Financial Planning for Dentists

When it comes to career plans, there can be a lot of differences for dentists fresh out of dental school. Some want to become practice owners, others want to work for a corporation. Whichever path you choose, there are a lot of financial planning questions that all dentists have. What is the best way to pay of my dental school loans? What insurances do dentists need? How do I pay less in taxes? What retirement plans are available for dentists?

Student Loan Repayment Programs for Dentists

I figured I would start the blog talking about student loan repayment options. Why? After a quick google search, more than 80% of dental students in the class of 2020 took out loans for dental school with the average loan balance being just over $300,000.

If you don’t have student loans, you have a nice head start on some of your peers. If you do have student loans, you are in the norm. With the average loan balance being over $300,000, it will be important to develop a game plan on how to pay them back in the most efficient way based on your goals and career path. Below are a few student loan repayment programs for dentists. Depending on your career path, some will be more attractive than others.

Public Service Loan Forgiveness Program

In the PSLF Program, there are a few steps involved in order to qualify for loans forgiveness. Below are the requirements that need to be met, which are listed below. After completing the requirements below, if there is any balance remaining, this amount will be forgiven.

You must have direct loans.
You must work full time for a qualifying employer
You must be on a qualifying repayment plan
1. Income-Based Repayment (IBR)
2. Pay As You Earn (PAYE)
3. Revised Paye As You Earn (RePAYE)
4. 10-year Standard Repayment
You must make 120 monthly payments

The first requirement is having direct loans through the federal government. If you have private loans, or have already refinanced your loans, they will not qualify.

The second requirement is to work full time for a qualifying employer. In general, full-time employment is considered working at least 30 hours per week or if you meet your employer’s definition of full-time – whichever is greater. If you have multiple qualifying employers, you may meet the full-time employment requirement if you work at least 30 hours per week on average.

Part two of the second requirement is working for a qualifying employer. The Department of Education lists the following organizations as qualifying employment for PSLF:

Any level of government organization (federal, state, local, or tribal)
Non-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code
Other types of non-profit organizations that are not tax-exempt under Section 501(c)(3) of the Internal Revenue Code, if their primary purpose is to provide certain types of qualifying public services

The third step is to enroll in a qualifying repayment plan. Only payments made on one of the income-driven repayment plans or the Standard 10-year repayment plan qualify for PSLF.

Once you’ve ensured your loans are Direct loans and you’re working for a qualifying institution, your monthly payments on the qualifying repayment plans should begin accruing towards the 120 required payment mark. If you’re curious which repayment option makes the most sense for your situation, we recommend consulting both your financial advisor and your loan servicer.

Lastly, you must make 120 monthly payments. This is one payment each month for 10 years. After making 120 qualifying monthly payments, any balance remaining would be forgiven under this plan.

In the PSLF program, there are some strict requirements that need to be completed, however if you are a dentist that will satisfy these requirements, it could be worth exploring.

State Loan Forgiveness Programs

The second loan repayment option for dentists is state loan forgiveness programs. Good news, there are eligible programs in all 50 states, the district of Columbia and Puerto Rico. Here is a list of all the programs available. These are designed for dentists working in underserved areas. If you are interested in working or end up working in an underserved area, this could be worth exploring.

National Health Service Corps Loan Repayment Program

Under the NHSC Loan Repayment Program, you can qualify for up to $50,000 in tax-free loan repayment for a two-year term. If at the end of the initial two-year contract, you may be eligible to apply for additional loan repayment funds to pay any remaining education loans. One thing to note is there is no guarantee that you will receive the continuation contract.

This loan repayment program is designed for dentists working in Health Professional Shortage Area (HPSAs). To learn more about the program, please visit the NHSC Loan Repayment Program.

Military Loan Repayment Programs

The Military offers student loan repayment benefits to dentists that serve in the Military. If this career path is interesting to you, you could get your medical student loans forgiven in exchange for six years of service.

Refinancing your student Loans

If none of these routes are the option that you want to pursue, it could make sense to refinance your dental school or undergrad loans to a lower interest rate so you can pay them off faster. I would move slowly with this option. Make sure to have these reviewed by your financial advisor to ensure that the loan terms are competitive and affordable for your situation. There is no undo button after refinancing your loans.

Regardless of which route you are pursuing, brace yourself for a higher loan repayment amount. If you are on one of the income-driven repayment plans for federal loans (IBR, PAYE, REPAYE), it may take a full year of income before the loan payment amount goes up. Be prepared for that increase, though, as it could be several thousand dollars per month.

If you would like to meet with a Financial Advisor to chat more about the loan repayment options available to you, please click here.

Business loans for dentists

If a goal of yours is to own a dental practice, odds are you will utilize a business or bank loan. This is very similar to a mortgage but instead of a home, this will allow you to purchase a dental practice. Each bank works a little differently, but the idea remains the same. You will borrow money from the bank to purchase the dental practice. Common term lengths are 5, 10, 15 or 20 years. Before purchasing a practice, it is important to have a CPA and/or Financial Advisor review the practice financials.

Often times, if you borrow money from the bank, they will require you to have life and disability insurance. In the event that you passed away or were unable to work anymore, they would want to cover the amount remaining on the loan.

