April 12, 2019
For young ODs who are trying to build their business and pay off school loans, retirement planning may seem far-off. But more experienced ODs will attest to the importance of developing a plan for retirement as a primary point in optometry accounting and financial planning.
Unfortunately, not all optometrists can rely on selling their practice after a long and successful career, and it is essential to have multiple exit strategies and financial plans in case of an emergency.
ODs have various options for developing a responsible retirement plan for themselves and their business that will ensure the smoothest transition into retired life, whether that might be in five years or 50.
A Simplified Employee Pension Individual Retirement Account, or a SEP IRA, is a retirement savings plan designed with small businesses in mind, which makes it an excellent option for ODs with a smaller practice and fewer employees.
Much like a 401k, a SEP IRA has a maximum annual contribution amount that varies depending on the year’s compensation. The lesser of $55,000 in 2018 or up to 25% of compensation or net self-employment earnings. Net self-employment income is net profit less half of your self-employment taxes paid and your SEP contribution.
Any amount put into a SEP IRA annually is tax deductible. This means your contributions, as well as the contributions that are made on behalf of your employees, can be deducted from your practice’s federal taxable income.
Unlike a Solo 401k, SEP IRAs can be launched until April 15th of the following tax year. In comparison with Solo 401ks, SEP IRAs are also simple to set up online and involve very little paperwork.
Because they are considered separately from personal Roth IRAs, the contribution limits for SEPs are not affected by your individual IRAs, another major bonus.
Solo 401ks, as their name implies, are popular among firms that do not have employees, as the IRS stipulates that companies with employees are actually barred from contributing to a Solo 401k. This makes them the retirement plan of choice for ODs working independently.
There are many advantages to opening a Solo 401k as a part of your retirement plan, as they effectively feature many of the characteristics of a typical employer-sponsored retirement plan.
First of all, they offer substantial contribution flexibility for employers, with employer contributions maxing out at 25% of net income annually. In fact, with a Solo 401k, you could contribute anywhere up to $55,000 in 2018.
Another significant advantage of the Solo 401k is that there are no income or age restrictions for opening one, and anyone with an employer identification number can easily initiate a Solo 401k through an online broker.
However, because of the tax advantages you receive with a Solo 401k, the IRS strictly limits when you can access your money, and any withdrawals made before the age of 59½ years old are subject to a 10% penalty and income tax.
A Savings Incentive Match Plan for Employees IRA is a retirement plan for businesses that employ 100 or fewer individuals, and it acts as an excellent method for employee retention.
One advantage of Simple IRAs is that they allow employees to defer tax payments to retirement. An employer is required to make one of two kinds of contributions: Employers can contribute a 3% match of the employee contribution, which maxes out at $12,500 annually (2018) or a 2% nonelective contribution to all eligible employees, regardless of whether they make deferral contributions.
While optometry bookkeeping will keep a practice on track financially, responsibly diversifying your retirement portfolio is what allows you to enjoy a comfortable life post-practice.
It is important that self-employed optometrists at any point in their career include a varied retirement plan in their financial plan for their practice.
At Caro & Associates, we have the experience and know-how to help you realize your retirement goals. Book an appointment with us today and let us help you develop your independent optometry business.
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