In addition to being an effective tool for employee retention and a vehicle to prepare you for financial security in retirement, a 401(k) plan also has several tax benefits for physicians in private practice. Every time you and your employees make a contribution with pre-tax dollars, you and they receive the benefit of a tax deduction. Other components, such as an employer match, also become a tax-deductible expense for your medical practice. Tax-time is already upon us, but you can take advantage of this information to plan your contributions and investment strategy for the rest of the year and get the maximum tax advantage out of your 401(k) plan.
Deductible Business Expenses
- Retirement Plan administration fees can be a tax deductible business expense. There are two separate types of fees that are incurred with your plan: 1.) Investment management fees, which depend on which fund you invest in and the expense ratio of that fund; and 2.) Administrative fees, which is what it costs to administer your plan. When the latter fee is paid by the practice, it becomes a deductible business expense.
- Profit sharing and matching contributions are an allowable business deduction and are not taxed to the participant until distributed; usually much later in life when one is in a lower tax bracket. A physician/owner can save up to $52,000 in his/her 401(k) plan account in a single year ($57,500 if over age 50). This is much more than if they only maximize the $17,500 ($23,000 if over age 50) employee 401(k) contribution limit.
Personal Tax Deductions
- 401(k) contributions reduce your taxable income. The contributions you make are taken directly out of your salary before taxes are figured. This means that these amounts are not included in your taxable income for the year, so the amount of income that you make is considered lower for tax purposes.
- You can also choose to make Roth after-tax 401(k) contributions which are taxed now, but not taxed later when withdrawn, nor are the earnings taxed. This could be a big tax advantage to a young saver who allows their 401(k) account to grow for many years. (You must meet IRS guidelines for the Roth to be tax-free.)
You have no control over what happens to tax rates. But with a little foresight and planning you can use your retirement plan to lower your tax bill. Feel free to contact UPAL if you want to learn more about this subject.
A reminder about employee contribution limits.
|Annual Compensation Limit||$250,000||$255,000||$260,000|
|Defined Contribution Maximum Annual Contribution||$50,000||$51,000||$52,000|
|Annual §401(k) Employee Deferral Limit||$17,000||$17,500||$17,500|
|Age 50 Catch-up Contributions to §401(k) Plan||$5,500||$5,500||$5,500|
|Highly Compensated Employee Threshold||$115,000||$115,000||$115,000|
|Income subject to Social Security Wage Base||$110,100||$113,700||$117,000|