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Retirement Planning
14 May, 2021

Understanding the essentials of creating a Tax-Free Retirement for dentists

Working in the dental industry is extremely rewarding and can provide a comfortable lifestyle for many years. However, when dentists retire, they often find that their income is lower due to the tax burden they were not expecting.

In a perfect world, we would have all the time in the world to make retirement plans, but when juggling caring for patients, your business, and your family, it tends to be a lower priority. When putting away for the future, it is easy to face what that means later. However, asking a few questions now, wherever you are in your career, can make all the difference in retirement. The biggest question is when you will retire? What type of plan is the most beneficial? These questions haunt dentists across America every day. 

Retirement Investment Options

First, let’s talk about the difference between a traditional retirement plan and a Roth. Which one should you choose? Traditional plans include defined benefit pensions, 401Ks, IRAs, SEPS, simple IRAs, etc. The benefit of these plans is that the money you invest is completely tax-deductible. The tax is deferred until you pull the money out. If you are in a higher tax bracket, this is important to know! A traditional plan is a great option if you want to pay less tax now because it allows you to lower your taxable income. There are different contribution limits depending on the type of plan. A defined benefit pension allows the most deductible contributions and, contrary to popular belief, often works great for small businesses.

In retirement, when you pull the money out, retirees often no longer have the same tax benefits, such as mortgage interest, child tax credits, or HSA contributions, and the tax bill is can be high. Considering the growing national debt, it’s probable that tax rates will rise. Roth IRAs are the opposite of the traditional plan. A Roth IRA allows you to contribute after-tax dollars without having to pay taxes upon retirement, for either principal or earnings. Additionally, utilizing a Roth option can also lessen the tax burden from Social Security receipts. 

A Roth IRA is one way to have a Tax-Free retirement. However, there are limits. The maximum amount you can put into an IRA, traditional or Roth, is $6000/year or $7000 if you are 50 or better. I’m not going to lie; the max limit for a tax-favored account sounds like nothing compared with what’s allowed in other retirement accounts. But don’t let that discourage you from getting creative and trying out some new moves! Most 401k plans allow a Roth option for employee contributions, which would allow Roth contributions of up to $19,500 or 26,000 for those 50 or older.

And there is also an income limit to the Roth IRA. You are not eligible for making contributions if you make more than $125,000 yearly as a single individual or $198,000 in a joint filing. If you fall into this category, which many dentists do, don’t give up! There are some options still available to you.

Most people don’t know there is a backdoor Roth IRA option. You can take a traditional IRA and pay all the taxes on it and roll it into a Roth to avoid paying taxes later in retirement. A common but not so common strategy is to contribute to a traditional IRA each year and immediately roll each contribution into a Roth, which legally bypasses the income limits and accomplishes the same exact goal.

If you are reading this, then it is not too late to take steps that will reduce your tax burden when you retire.

If there’s one thing we know for sure, taxes can become a headache as soon as an individual stops working and their income dwindles in comparison with what they were paying while employed full-time. This does not mean the end of hope though; individuals who plan wisely have many strategies at their disposal, which allow them to minimize the amount of tax paid in retirement.


Additional Retirement Options

Some tax options outside of the traditional funds can help you towards a tax-free or at least a lower tax retirement. The RPT (Restricted Property Trust) is an attractive alternative or addition to deferred compensation plans for successful business owners who wish to mitigate income taxes and appreciate assets. Contributions are partially deductible, and there is still a tax-free eliminant upon withdrawal.

First and foremost, life insurance is to protect family members against a future that doesn’t include the covered person. Some life insurance policies can also help in retirement. Whether it is a good fit is dependent on the individual situation. Contact your CPA or financial advisor to discuss if a retirement benefiting life insurance policy may work as part of your retirement plan.


Selling Dental Practices at Retirement

When you’re preparing to retire, one of the most valuable decisions that need addressing is what to do with your practice. Often when we tell people how much tax they will owe with the sale of their dental practice, there is a sense of sticker shock. Some either reverse their decision or delay selling. Here are a few pointers to help you avoid paying more than necessary in taxes when selling your practice. Consult with your CPA and lawyer before proceeding. 

The first thing to do is pay off debts. At the time of sale, you are taxed on the value of the cash you receive plus the value of the debt that is relieved. Most people are not excited about being taxed on money they’re never going to see. One way to avoid paying taxes on debt relief is to pay down debt as much as possible before selling. When you pay down the debt you take fewer distributions and you are preserving your basis which will also help reduce the taxable gain. 

When you sell your practice you have to allocate a portion of the sale toward equipment and supplies. Another portion is allocated toward goodwill. If you’re the seller, it is to your advantage to allocate as much as possible to goodwill. Capital gains at the time of this writing are lower than regular rates. Dentists are typically taxed on ordinary income for the sale of supplies and depreciation recapture on equipment. As of the time of this writing, the highest ordinary tax rate on ordinary income is 37%; however,  there is a proposal to increase it to 39.6%. 

It is also proposed to eliminate preferential capital gains tax rates for those with incomes over $1 million. So, that would be 39.6% on everything plus your state taxes, if applicable. If that happens, dentists may want to seller finance in order to keep their annual incomes below $1 million, rather than take the money upfront. You also may be able to receive a more favorable sale price with this strategy. 



Retirement planning can be extremely complicated, and there are some definite possible pitfalls. With many different investment strategies and retirement vehicles to choose from, it can be difficult for a professional who has been in the field for decades to keep up with what’s new in these rapidly changing times. To help navigate this confusing landscape, we offer access to tax details and resources to clients. Whether you’re just starting or are an experienced veteran of the industry looking at your next steps toward retirement, give us a call today so we can help get your questions answered.

Note: The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Ed Gabriel, CPA is President of DrillDown Solution and a graduate of Brigham Young University. His clients benefit from over 40 years of experience in maximizing profits, minimizing taxes and putting them in the best financial position possible.