Retirement Plans for Solo Practitioners | Guest Post by David Frank, CFP®
You’ve gotten your Private Practice off the ground and you’re ready to start saving for your future. Awesome!
But… you might find yourself a little stuck (or overwhelmed) by the choices you need to make next.
If that describes you, this is the post for you!
Today we’ll discuss how therapist Solo Practitioners can get started saving for retirement – and which Retirement Plans are best for them.
One word of warning, this is general educational content and NOT advice. Advice requires a nuanced understanding of your personal circumstances – which obviously I don’t have. If you suspect you need professional advice, please seek that out!
First Things First: Start with an Emergency Fund 🚨
Especially as a small business owner (yes, that’s what your Private Practice is!) it’s important to have an adequate Emergency Fund.
Before contributing to a retirement fund, I like to see clients have at least one month’s worth of non-discretionary expenses in a nice, stable bank account. This should include non-discretionary expenses for both your personal life and your practice.
Longer-term, I like to see clients have Emergency Funds with 3-6 months worth of non-discretionary personal expenses and a couple months of fixed practice expenses.
While Retirement Accounts are amazing, they come with a lot of rules and restrictions. Once you put funds into a Retirement Account, you pretty much can’t get at them until you’re 59.5 years old. (Yes, there are some exceptions, but they’re complex.)
Pick the Right Retirement Plan for You
As a small business owner, you have a confusing array of Retirement Plans available to you.
That’s a great thing! But it does mean you have to navigate the complexity.
Fret not! It’s a lot simpler than it sounds.
🌟 Pick your retirement plan based on how much you want to contribute each year.
In general, the higher the annual contribution limit, the more complex (and expensive) the Retirement Plan is.
Deciding Factor: Your Desired Annual Contribution
In most cases, you’ll want to simply pick the Retirement Plan with the lowest annual contribution limit that meets your annual savings needs.
A Traditional IRA or Roth IRA is easiest and has the lowest annual contribution limit.
Next is a SEP-IRA which usually allows a slightly higher annual contribution (although it depends on your practice income).
Finally, an Individual 401(k) offers you the highest annual contribution limits (by far).
The annual contribution limits of each plan change (virtually) every year. (They get adjusted upward for inflation.)
You can find the latest limits here or on the IRS website.
Looking for a little help making these calculations? Get a free contributions calculator (and webinar) by signing up here!
Reasonably Easy to Change Retirement Plans
If you change your mind down the road, no big deal. If you open a different type of Retirement Plan later on, you can leave your old Retirement Account balances alone to grow – or you can roll them over into the newly created plan. (Yes, there are nuances and rules you need to follow.)
Solo Practitioners Can Usually Ignore other Retirement Plan Options
You might have noticed I’ve only talked about 3 of the different Retirement Plans out there. And yes, there are a lot more. But for Solo Practitioners the three plans I’ve described will meet the needs in virtually all cases. The other types of Retirement Plans out there are usually better suited for Group Practice Owners or reasonably unusual situations.
Decide on Roth or Traditional 🤔
Once you’ve picked your Retirement Plan, you’ll then need to decide if you want it to be Roth, Traditional (or both).
The most important thing to remember about the decision between a Roth and Traditional Retirement Account is that it doesn’t really matter.
Ok, sure, yes, it DOES matter – but maybe not as much as you think.
I like to see most of my clients have a balance of Roth and Traditional account balances. So it’s not that one is wrong and the other right, it’s more that you want to end up with both.
But let's first understand the key differences between Roth and Traditional accounts.
Tax Treatment is the Only Difference between Roth & Traditional
The difference is the way taxes are handled. All Retirement Accounts are tax-advantaged accounts – so named because, well, they offer tax advantages.
Traditional Accounts offer an immediate tax deduction for contributions. The flip side is that you DO pay income taxes on the distributions out of that account.
Roth Accounts work in the exact opposite way. When you contribute to a Roth Retirement Account, you get NO tax deduction. But in exchange for paying taxes today, when you take distributions out of your Roth account in the future, no income tax is due. (Yes, of course there are nuances and rules you need to follow.)
Is the Roth or Traditional Better for You?
So which is right for you?
In general, it makes more sense to contribute to a Roth when your tax rate is low. That might happen when your annual income is lower, or if you live in a no-income-tax state, like Texas or Florida.
Conversely, it usually makes more sense to contribute to Traditional Accounts when your tax rate is higher. That happens when your income is relatively high or you live in a high-income-tax state, like California or New York.
But contributing to EITHER type of account is the real win. Don’t get stuck trying to figure out if Roth or Traditional is the best. You can even split the difference and contribute to both in the same year.
Mind the Rules – But Don’t Get Scared Off!
Don’t get scared off by all the rules around Retirement Plans. Yes, there are a lot, but they aren’t THAT bad.
The three biggest mistakes to avoid are contributing more than is allowed, exceeding IRA income limits and not contributing to the Retirement Accounts of your employees.
The moment you hire your first W-2 employee, the rules change (a lot). But as long as you’re solo, you don’t have to worry about those complexities.
Contribution Limits
Contribution limits apply cumulatively across all your Retirement Accounts.
In other words, if the annual IRA contribution limit is $6,000, you can put $3,000 in a Roth IRA and $3,000 in a Traditional IRA (that totals $6,000) – but you decidedly may NOT contribute $6,000 to EACH of your IRAs.
Income Limits for Certain IRA Contributions
Your ability to contribute to a Roth IRA is limited by your income. Once you exceed that income limit, you may not directly contribute to a Roth IRA (but you may still use the Backdoor Roth IRA).
In certain cases, the deductibility of your Traditional IRA contribution may be limited above certain income levels. All these details are annoyingly complex.
Like the annual contribution limits, these income thresholds typically increase each year.
Know these limits BEFORE you make a contribution.
Learn more about all the IRA rules here.
If in doubt, about any of these rules ASK!
Your tax professional or Financial Planner can help you navigate these complexities.
Select an Investment for your Retirement Account
Once you’ve chosen the right Retirement Plan for you, you have one more big decision to make: what investments to put in that account.
Retirement Plans and Accounts themselves are not investments. Rather, they are containers which can hold a wide variety of different investments.
But just because your Retirement Account could potentially hold a wide range of investment funds, doesn’t mean it should.
Simplicity is often the best approach here.
I often recommend Vanguard Target Date Retirement Funds as a great way to get started saving for retirement. This is a single fund solution, where you simply select the fund with a target year closest to your target retirement year. The fund managers take care of the rest for you.
Target Date Retirement Funds won’t always be the best choice, but they will almost always be a pretty darn good choice. Whatever fund you choose, be sure to balance risk and keep the investment fees reasonable. While not perfect, in my experience Vanguard typically does a very good job at both.
Next Steps! 🥾
To get started, consider opening an account with Vanguard (which I frequently recommend) or another reputable financial institution. Always monitor the fees you’re being charged!
For more detailed guidance, check out my recorded webinar and get free resources like a Retirement Plan cheat sheet and a contributions calculator.
Author Bio:
David Frank is the financial planner for therapists and founder of Turning Point Planning.
He helps therapists organize, optimize and protect all their financial resources, including their practice. He provides the confidence your finances are on track, so you can focus your time and energy on what matters most.
But don't let his love of the tax code and spreadsheets scare you off! You're just as likely to find him with his nose buried in one of Pema Chödrön's books as reading up on the latest financial planning techniques.
Back to zynnyme here: Feeling like you don’t have any spare income to even THINK about retirement yet? Check out our free training Profitable Private Practice to create a plan that actually WORKS for you! Click here to watch the on-demand free training today.
