Retirement Planning for Lawyers: The $3.5 Million Solution [+ Pitfalls❌]

We’ve structured over 2,000 retirement plans for high-income business owners. As such, we understand retirement planning for lawyers.

When your business income is $200k or so, you can implement some basic strategies. But as it gets higher (even over $1 million), you will need a more comprehensive approach.

In this article, we will discuss some basic plans and some of our advanced structures. We will also provide you with the strategies we use for attorneys with different income levels. We will also show you how to implement our $3.4 million solution!

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Retirement Planning for Lawyers

Lawyers have some unique challenges when it comes to retirement planning. Normally, this is because of their higher incomes.

As a result, typical retirement structures like 401(k) plans, SEPs, and SIMPLE IRA’s won’t get you very far. Once your business profit gets over the $300k level, you usually need to look at more advanced approaches.

Lawyers who do more transactional type of work like wills, estate planning, family law, business structuring, and providing general legal advice, will tend to have more consistent income even though it is usually on the lower side.

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But litigation attorneys can obviously have substantially higher income. In addition, this income is often very volatile.

For example, an attorney might have $300k of income in one year and then $2 million in the subsequent year. The question becomes: how do you structure retirement plans to deal with this volatile cash flow?

The table below spells out some of the basic and advanced structures that you can use. We will then discuss them in more detail.

But before you implement any structure, ensure you discuss with your CPA and financial advisor first. Each attorney’s situation is unique, and these plans can be complex to understand.

Basic PlansAdvanced Plans
SEP IRASafe Harbor 401(k)
Traditional IRACash Balance Plan
SIMPLE IRATraditional Defined Benefit Plan
Solo 401kMoney Purchase Plan

Basic Retirement Structures for Lower Income Lawyers

In this article, when I say lower income, I mean less than $300,000 of annual business profit. This, of course, is a large amount of money for the average person.

With this income, you must pay tax and put food on the table. So typically, you want to use basic structures that will allow you to get smaller contributions without too much complexity.

But many of our advanced retirement strategies can work well for lower-income attorneys. In fact, we see them working very well for attorneys in the following situations:

  • Over age 60. When you are over age 60 you generally want to maximize retirement contributions. You have likely paid off a lot of debt, including student loans and mortgages. You are focused on saving as much as possible so you can retire in the next several years.
  • You have a spouse with substantial income. If your law practice is your sole source of income, then you may be restricted when it comes to retirement planning. But if you have a spouse with a high income (perhaps another attorney), you may be able to live on one income and save the other. We see this a lot. So even though your income may be marginal, you can stash away as much of it as possible in tax-deferred accounts.
  • You live in a high tax state. Let’s face it, taxes play an important role in retirement planning. Living in a state with a high-income tax will give you a little more incentive to make larger retirement contributions. We have many California clients who have a marginal federal and state tax rate of over 50%. But if you live in a state with no income tax (like Florida or Texas), it makes less economic sense to make higher contributions.

The first question you want to ask yourself is how much you want to put into retirement each year. If you want to do less than $75,000, there are some options for you. But if you want to get in $75,000 plus, you will have to consider other options.

Basic structures

Here are some of the basic options that you should consider when you have lower income:

  1. 401(k) Plan
  2. Individual Retirement Account (IRA)
  3. Roth IRA
  4. Simplified Employee Pension (SEP) IRA
  5. Savings Incentive Match Plan for Employees (SIMPLE) IRA
  6. Profit-Sharing Plan

Most of these plans are easy to set up and have low annual administration fees. In addition, many large custodians like Fidelity, Vanguard, and Schwab can set the plans up for free. As long as you use their platform, they will make a small amount on your assets, and they are content with that.

Retirement Planning for Lawyers

I recommend you first consider these plans. But note my advice on the combination rules and your future income. If you look out over the next several years and see your income dramatically increasing, it might make sense to look at some of the advanced strategies below.

There can be issues when combining some basic strategies with other advanced retirement plans. Ensure you do your diligence upfront before you get stuck in a plan that will not allow you the substantial contributions you might want a few years from now.

Our Recommendation

With lower income, stick with a 401(k) plan. You can use a solo 401(k) if you have no employees. But if you have employees, you can use a Safe Harbor 401(k) plan.

This will give you the highest contributions and allow you to layer a more sophisticated retirement structure on top of this plan down the road. It is a great starter plan.

