financial confidence and clarity, and delivering kindness and compassion to every relationship they’re privileged to serve.” To contact: 317-853-6777 or adam@integratedpwm.com.

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