Retirement doesn’t rank very high on most new optometrists' to-do lists. Especially those OD’s who are trying to build up their own practice.
You need to spend your time building up your patient base or finding great staff to help you grow. No time to think about something that is decades away!
The prevailing thought is that when you decide to stop working you will be able to sell your practice for a nice payday and ride off into the sunset. This means that practice owners will need an exit strategy from the get-go to ensure that they will be able to sell their practice easily and for top dollar.
But it doesn’t always work that way.
Many practice owners will end up selling their practice as distress sales for various reasons such as health problems or family issues.
Hopefully your practice will be highly sought after and will make you a multimillionaire. But just in case it doesn’t, consider these retirement options for self-employed ODs. Remember, investing early and contributing often will give you a great chance of having a sizeable nest egg upon retirement.
First up is the Solo 401k. This is a plan for those OD’s with no employees, such as independent contractors or some leasing docs.
The main advantage of the Solo 401k over other retirement options is the ability to contribute a lot of money each year. Up to $53,000 to be exact.
Just like a regular 401k an employee of a big company would get, you can contribute $18,000 as an employEE in your Solo 401k.
You can also make employER contributions, up to 25% of your net income. That’s a lot of potential money in retirement.
Overall, it’s the best option if you are an independent contractor. While you don’t get potential matching funds like a traditional employee might, being able to save money on taxes and having tax free growth on up to $53,000 per year can be very powerful. Solo 401k’s are also fairly easy to set up on your own. You don’t have to go through a fancy broker or salesman. You can sign up with any major brokerage like Vanguard or Fidelity.
As with a traditional 401k, early withdrawals from a Solo 401k will be subject to income tax along with a 10% penalty.
Here is the nitty gritty info from the IRS.
Simplified Employee Pension Individual Retirement Account, or SEP IRA, is a good option if you have a few employees, which applies to most small practices.
It is similar to a Solo 401k in that you can contribute up to $53,000 per year to the account.
The difference is that you cannot make that $18,000 employEE contribution which you could with a Solo 401k. You have to make do with the employER contribution of 25% of your net income. So if you make a healthy net income for the year ($212,000 to be exact), you will be able to reach the $53,000 limit. If you also have your own individual traditional or Roth IRA you can still contribute to a SEP with no problems. SEP accounts are considered separate accounts so the contribution limits are not affected.
They are very easy to open online with minimal paperwork compared to a Solo 401k. You can also open and fund a SEP IRA as late as April 15 of the next tax year, which you cannot do with a Solo 401k.
Here is the IRS info on SEP IRA’s.
What’s this? A health savings account can be used as a retirement account?
Yes it can!
If you decide to use it that way of course. You can only open an HSA if you have a high deductible health plan (HDHP). These are becoming more and more common nowadays with the changing healthcare landscape in the country.
In general, an HDHP provides no cost preventative care exams but requires you to hit the high deductible before the insurance pays for anything else. For the year 2016, the minimum deductible needed for a plan to be considered an HDHP is $2,600. Meaning you have to spend $2,600 in health care costs for the year before the insurance starts paying.
To help with this, the government allows HDHP users to open an HSA.
This account is incredible in that it allows you to contribute money tax free, the money grows tax free in your investments of choice and there is no tax on withdrawal if used for healthcare expenses.
It’s a triple tax break!
And the money is yours to keep for as long as you like. There is no use it or lose it provision like a Flexible Spending Account, which means if you keep contributing and let the investments grow over time, it can be used as a retirement account for healthcare expenses. With healthcare costs expected to be at least a quarter of a million dollars for the average person in retirement, every little bit helps.
Here are the IRS rules on HSA’s.
SIMPLE stands for Savings Incentive Match Plan for Employees and is available for any small business with 100 or fewer employees. It has characteristics of a SEP IRA and a Solo 401k.
Like a SEP IRA, it is very easy to open and get up and running. Like a Solo 401k, you have contributions as an employEE and an employER. On the employEE side, you can contribute up to $12,500. On the employER side, you contribute a 3% match on the employEE contribution.
It’s a good option to consider once you start having lots of employees and need to offer some good retirement incentives to help with employee retention.
The IRS lays out its rules for SIMPLE plans here
These are 4 basic, but powerful vehicles for retirement savings. Many surveys show that the vast majority of small business owners don’t save for their own retirement. They’re too busy focusing on growing their business, which is not necessarily a bad thing.
But taking a little bit of time to set up the appropriate account and contributing to it on a regular basis could give you a nice extra cushion once retirement rolls around, and you'll be just fine even if your practice doesn’t sell for ten million dollars!
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Did you know that the average optometry student graduates with $173,000 of student loan debt? Paying off that debt requires smart budgeting and a lot of discipline. Many of the ODs in our community have also chosen to refinance their loans to lower the interest rates and/or reduce monthly payments. If you're looking to refinance, we heartily recommend that you check out Credible. In a nutshell, Credible is a free service that lets you compare prequalified student loan refinancing rates from up to 10 lenders without affecting your credit score. Click here to compare rates