According to the National Bar Association, nearly 50 percent of all private lawyers in the U.S. are solo practitioners. Being out on your own, either in a solo practice or small firm, means you’re responsible for establishing and funding your retirement plan. This is a significant repsonsibility considering everything you will need to pay for without an income from employment, such as the lakeside village nursing home you’ve been coveting. And with the daily demands from clients and administrative tasks, it’s easy to let planning for retirement fall by the wayside. In fact, nearly one in five people (not just lawyers) who are nearing retirement have zero money saved. This is especially concerning when you consider that the average length of retirement is 19 years. If you need help making a Plan For Retirement, contact a service such as RichLife Advisors.
Needless to say, the time to begin saving for retirement is now. Having a basic understanding of how some of the common retirement plans work may help.
This article will highlight the key features of, and differences between, commonly employed retirement plans for the 50 percent of lawyers mentioned previously. This may not only help in deciding which plan is right for you and your firm, but it may also help in bringing you closer to your retirement goals.
Individual Retirement Arrangements (IRAs)
Individual Retirement Arrangements (IRAs) can be opened by most individuals with earned income. These arrangements require individuals to open their own IRA account to which contributions are deposited. The account owner controls investments and withdrawals. Contributions are 100% vested when deposited, which means that once money is deposited in an account, it belongs to the account holder. There are three types of IRAs available, each with different contribution, tax and distribution characteristics.
Anyone under the age of 70 ½ who received eligible compensation during the year is eligible to open a traditional IRA.
The lesser of $5,500 per individual ($11,000 per couple), or 100% of earned income for the taxable year may be contributed to the account. Individuals aged 50 and older are allowed to make catch-up contributions to their IRAs above the scheduled maximum annual contribution limit. The catch-up amount at the time of this writing is $1,000. Contributions must cease once the account holder reaches age 70 ½.
Distributions may begin after age 59 ½ and must begin by April 1 of the year following the year an individual turns 70 ½ . Distributions before age 59 ½ and withdrawals less than the required minimum distributions (RMDs) may be subject to tax penalties.
Contributions to a traditional IRA are generally tax deductible. Income and capital gains earned in the account are tax deferred until the funds are withdrawn.
Anyone with earned income is eligible to open a Roth IRA provided their adjusted gross income (AGI) falls below specified income levels. You can look up these levels on the IRS website. As a point of reference, a single person may contribute the max amount to a Roth IRA if their AGI is below $116,000 ($183,000 if filling jointly.)
Contribution limits to Roth IRAs are the same as those for traditional IRAs. Additionally, a married employee may contribute an additional $5,500 to a nonworking or low-income spouse’s Roth IRA. Unlike traditional IRAs, contributions may be made past age 70 ½ as long as the taxpayer has earned income that year. And, like traditional IRAs, annual catch-up payments of $1,000 may be made once the account holder reaches the age 50 or older.
Distributions may begin after age 59 ½ but, unlike traditional and SEP IRAs, Roth IRA distributions are not required to begin at age 70 ½.
Contributions to a Roth IRA are nondeductible; therefore, contributions withdrawn are always tax-free. Earnings accumulated in the account may also be withdrawn tax free five years following the initial deposit as long as the account holder is 59 ½ or older.
Note: An individual may contribute to both a traditional and a Roth IRA; however, the maximum combined contribution is $5,500 (or $6,500, if 50 or older).
Simplified Employee Pension (SEP)
SEPs are designed for self-employed persons and small businesses, and they work much like a traditional IRA.
To be eligible, an employee must be at least 21 years old, have performed services for the employer during at least three of the last five years and have received at least $550 in compensation from the employer in the current year. SEP rules require the employer to allow all eligible employees to participate.
SEP IRAs allow employers to contribute up to 25% of an employee’s salary to the employee’s SEP IRA each year, up to a maximum of $53,000 (as of 2015). The employer determines the level of contributions each year and must contribute the same percentage for each employee, as well as the employer.
