Orthodontist Practice Cuts Taxes by 60% with Strategic 401K and Cash Balance Plan

The Challenge: Growth Success Creating Retirement Planning Obstacles

Success can sometimes create unexpected challenges. For this thriving orthodontist practice, rapid growth meant expanding their team, which inadvertently created barriers to maximizing the owners' retirement savings. Here's how smart plan design turned this challenge into a competitive advantage.

The Growing Practice Dilemma:

• Practice Owners:  Orthodontist (age 45) and spouse (age 44).
• Expanding Team: Growing staff of hygienists and front-desk personnel (ages 23-30).
• The Problem: 401K contribution costs for young employees were prohibiting owners from maximizing their retirement savings.
• Growth Impact: Success was creating retirement planning limitations.

The Strategic Solution: Leveraging Age Demographics

The key to this practice's success was recognizing that their challenge could become their greatest asset. The significant age gap between the owners and their younger employees created the perfect opportunity for an age-weighted retirement plan strategy.

Phase 1: 401K Plan Enhancement

The practice amended their existing 401K plan to include a 3% safe harbor contribution. This strategic move provided several immediate benefits:

• Eliminated top-heavy testing restrictions.
• Allowed owners to maximize salary deferrals of $47,000.
• Provided competitive employee benefits.
• Created foundation for advanced planning strategies.

Phase 2: Cash Balance Pension Plan Integration

The game-changing element was adding a cash balance pension plan with a sophisticated cross-tested formula. This design took advantage of the age demographics to maximize benefits for the owners while maintaining reasonable costs for younger employees.

How Age-Weighting Works:

Cash balance plans use actuarial calculations that favor older participants. The closer someone is to retirement, the larger the contribution needed to fund their projected benefit.

• Owners (ages 44-45): Higher contribution requirements due to shorter time to retirement.
• Young Employees (ages 23-30): Lower contribution requirements due to longer accumulation period.
• Results: Majority of employer contributions directed to owners.

The Implementation: Sophisticated Plan Design

Dual-Plan Structure

The practice now operates two complementary retirement plans:

• Employee salary deferrals
• 3% safe harbor contribution
• Profit sharing component
• 2-6 year vesting schedule

Cash Balance Plan

•  Age-weighted contributions.
• Cross-tested formula.
• Owner-focused benefits.
•  Actuarially determined allocations.

Cross-Tested Formula Benefits

The cross-tested formula allowed the practice to satisfy non-discrimination requirements while directing the vast majority of employer contributions to the owners' cash balance accounts.

The Outstanding Results

Contribution Transformation:

•  Before: $47,000 annual contributions (401K only).
•  After: $417,000 annual contributions (combined plans).
•  Increase: 787% improvement in retirement savings capacity.

Cost-Benefit Analysis:

• Total Owner Contributions: $370,000 (92% of total).
• Employee Funding Cost: $35,000 (8% of total).
• Net Annual Tax Savings: $152,650.
• Tax Reduction: 60% decrease in tax liability.

Why This Strategy Works for Growing Practices

Age Demographics Advantage

Many successful practices have similar demographics: established owners in their 40s-50s with younger support staff. This age gap creates natural advantages for cash balance plan design.

Competitive Employee Benefits

Despite the age-weighting, employees still receive meaningful benefits through the 401K plan, helping with recruitment and retention in competitive markets.

Tax Efficiency

The substantial tax deductions help fund practice improvements and equipment upgrades, creating a positive cycle of growth and reinvestment.

The Reinvestment Impact

The tax savings didn't just benefit the owners personally – they enabled strategic business reinvestment:

• Purchase of state-of-the-art orthodontic equipment.
• Practice expansion and modernization.
• Enhanced patient experience and treatment capabilities.
• Improved competitive positioning in the market.

 "Our practice is thriving, and now our retirement plan is too. The tax savings helped us invest in new state-of-the-art equipment." — Dr. Evans, DMD

Critical Elements for Success:

• Age Gap: Significant age difference between owners and employees.
• Stable Income: Consistent practice revenue to support contributions.
• Long-term Commitment: Willingness to maintain plan for multiple years.
• Professional Design: Expert plan administration and compliance.
• Employee Communication: Clear explanation of benefits to staff.

Considerations for Dental Practices

Practice Maturity

This strategy works best for established practices with predictable income streams and stable staffing patterns.

Employee Relations

Success requires clear communication about how the plan benefits all participants, even though contributions are age-weighted.        

Ongoing Administration

Cash balance plans require professional administration and annual actuarial certifications, making expert partnership essential.

Is This Strategy Right for Your Practice?

This orthodontist practice's success story demonstrates the powerful potential of combining 401K and cash balance plans for practices with favorable demographics. The key indicators that this strategy might work for your practice include:

• Practice owners significantly older than most employees.
• Strong, stable practice income.
• Desire to maximize owner retirement contributions.
• Willingness to provide competitive employee benefits.
• Long-term practice ownership plans.

Transform Your Practice's Retirement Strategy

 Every dental practice is unique, but the principles demonstrated in this success story – leveraging demographics, strategic plan design, and professional implementation – can be adapted to your specific situation.

Contact MyPensionTree to explore how your practice could benefit from advanced retirement plan strategies.