Tax-deferred retirement plans lower taxable income and invest for long-term financial security. Three standard tax-deferred retirement plans are a 401(k), an Individual Retirement Account (IRA), and a Simplified Employee Pension Individual Retirement Plan (SEP-IRA). An attorney fee deferral can complement retirement savings while providing lawyers with a more flexible distribution schedule.
Below you’ll find a high-level overview of 401(k)s, IRAs, and SEP-IRAs, and how they compare to attorney fee deferrals.
Comparison: 401(k) vs. Individual Retirement Account (IRA)
401(k)
- Offered through employer
- Funds grow pre-tax, reducing taxable income
- Income tax due as funds are distributed
- 2024 maximum contribution is $23,000 ($30,500 if age 50+)
- May include employer match
- Investment options limited to those chosen by plan administrator
- Early withdrawal penalties
- Required minimum distribution for age 72 (73 if you reach age 72 after Dec. 31, 2023)
Individual Retirement Account (IRA)
- Held by banks, brokerages, and investment firms
- Funds are invested post-tax
- Contributions are tax-deductible
- Income tax due as funds are distributed
- 2023 maximum contribution is $7,000 ($8,000 if age 50+)
- Typically have broader investment options than 401(k)
- Early withdrawal penalties
- Required minimum distribution for age 72 (73 if you reach age 72 after Dec. 31, 2023)
Simplified Employee Pension Individual Retirement Plan (SEP-IRA)
- Offered through employer (generally for self-employed individuals or small-business owners with few or no employees)
- Funds are invested pre-tax
- Contributions are tax-deductible
- 2023 maximum contribution is the lesser of 25% of compensation or $69,000
- No catch-up contributions for age 50+
- Account provider determines investment options
- Early withdrawal penalties
- Required minimum distribution for age 72 (73 if you reach age 72 after Dec. 31, 2023)
If you are a contingency fee-based attorney, you have another tax-advantaged savings option: an attorney fee deferral.
Attorney Fee Deferral
- Available only to contingency fee-based attorneys
- Funds grow pre-tax, reducing taxable income
- Income tax due as funds are distributed
- No maximum contribution
- Can utilize fixed annuities, market-based structured settlements, or a combination of the two
- Option to have your investment advisor manage the funds
- No early withdrawal option, but payments can be scheduled to begin before retirement
Attorney fee deferrals offer an additional opportunity to maximize and diversify income while taking advantage of significant tax benefits. Lawyers should strongly consider using an attorney fee deferral to dovetail with traditional retirement plans.
Learn More
Retirement planning is unique to the individual and should be discussed with your financial advisor, accountant, and in some instances, your estate planner. For more information about attorney fee deferrals, contact Sage Settlement Consulting today.