By Steven Jamison, CFP®, CPA
Professional practice owners face unique challenges when it comes to planning for retirement. It’s important to find ways to maximize tax-advantaged savings for retirement. Caps on retirement contributions tend not to benefit high-income earners, which means creating a solid retirement savings strategy is a priority.
One way practice owners can build up savings for healthcare costs is through a 401(h) plan. These plans are added on to existing defined benefit plans, and can offer a triple-tax savings to those who take part.
Defined Benefit Plan
Defined benefit plans are retirement plans where typically the business or employer contributes, not the employee. Defined benefit plans can have a variety of structures with significant implications. For example, some have a defined payout during retirement, and most have provisions for some degree of minimum annual funding. These provisions can have a significant impact on the plan sponsor’s cash flow and tax obligations. A careful review of these revisions is important to ensure the plan design aligns with the plan sponsor’s goals. In order to fund health benefits during retirement, 401(h) plans are added on to defined benefit plans to provide additional funds, but only during retirement.
Benefits of 401(h)
A 401(h) is similar to a health savings account (HSA), however, withdrawals cannot be made until retirement. Also like an HSA, it offers triple the tax advantages, including:
- The funds going in are tax-deductible.
- As the funds grow in the account, the interest, dividends, and capital gains are not taxed.
- When funds are withdrawn for healthcare expenses, the withdrawal is tax-free.
What makes the 401(h) plan even more attractive is the fact that it covers dependents and beneficiaries. The funds are tax-free as long as they are used for qualified health expenses, including:
- Elective cosmetic surgery procedures
- Spa, massages, and fitness programs
- LASIK eye surgery
- Eyeglass frames
- Insurance and insurance deductibles
However, the funds can be used for non-healthcare-related expenses as well, but there will be tax consequences. You are able to transfer funds back into the cash balance account, and if you choose to then use funds from the cash balance account for non-healthcare-approved items, you would have to pay ordinary income tax on those funds.
Work With Specialized Professionals
Creating your 401(h) is fairly simple; you just need to reach out to a plan administrator familiar with this plan design to prepare the necessary plan documents and annual administration. If your plan administrator is not familiar with a 401(h), our Jamison Hanson team would be happy to review the 401(h) process with them. Or we can provide a referral if needed.
Get Started Today
We at Jamison Hanson work with a wide variety of professional practice owners, including dentists, veterinarians, optometrists, attorneys, and medical specialists, and have a depth of knowledge of pairing defined benefit plans with a 401(h).
As with all our services, we will build a custom plan to put your money to work for you, so you can feel confident in your financial future and get back to the life you love. Our simple solution to wealth management: Save time. Build wealth. Live life. Schedule a 15-minute introductory call online or reach out to me at (503) 391-1040 or steven.jamison@jhadvisors.com.
About Jamison Hanson
Jamison Hanson is a full-service, fee-only financial planning and accounting firm. The firm name was changed to Jamison Hanson in 2021 when Steven Jamison and Dennis Hanson joined their firms, but the firm’s roots extend through decades of time and early founders, whose legacy the firm retains. Our mission is to make life easier for our clients by serving as their personal financial concierge and assisting with tax compliance, investment management, and other financial needs.
About Steven
Steven Jamison is President at Jamison Hanson, a full-service, fee-only financial planning and accounting firm. As a Certified Public Accountant and CERTIFIED FINANCIAL PLANNER™ professional, Steven uses his specialized knowledge of tax, financial, and investment matters to enhance the lives of personal representatives and trustees and professional practice owners (especially dentists) in Oregon and along the West Coast. With a passion for simplifying finances, optimizing opportunities, and saving money, Steven provides customized wealth advisory and accounting services, including investments, income and estate tax planning and compliance, and retirement planning, so that his clients can stress less and feel more confident about reaching their goals.
Steven prioritizes his clients, building long-lasting relationships that make a significant impact on their financial lives. He graduated cum laude from Brigham Young University with a Bachelor of Science in Accounting and is a member of the Willamette Valley Estate Planning Council and American Institute of Certified Public Accountants. Outside of work, Steven enjoys spending time with his wife, Rachel, and their five children. You can often find him adventuring in the outdoors—biking, hiking, traveling, and swimming. In addition to the Willamette Valley, they enjoy the splendor of the high desert of central Oregon and the lush beauty of the Hawaiian Islands. To learn more about Steven, connect with him on LinkedIn.