Many lower-income attorneys will set up a SEP. This can be a good plan. It merely acts as a profit-sharing plan.

You can contribute 25% of your W-2 if you’re a corporation or 20% of your business profit if you’re a sole proprietor (subject to the maximum annual limit).

But a 401(k) has a profit-sharing level that acts much like a SEP. In addition, you can get in annual employee deferrals. So you can make larger contributions with a lower income.

Approximately half the SEPs on the market cannot be combined with more advanced retirement strategies. This makes the 401(k) the best option.

Thinking of setting up a SIMPLE IRA? I recommend against it in most situations.

SIMPLEs cannot be combined with any other retirement structure. They are one of the most restrictive plans on the market.

Only consider a SIMPLE if you’re confident your income will stay on the lower side and the annual contributions are consistent with your retirement goals.

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But if you see your income increasing, the SIMPLE can be a significant challenge because you will not easily be able to graduate up to a more sophisticated overall retirement strategy.

Advanced Retirement Structures for Higher Income Lawyers

As discussed, once your income is above $300k a year, you will find yourself in a more difficult tax situation. Higher income means higher tax brackets. As a result, the basic strategies won’t get you too far when it comes to retirement planning for lawyers.

Suppose your income is over $1 million and you are a litigation attorney. In that case, you might find that it makes sense first to do a structured settlement and then layer in the retirement strategies after you’ve reduced your income.

This approach can spread your revenue out over several years and then apply a retirement contribution in each of those years. This will provide you with the best of both worlds: an income deferral and a retirement deferral.

Advanced Structures

Here are some of the advanced options you should consider when you have high income and are looking for contributions in excess of $75k:

  1. 401(k) Plan
  2. Cash Balance Plan
  3. Mega Backdoor Roth
  4. Defined Benefit Plan
  5. Deferred Compensation Plan
  6. Profit-Sharing Plan
  7. Employee Stock Ownership Plan (ESOP)

Many of the above advanced structures will give you contributions from $50,000-$500,000, depending on your situation. In addition, some of these plans can be combined together to accelerate the tax deferral. But be careful. The IRS imposes certain limitations and restrictions when plans are combined.

Cash Balance Plans

Cash balance plans can play such a significant role for high-income attorneys that I wanted to discuss it separately. These plans allow for substantial retirement contributions, often more than $400,000 annually. This is typically our favorite strategy when it comes to retirement planning for lawyers.

They are usually my first option. In addition, they can be easily combined with a 401(k) plan to provide an additional deferral and profit sharing. The most you can have in a cash balance plan is $3.4 million. That’s why we call it our #1 tax and retirement strategy.

A cash balance plan is a type of defined benefit structure that combines features of both traditional defined benefit plans and defined contribution plans. The plan operates by crediting each employee’s account with a percentage of their salary each year, often expressed as a fixed percentage or a specific dollar amount. Additionally, interest credits are typically applied to the account balance, either at a fixed rate or a variable rate based on a predetermined formula.

FormulaAmount
Beginning of Year (BOY)$70,000
Interest crediting rate5%
W2 comp$100,000
Pay credit60% of W2
End of Year (EOY)$133,500

Unfortunately, the IRS does limit the profit-sharing contribution. So, you limit your ability to contribute on the 401(k) side. But you pick up significant contributions to the cash balance plan. This structure is a home run in the right situation.

Below is a video I did on some of the pros and cons of cash balance plans:

Our Recommendation

This is easy. If the goal is $100,000 plus annual contributions, I typically use a cash balance plan combined with a 401(k) profit-sharing plan. This will allow you to make substantial contributions on a tax-deferred basis and give you the optional contributions of a 401(k) plan along with profit-sharing.

Combine this with the Mega Backdoor Roth strategy if you still want to invest additional income. This can give you the tax-deductible contributions and sizable Roth contributions that will grow tax-free. It is truly the best of both worlds. But, of course, you must have the income and the financial discipline to structure it.

DB Plan ProsDB Plan Cons
Eligible for Section 199A or QBIDPermanent Plan Structure
Flexible Contribution RangeHigh Admin Fees
Contributions of $300k+Conservative Investments
Tax-Deferred FundingMandatory Funding

A Word About Investments

First of all, we are not financial advisors and cannot give you investment advice. But we can give you an overall framework that can drive your retirement account investment profile.