Insurances for Dentists

Whether you are fresh out of dental school, a few years into practice, or towards the tail end of your career, there are insurances that are important for all dentists to be aware of. Some insurance products are mandatory, while others may not be necessary for your situation. Please see insurances below that are often recommended for dentists to secure.

Disability Insurance

We will start with disability insurance, specifically talking about long-term own-occupation disability insurance. In its simplest form, this is an insurance product that protects your income if you cannot perform the substantial and material duties of your own occupation. If an injury or illness is preventing you from being a dentist, the monthly benefit will pay out to help make you whole again.

Why is this important? Are you dependent on your income? If the answer is yes, you need disability insurance. It’s as simple as that. If the answer is no, this means you could you retire today and never work again. If you are still building your financial plan, odds are you are dependent on your income, so you want to make sure it is fully protected.

Sometimes, you will be offered group coverage through your employer. This amount usually does not protect your full income. It usually protects a percentage of your income up to a certain dollar amount. Commonly, we will see 60% of your income up to $10,000/mo. Whichever is the lesser of the two is the amount that you receive if you became disabled.

Life Insurance

Life insurance is one of the more well-known insurances out there. In its simplest form, if you have life insurance and pass away, it will provide a benefit to your beneficiaries. Life insurance is advertised way more than some of the other insurances. To start, you need to confirm whether life insurance in general is right for you at this stage. There are four main reasons why people secure life insurance

Protection

This is the reason for life insurance that most people are thinking of as they approach life insurance. For those of us with loved ones that rely on our financial support, life insurance is one of the best ways to ensure that, even when we’re no longer around, those loved ones are well provided for.

Of course, children are the first thought for most folks on this front, but a spouse with whom you hold a joint debt or a parent who will rely on your support during retirement is equally vulnerable.

Many employers will offer group life insurance to the employees of the company. Often times, this is not a sufficient amount. It will be important to review your current coverage to see if you have an adequate amount.

We would be happy to review your current situation to ensure you are adequately covered.

Business Loans (Assignment of Collateral)

If you intend to take a business loan of more than $50,000, you can expect that the lender will require you to carry life insurance with the lender as the beneficiary in the amount of your loan. The short story is that no one at the bank knows how to run your business; if you’re no longer around, they would simply like their money back. This concept is known as assignment of collateral.

For dentists looking to start/expand/buy a practice, we can help you identify a life insurance policy that will give you the coverage you need on a cost-efficient basis and help you get back to your business.

Generally, an appropriate solution is to match an inexpensive term life insurance policy to the dollar amount and time period for the loan you took out.

Life Insurance as an Accumulation Vehicle

Life insurance can be used as a supplementary part of a savings plan. This strategy has received a lot of negative press in recent years and is certainly not for everyone, but for households in the right overall financial position it can be a tax-favorable element of the overall strategy.

For this purpose, you must use a variety of permanent life insurance as opposed to a term policy, because permanent life insurance contracts include the ‘cash value’ component that represents growing worth of the policy.

Before looking into life insurance as an accumulation vehicle, it will be important to connect with an independent financial advisor to review your current situation. Often times, this product is over recommended and not appropriate for everyone.

Future Planning

Individuals who feel none of the needs above describe them yet but believe that one or more will apply in the future (like starting a family), may be well served to look into coverage sooner rather than later.

Life insurance, like many insurance products, is the easiest and least expensive to secure when applied for while young and healthy. Every year older you become, the price of coverage typically increases, and even a minor change in health can make life insurance coverage dramatically more expensive, or potentially impossible to secure.

Related: Do I Need Life Insurance?

Business Overhead Expense Protection

The idea behind business overhead expense insurance is like disability insurance but for your business. If you were to get sick or injured and are unable to practice, the coverage can help keep your business up and running. You have personal disability coverage to meet household expenses, this functions in the same manner but for your business.

If you are a practice owner, you would want to customize a plan for you that meets the overhead of the business and cover specific obligations to match the payment terms of your practice loan. For example, if you were the only dentist at the practice, business overhead expense protection would cover the salary of a dentist to carry out the duties that would have been performed if you were not disabled.

With business overhead insurance, this is a little more complex and there are a few different features and riders that you can have on the policy, which affects the cost. If you have any questions on this, we would be happy to meet with you to review your current situation.

Retirement plans for dentists

Retirement plans for dentist who are employees

Retirement plans for dentists who are employees of a practice or group, are going to be determined by the company. Some employers may offer more than one retirement plan to pick from, but unless you are one of the decision makers for the company, you won’t have much say what the employer offers. You will simply have the option to enroll and participate in the plan provided or not. The most common plan provided is the plan that is provided to employees is a 401(k).

401(k)

A 401(k) account is a retirement account that allows you to make elective salary deferrals. This means you can elect to have a certain amount withheld from your paycheck and deposited into the account. The contribution limit for 2022 is $20,500.

Deposits can be made on a pre-tax or post-tax (Roth) basis (As we have mentioned in previous blog posts, not every employer offers the ability to contribution on a Roth basis, but it is becoming more and more popular). If you make pre-tax contributions, money is deposited before taxes are taken from your paycheck.

