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Saving for retirement has consistently been in the news. Many
forms of media including magazines, newspapers, radio and television
shows stress the importance of saving during your working years
to assure a comfortable and enjoyable retirement.
There are questions: How do I get there? What is a 401(k) plan?
What plan is best for me and my firm? It is estimated that you will
need 70 percent - 80 percent of your current income in retirement
to support yourself. Assuming you no longer have clients to bill,
this income must be derived from alternative sources. A primary
source of income for many attorneys, and their staff, will be payments
from retirement plans established during their working years. You
need to know what to look for in a plan and how to select the option(s)
that best meet your needs.
Profit sharing plans offer firms the greatest flexibility in making
contributions for participants. There need not be profits to make tax-deductible
contributions to the plan.
Each year the firm decides if and how much will be contributed
to the plan - up to a maximum of 15 percent of all participants'
compensation (attorneys and staff).
TIP: Many solo proprietors and small firms establish this
type of retirement plan as their first plan because of the contribution
flexibility. Each year, the firm can decide whether or not to contribute,
with the contribution range being from 1 percent - 15 percent.
Money purchase pension plans, also called defined contribution
plans, require the sponsoring firm to make regular contributions
on behalf of participants (attorneys and staff). Contributions are
determined by a formula based on each participant's compensation.
Employers are subject to tax penalties if the required contribution
is not made. Employers may contribute and deduct from their taxes
up to a maximum of 25 percent of each participant's compensation
or $30,000 per participant, which ever is less, subject to applicable
deduction limits.
TIP: We see solo proprietors and small firms establish
these plans when they are comfortable that each year they will be
able to afford the contribution. In addition, many firms "pair"
these plans (establish a money purchase plan in addition to a profit
sharing plan) to allow for maximum contribution, perhaps not every
year, but financially successful years. For example, if the money
purchase contribution is set at 10 percent (not the cap of 25 percent)
and is paired with the discretionary profit sharing plan contribution
in a particular year of 15 percent, one can still reach the 25 percent
limit.
The 401(k) Options- Save for Your Retirement and Lower Current Taxes
Traditional 401(k) plan
If you choose a defined contribution profit sharing plan with
a 401(k) option, your firm's eligible participants will have the
opportunity to reduce their federal, and often state, income taxes
through voluntary pretax savings contributions. If you choose to
match employee contributions in whole or part, your firm will realize
even greater tax savings. Contributions can be deducted automatically
from participants' paychecks and may be invested in any of the Program's
investment options. Because it is the only employer-sponsored qualified
retirement plan that allows participants to contribute current income
on which taxes are deferred, the 401(k) plan is the fastest growing
area of retirement planning.
TIP: Many attorneys and staff equate 401(k) with an attractive
employee benefit. The term has become synonymous with an employers
intent to attract and retain good attorneys and staff. IF
there are no employer contributions (such as matching) and the firm
pasts required discrimination testing, there may be no employer
contributions necessary. Did you know a firm as small as two - one
attorney and one staff - can establish a 401(k) plan?
SIMPLE 401(k) plan
If you choose the SIMPLE 401(k), many of the administrative requirements
that accompany the traditional 401(k) are eliminated. Like the traditional
401(k) plan, your firm's eligible participants will have the opportunity
to contribute pre-tax dollars and reduce taxes. Unlike the traditional
401(k), the higher-paid employees deferrals are not contingent upon
the lower-paid deferrals. This is due to the fact that SIMPLE 401(k)
plans require the employer to fund the plan by matching participants
contributions 100 percent up to 3 percent of annual compensation,
or by making a flat contribution of 2 percent of all compensation
to all eligible participants.
TIP: If you expect that your firm will have issues with
participation of the lower-paid personnel resulting in failure of
required testing in the traditional 401(k) this option is worth
considering. For more information about these and other qualified
retirement plan options, call an ABA Members Retirement Program
Plan Consultant at 1-800-826-8901.
Susan White is a Vice President for State Street, the service
provider for the ABA Members Retirement Program. Susan is responsible
for Program marketing and relationships with state and local bar
associations.
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