by Bruce Bryen, CPA, CVA
Almost all the dental practices in the United States have been advised to close their offices by either their local dental organizations or by the ADA. Additional advice has been to lay people off and to cut expenses to the maximum. Those still maintaining an office presence are doing so with a minimal staff. The essence of the organizations and financial advisors advice has been to do what it takes to retain as much cash as possible. The money should be conserved to maintain the dental practice presence in the minds of the patients as well as potentially new clientele. Cutting costs during this crisis is sound, as is doing so when there is no crisis. Whatever expense item that can be eliminated is good to follow up upon so long as the practice can maintain its reputation and communicative skills. There has been one suggestion that has not been made in any article or by any financial advisor or dental CPA that this author has had the opportunity to relate. The concept that no one seems to be paying any attention to is one of trying to increase the reportable income of the dentists who have had their practice’s finances decimated by the corona virus.
Keep cutting expenses but be smart with income as well.
For those with good dental CPAs as well as other creative types of financial advisors, there is a way to manufacture income so that the reduced reportable income from the dental practice won’t go to waste. Having a much lower tax bracket because of the corona virus can be utilized in a sound business like approach. When markets return to a good performance level and when the dental practice gross revenue bounces back, the ability to utilize this creative plan won’t exist anymore. Conceptually what would occur is that those who have reached age 59.5 or older should consider withdrawing more from their retirement plans now so that they can report more income in 2020 while the retirement plan distributions will be taxed at a much lower income tax rate. In order to do this before age 70.5, the retirement plan document should have an “in service withdrawal,” provision. Age 70.5 is the normal required minimum distribution age for most retirement plan participants. If the dentist is age 70.5 or older, a required minimum distribution is required. This does not prevent the dentist from distributing more than the minimum, especially if he or she is still practicing. This is because the corona virus reduced the taxable income of the dental practice so significantly that the additional taxable withdrawals from the retirement plan will not have a detrimental effect as it would have had with continued high income being reported from the practice as well as the required minimum taxable distribution. Some may say that by taking the additional withdrawals that the 401k/ profit sharing plans will have their total assets substantially reduced and that the future will be detrimentally affected if this plan is followed.
What can be done to overcome any asset dissipation in the 401k/ profit sharing plan?
Each dentist’s own dental CPA or other financial advisor should review the concept to see if it makes sense for him or her based on the direct knowledge that the dentist’s own advisors have the direct knowledge of his or her financial structure so that a plan is approved by that advisor and not by merely reading this article.
The opportunity for a total review of the retirement plan and the advice surrounding its implementation is available to overcome any asset loss. If the advice is taken to reduce the asset value of the 401k/ profit sharing plan by taking additional taxable withdrawals, the following should be discussed. This opportunity may never be available again but the dentist’s own advisors must be tax oriented, understand retirement plans and be able to communicate the upside and downside to the potential that will be explained. To understand the possibility of saving huge amounts in taxes now, it is important to understand the difference between the two types of retirement plans. A short explanation of the defined benefit plan and the defined contribution plan follows so that the advantages and disadvantages can be understood and why this concept can be so attractive in 2020.
The upside and downside of the defined benefit plan and the defined contribution plan:
With additional “in service withdrawals,” from the 401k/ profit sharing plan, the account balance and value will lessen. This becomes the time to discuss a new retirement plan concept rather than the defined contribution plan currently in use. The adoption of a defined benefit plan will cause future deductible contributions to increase dramatically and therefore add back the asset value very quickly. As an example, in 2020, for those fifty years of age and older, the deferral allowed to be contributed to the 401k is $26,000. That amount combined with the profit sharing allowable maximum of $37,500 equals a total of $63,500 allowed under certain conditions based on age and income from the practice. A defined benefit plan can double or triple the deductible contribution so that in a short period of time the account balance will substantially improve. With the stock market at a low point and maybe even getting lower, it would be a good time to buy with these additional funds or to invest them as one saw fit to do so. The defined benefit plan is one that is managed differently from the 401k in that you don’t need mutual funds to be the investment choice. There are many options available for investment. The dental CPA who understands retirement plans and the speed at which the defined benefit plan can overcome asset losses will be a good resource. If the dental CPA does not understand the value of setting off this year’s potential low practice income by utilizing the retirement plan income potential, he or she possibly should be asked to get a second opinion for the dentist who wants to take some type of action to keep taxes down and not waste the lower tax bracket taking place with the 2020 income. This is a very sophisticated plan and should be addressed with those who understand the ramifications of the many issues being addressed with it. The dentist should make sure that he or she is getting advice from the person who can expertly offer advice during this economic and health pandemic.