TV law shows are filled with beautiful people, melodramatic dialogue, and a montage of attorneys jumping out of their seats yelling, “Objection!” Cut to reality, and you’ll find long hours, payroll, and clients that haven’t paid. Having your own practice has its challenges but is just as rewarding. Getting caught up in the day-to-day of running a firm is easy, and you can lose sight of your own best interests, including saving for retirement.
Student Debt And Lack Of Retirement Savings
According to the National Center of Educational Statistics, 75% of law students had loans and graduated with an average debt of $145,500. (1) That’s the average cost of a house or condo in Covington or Cincinnati. Paying off student loans, starting your practice, buying a home, and having a family have all taken precedence over retirement. But time passes quickly, so start saving for retirement now.
If you work at an established law firm, start contributing to the company 401(k); if your firm matches contributions, even better. For 2020, you can contribute up to $19,500 and $26,000 if you’re age 50 or over. (2) Contributions are automatically deducted from your paycheck. It’s an easy way to set it and forget it.
Your Options As A Small Firm
It takes a little more effort to save for retirement when you have your own firm, but it can still be done efficiently and effectively. You have a few options. Having a SEP IRA (Simplified Employee Pension) is the easiest way to start saving if you have no to very few employees. You can contribute up to $57,000 or 25% of compensation for 2020. (3)
SEP IRAs do not require nondiscrimination testing or filing of 5500 returns, but they do require completion of a short IRS Form 5305-SEP, (4) which establishes what percentage of salary you will contribute to the account. If you do have employees, you must contribute an equal percentage of their salary. A portion of your contribution can also be deducted from your business tax return.
Solo 401(k)s are another way to save for retirement as the sole proprietor. You can contribute up to $57,000 in 2020, which includes $19,500 or 100% of your compensation and a profit-sharing contribution of 25% of compensation based on a salary cap of $285,000. If you are 50+, there is an additional $6,500 catch-up contribution. Contributions are pre-tax, so they reduce your taxable income for the year.
Setting up a plan is as easy as opening an account. You’ll have to complete an application and a standard plan adoption agreement. If you already have a solo 401(k) and have a balance of $250,000 or more, you will be required to file a yearly Form 5500-SF, so keep that in mind. (5)
If you want to put away even more money, you may consider setting up a cash balance plan. The cash balance plan is a type of defined benefit plan that allows you to a lot of money on a pre-tax basis. The maximum you can contribute is based on your age and can exceed $300,000. Cash balance plans are great for solo attorneys who do not have employees and can work well for small law firms where the owners are older and are highly compensated. However, these plans are a bit more complicated to set up.
If you are near retirement and are considering selling your practice, it shouldn’t be your only retirement strategy. Once you’ve paid off your student loans, put those monthly payments into retirement savings. You love what you do, but you can’t work forever—even if you wanted to. If it seems like an overwhelming task, we can help you set up a plan that best meets your circumstances.
Schedule a no-obligation consultation, and together let’s find out if Wurz Financial Services is the right firm for you to depend on during your journey to a comfortable retirement. Contact us at 859-291-9879 or firstname.lastname@example.org today!
Also, join us at one or both of our free webinars:
- Social Security 101: The 3 Rules To Maximize Your Lifetime Retirement Benefits!
- Will I Have Enough To Retire?
Darren Wurz is a co-owner and financial planner at Wurz Financial Services, an independent, family-owned and operated financial services firm dedicated to helping its clients transition from their working life to a comfortable retirement with confidence. Darren received his master’s of science degree in financial planning from Golden Gate University and also holds the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation. He operates the Northern Kentucky/Cincinnati office of Wurz Financial Services and is an active member of the Covington, KY rotary club, the Northern Kentucky Chamber of Commerce, and the Covington Business Council. To learn more about Darren, connect with him on LinkedIn.