Of course, your investment mix in your retirement accounts should be diversified. But you want to diversify those investments across the different retirement structures. We will summarize below the investment profiles based on your selected retirement structures.

Roth contributions, including Mega Backdoor Roth

Because these are tax-free accounts, this is where you want to include your high-risk investments. If you have a home run investment, allocating them within the Roth could make sense.

If you have a $10,000 Roth account and turn it into $100,000, that $90,000 gain is all tax-free. But remember, risk works both ways, so always be prepared for a strikeout.

401(k) plans, SEPs, other defined contribution structures

Define contribution plans should generally have higher-risk asset allocations. But not as high as a Roth.

The reason is that these plans do not have annual contribution limits based on the account balance. So volatile returns will not impact contribution levels.

Keep these assets generally invested in stock and equities. But of course, consider your age and timeframe until retirement.

Cash balance plans and defined benefit plan structures

A cash balance plan is a type of defined benefit plan. No matter what type of defined benefit plan you use, these plans will generally have conservative interest allocation factors. The IRS allows interest rates ranging from around 2% to 6%. But most plans will have a 5% interest crediting rate.

As a result, you want to mirror this interest crediting rate. You’ll never exactly equal a 5% return. But if you can average somewhere between zero to 10%, you should be fine. This is usually the case when providing retirement planning for lawyers.

But these structures do not like volatility. Huge increases or decreases in asset returns can result in large swings in plan contribution requirements. So, if your goal is to make steady large contributions, keep these plans investing conservatively. The last thing you want to do is invest these plans in crypto or other speculative assets.

How Lawyers Can Implement a Retirement Strategy

Here is the 5-step process to implementing a retirement strategy:

  1. Examine your tax rate and contribution requirements

    The first thing you should do is discuss your tax rate with your CPA and your retirement goals with your financial advisor. If you have a tax bracket higher than 40%, it may be advantageous to take advantage of more aggressive strategies like cash balance plans and defined benefit plans.

    However, if your tax rate is below the 40% threshold, taking advantage of defined contribution plans might make more sense. But with your team of professionals, they can help you address the various options.

    Also, ensure that you can afford the desired contribution levels. You may be in a high tax bracket, but you still need to put food on the table. You should be able to comfortably make your annual contributions.

  2. Develop a comprehensive approach

    Develop a retirement savings strategy tailored to your tax bracket and desired contributions. Determine how much you need to save for retirement and establish a timeline to achieve your target. Explore retirement account options available to lawyers, such as 401(k)s, SEPs and cash balance plans.

    Make sure your plan considers any increased income that you are budgeting in future years. Your retirement plans should be flexible enough to accommodate higher contributions down the road.

  3. Determine your investment allocation

    Ensure that your riskiest assets are in your Roth accounts. Your most conservative investments should be in your cash balance plan or defined benefit plan. The moderate to aggressive assets can be invested in your 401k plan or other defined contribution structure.

    The develop an investment plan aligned with your risk tolerance and time horizon. Consider diversifying your investment assets across various categories, such as stocks, bonds, real estate, and mutual funds. Review and adjust your investment strategy periodically as needed to ensure it remains on track to meet your goals.

  4. Perform an annual review

    Your CPA and financial planner should review your strategy with you at least annually. The key is to identify any weaknesses or changing business situations that require increased or decreased retirement contributions.

    Retirement planning is not a static exercise. You may be many years from retirement, so you should constantly anayyze your situation and make revisions as required.

  5. Monitor and adjust

    Regularly review and reassess your retirement plan to track progress and make necessary adjustments. Life circumstances and financial markets can change, so it’s important to stay engaged with your retirement plan and adapt as needed. Consider working with a financial advisor who can help you navigate any changes and ensure you’re on the right track.

    Remember, retirement planning is a complex and highly personalized process. You must consult with a qualified financial professional who understands your unique circumstances and who can create a comprehensive retirement plan tailored to your specific needs.

Final Thoughts

Retirement planning for lawyers is a vital undertaking to secure a financially stable future. It also is a great way to lower your marginal tax bracket while you are in your high earning years.

By assessing your retirement goals, leveraging retirement structures, diversifying investments, and incorporating estate planning, attorneys can lay the foundation for a comfortable retirement.

Maximizing contributions to retirement accounts is key. Lawyers should aim to contribute the maximum allowable amount each year to benefit from compounding growth over time.

Paul Sundin

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