Think tax-favored retirement plans
By Mark E. Battersby

Saving for retirement is a problem faced by everyone — including your colleagues in chiropractic. Not too surprisingly, our federal income tax laws can help everyone — solo practitioners, self-employed chiropractors, and practice principals alike — achieve their retirement planning goals.

The question facing you concerning saving is this: Do you plow profits back into the operation in order to increase its eventual sales price, or do you create a separate nest egg?

A number of different types of investments can be used to fund your eventual retirement. The specific investment vehicle or vehicles usually depend upon the number of years remaining before your retirement, your age, and, of course, the level of risk you are comfortable with.

• IRAs. The most popular tax-favored retirement savings device is the individual retirement account or IRA. For the most part, the paperwork and tax reporting requirements are minimal and, best of all, there is no need to include employees — if any.

The biggest drawback to an IRA is that the maximum annual contribution is limited to the lesser of earned income or $4,000.

On the plus side, any chiropractor who will be at least 50 by the end of the tax year can make additional contributions either to a traditional or Roth IRA. Last year, the maximum amount of this catch-up contribution was $500. After 2005, the maximum catch-up amount is $1,000.

And, best of all, IRAs may hold about any investment except so-called “collectibles,” (e.g., antiques and stamps).

Any individual under the age of 701/2 during the tax year may contribute or put money into a traditional IRA using before-tax dollars. Amounts earned in a traditional IRA are taxed only when distributions are eventually made, ordinarily at a time when the chiropractor is in a lower tax bracket.

Thus, with this most basic vehicle for retirement savings, you contribute money before the tax bill eats a portion. The amounts earned while in the IRA account accumulate without adding to the tax bill. When these funds and the tax-free earnings are eventually withdrawn from the IRA, they are taxed, but at the tax bracket you find yourself in at that time.

Unfortunately, no one may withdraw amounts from a traditional IRA who is under the age of 591/2 without incurring a 10 percent early distribution penalty.

Note: If you (as a solo practitioner or self-employed chiropractor) or your spouse is an active participant in an employer-maintained retirement plan, the IRA deduction may be reduced or even eliminated.

Remember, income restrictions limit the amounts that you can contribute each year to an IRA. Those limits on income range between $50,000 and $60,000, for a single individual. Married couples filing jointly face income limits of between $75,000 and $85,000 and cannot contribute anything tax-free above that limit, although the amounts within the IRA continue to grow free of taxes.

Roth IRAs provide more flexibility than traditional IRAs, and in general are subject to the same rules that apply to traditional IRAs. Contributions to a Roth IRA, however, are not tax deductible, although withdrawals are tax-free.

• Self-employed retirement plans. In the past, the term “Keogh Plan,” or “H.R. 10 Plan” was used to distinguish a retirement plan established by a self-employed chiropractor from those of big businesses.

Today, however, the federal tax rules make no distinction between pension, profit-sharing, or other retirement plans established by a corporation and those available to self-employed chiropractors, solo practitioners, or partnerships.

Even though there is general parity between retirement plans established by a self-employed individual and plans established by larger business entities, special rules often apply. For example, the term “employee” generally includes a participant in a plan of an unincorporated chiropractic practice or business who is a partner or sole practitioner.

Whenever the tax rules refer to “employer,” a solo practitioner is treated as his or her own employer. A partnership, however, is considered the employer of each partner. As a result, solo practitioners may establish their own retirement plans.

Only a partnership may establish a retirement plan for partners.

A retirement plan established by a chiropractic practice operating as an S corporation must adhere to the same rules that apply to regular C corporations. As a result, S-corporation shareholders are not entitled to claim retirement plan contributions based on their pro-rata share of pass-through income from the S corporation. A court has ruled this pass-through income cannot be treated as earnings from self-employment for retirement plan purposes.

• A SIMPLE plan. A “Savings Incentive Match Plan for Employees,” or SIMPLE, is one of the most attractive options available to chiropractic practice and small-business owners with 100 or fewer employees.

With a SIMPLE plan, you can decide whether to use a 401(k) or an IRA as the basis for his or her operation’s retirement plan.

A SIMPLE plan is just that — simple to administer. You make contributions to the plan by either matching each participating employee’s contribution dollar-for-dollar, up to three percent of the employee’s pay, or by making an across-the-board 2 percent contribution to all employees, even if they don’t participate in the plan.

The maximum amount each employee can contribute to the plan is only $6,000 per year, one of the lowest contributions of all available plans. Therefore, the tax deduction for the contribution will not be as great as it could be with some of the other plans available to chiropractors.

• SIMPLE 401(k) plan. Another type of SIMPLE retirement plan available to you is a SIMPLE 401(k) plan. This plan must generally satisfy the requirements that apply to other 401(k) plans. That can mean attempting to prove the plan does not discriminate in favor of the practice’s principal or “highly compensated” employees.

Generally, a SIMPLE plan may qualify by satisfying a number of requirements, such as allowing each employee eligible to participate in the qualified plan the right to make annual elective contributions, expressed as a percentage of compensation and not to exceed $6,000, adjusted for inflation.

• SEP retirement. As its name implies, the Simplified Employee Pension plan (SEP) is an even simpler type of retirement plan than a SIMPLE plan.

Essentially, a SEP is a glorified IRA that allows a chiropractic practice to contribute a set percentage, up to a maximum amount each year. Paperwork is minimal and contributions do not have to be made each year. Regardless of the word “employee” in its title, employees are not necessary to establish these plans.

If there are employees in the picture however, that is a different story. Employees do not contribute to SEPs. Employers must pay the full cost of the plan, and whatever percentage you pay for yourself, an equal amount must be contributed for each eligible employee. The maximum contribution is 25 percent of the employee’s income with a maximum contribution of $44,000 (in 2006).

A variety of pension and retirement plans are “tax favored.” IRAs are usually available from banks, stockbrokers, and other financial institutions. Establishing the formal plans necessary for other retirement plans usually requires the help of qualified retirement or pension planners and professionals.

Thanks to our tax rules everyone, you can profit from favored savings and investments. Whether utilizing an IRA or benefiting from the fact that the term “employee” includes participants in a retirement plan of unincorporated enterprise, either a partner or a sole practitioner, tax-favored retirement savings provide a welcome helping hand from Uncle Sam.

SIDEBAR:
IRS has retirement news for small employers

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer, and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Disclaimer: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional advisor about issues related to your practice.