Once in the 401(k), any investment gains are tax-deferred, meaning you don’t pay any taxes as long as the money stays in the account. You have to wait until you are 59.5 years old before you can withdraw the money, otherwise you are penalized and pay extra taxes. In retirement, when you withdraw the funds from a pre-tax account, the amount withdrawn is treated as earned income in that year and taxed accordingly.

Retirement Plans for Dentists who are Self-Employed

If you are self-employed, you have a several options available to you. Below is a little more detail on retirement savings accounts that can be opened for self-employed individuals.

SEP IRA

If you want to keep things easy and only make pre-tax contributions, then a SEP IRA is for you. The math works out so you can make pre-tax contributions of 25% of your earnings up to $61,000/year in 2022. You can do less of course, but that is the limit. It’s like any other IRA in that you can set it up wherever you want and invest the money however you want.

Do be aware that this does have implications on your ability to do the Backdoor Roth IRA. In order to utilize the Backdoor Roth IRA strategy, you must not have any pre-tax dollars in an IRA. Since this account is a pre-tax IRA, it will eliminate your ability to do the Backdoor Roth IRA. Although this may not be a deal breaker for your situation as you can only contribute $6,000/year as of now into your Roth IRA, it is something to be aware of and confirm with your advisor or CPA before opening the SEP IRA as opposed to a Solo 401k.

As mentioned, with each of these options for self-employed individuals, be sure you are reaching out to your financial planner and CPA before making any decisions on which plan is the best fit for you moving forward.

Individual 401(k)

The Individual or Solo 401(k) is similar to a company sponsored 401(k), except when you are self-employed, you are both the employee and the employer. As an employee, you can make either pre-tax or Roth contributions up to $20,500 in 2022 (plus $6,500 if over age 50). As the employer, you can also deposit up to 20% of earnings pre-tax into the account. A maximum of $61,000 ($67.5k if age 50+) can go into the plan in 2022.

A lot of dentists who utilize the Solo 401(k) like the ability to make the Roth contributions in addition to pre-tax. This enables them to build up an account that can be accessed tax-free in retirement. They will often do this in addition to Backdoor Roth IRA’s.

The catch with the 401(k) is there are additional tax-reporting requirements that go along with it. You are required to file an IRS form 5500-EZ for accounts with balances over $250,000. Not many accountants will do this, so you will likely need to do it on your own or set up the account with a company that will do this for you (for an additional cost, of course).

With the Solo 401(k), as compared to the SEP IRA in most cases, you will be able to contribute more to your retirement plans. Everyone who opens a Solo 401(k) can contribute the $20,500 for employee contributions along with 20% of income for employer contributions. For the SEP IRA, you are maxed at 25% of your earnings regardless.

Be sure to speak with a professional to help you understand the pros and cons for each of these accounts in order to make an informed decision.

Cash Balance Pension Plans

For the overachievers who are maxing out the Solo 401(k) at $61,000/year and are looking to invest additional monies on a tax-advantaged basis for retirement, then the cash balance pension plan is for you.

Some employers do provide these for their employees, so you may have one if you are an employee at a company.

The cash balance pension plan is a defined benefit plan, as opposed to a defined contribution plan like all these other accounts we have been reviewing. The maximum contribution limit varies by age. More money can be added the older you are. Older participants can contribute upwards of $300,000/year pre-tax! If self-employed, or the owner of a small practice, the goal is to contribute as much as cash flow allows to help reduce your taxable income.

Contributions are made pre-tax. Technically, the employer (ie, you if self-employed) provides a guaranteed interest rate on the account. The money can be invested, but if you invest too aggressively and the account goes down in value significantly, the plan may be considered underfunded, and you will be required to deposit extra money into it the following year.

Conversely, if the account outperforms the target return objectives, you may be limited in how much you can add in future years, restricting the tax-deductible contributions you can make.

Long-story short, if you are maxing out the 401(k) and wanting to save a lot of extra money for retirement, it could be worth looking at a cash balance plan.

Simple IRA

This retirement plan is for small businesses that have 100 or less employees. This can be attractive to practice owners because it is easier to set up than a 401(k) but has lower contribution limits (up to $14,000). It is also a more cost-effective way to increase retirement savings for the owner and employees.

For those who are 50 or older, you can make a catch-up contribution and contribute an extra $3,000. There is also a mandatory employer matching contribution that is required.

If you are curious what might be the most beneficial plan for you and your business, please reach out to connect with us. We would be happy to review your current situation and walk through what might be best for you.

In Summary

Whether you are fresh out of training or well into your career, there are plenty of financial questions and concerns that need to be addressed while creating a financial plan for dentists. Once you have a financial plan in place, it is important to review the plan annually.

Related Blog Posts

Disclosures:

Life insurance can be an investment product. This is information only and should not be construed as individualized advice. Consult with your tax professional for tax implications pertaining to your unique circumstances. Investing involves the risk of loss, including total loss of principal. Past performance is no predictor of future returns. This should not be construed as individualized investing advice. Consult with your investment advisor to develop an appropriate investment strategy for your circumstances.