Employer contributions are tax deductible to the employer. Contributions are not taxable to an employee until withdrawn. Earnings in the account accumulate tax deferred.
Withdrawals for Traditional, Roth and SEP IRAs
Withdrawals for all accounts mentioned above may be made in lump sums, in varying amounts, or in regular installments.
When withdrawals are from tax deductible contributions, they are taxable as ordinary income. When there are both deductible and nondeductible contributions, a formula is used whereby a portion of the withdrawal represents a nontaxable return of principle.
Withdrawals before age 59 ½ are subject to a 10% early withdrawal penalty unless they are due to death, disability, first-time purchase of a primary residence (up to $100,000 lifetime maximum), qualified higher education expenses for immediate family member or certain medical expenses.
Qualified plans refers to an employer-sponsored plan (not an IRA). . Contributions to the plan are tax deductible and earnings grow tax deferred. If all of the funds are contributed by the employer (this is known as noncontributory plan), the employee’s tax basis is zero. Everything above the tax basis is taxed at the employee’s ordinary income rate at the time of distribution.
The most recognized retirement plan is the 401(k). With this plan, an employee directs an employer to deduct a percentage of the employee’s salary which will be a contribution to a retirement account. The employer is permitted to make matching contributions up to a set percentage of the employee-directed contributions. All contributions are made with pre-tax dollars which reduces the employee’s salary by the amount of their contribution.
Self-Employed 401(k) Plans
Self-Employed 401(k) plans work just like the regular 401(k) plans discussed previously. The purpose of these plans is to allow sole proprietorships to set up and contribute to a 401(k) plan. To contribute, the business owner may have no full-time employees other than himself and his spouse. Because the covered individual is both the owner and an employee, this plan generally offers the highest possible contribution level of any defined contribution plan. If you’re self-employed and would like to find out more legal information on what to do when you are ready to retire, you can click here.
Savings Incentive Match Plans for Employees (SIMPLE) Plan
SIMPLEs are relatively easy to set up and inexpensive retirement plans for a business with 100 or fewer employees who earned $5,000 or more during the preceding calendar year. If a SIMPLE Plan is employed, the business may not have another retirement plan in place. The employee’s contribution, up to $12,000 with a $2,500 catch-up is pretax and may be matched by the employer.
Profit Sharing Plans
Profit-Sharing plans allows employees to participate in the business’ profits where the benefits are deferred into an account for future payment. Employers do not have to have a predetermined contribution formula, but for those that do, the formula typically expresses contributions as a fixed percentage of profits. In order to be considered “qualified”, a profit-sharing plan must have substantial and recurring contributions. Profit-sharing plans offer the employer a great amount of contribution flexibility, where they may skip contributions during low profit years.
Still Not Sure Which Plan is Right for You? Ask a Professional.
As this article demonstrates, there are lots of retirement plans to choose from. The plan that’s right for you and your firm depends on your goals and situation. As the owner of a solo practice or small firm, deciphering between these plans can be stressful. That’s where the help of a registered investment advisor may be very valuable as he or she can work with you to understand your needs and help you select a plan that is best suited for you and your business.
About the Author
Working with a financial advisor may help simplify your financial picture and provide you with peace of mind.
Bryan Ohm is the co-founder and President of MPM Wealth Advisors. He has over 30 years of experience working with individuals, families and small business owners around the country to create clear, holistic and customized investment plans aimed at achieving his clients’ financial goals and lasting from generation to generation. Visit our website or give us a call to learn more about our full range of services. It doesn’t cost anything to explore whether MPM can add value to your financial picture.
www.mpmwealth.com ? 419-861-1400
 Report on the Economic Well-Being of U.S. Households in 2013. Rep. Board of Governors of the Federal Reserve System, July 2014. Web. 22 July 2015.
 The IRA defines eligible compensation as wages, salaries, tips, commissions, bonuses, self-employment income, alimony and nontaxable combat pay.