Attorney looking for tax-deferred retirement options

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
beaverclea
Posts: 6
Joined: Sun Sep 17, 2017 11:12 pm

Attorney looking for tax-deferred retirement options

Post by beaverclea » Mon Dec 02, 2019 10:03 pm

Thanks in advance for your thoughts/advice!

I'm a new partner at a law firm seeking additional tax deferred retirement tools beyond what is currently offered in my firm. Overall household income is $600K in Denver, and spouse and I are both 38. Currently I have maxed out the existing options.

• Cash Balance Plan – which I am contributing around $25K Pre-tax. This amount seems to be fixed and I cannot increase it.
• Profit Sharing – which I am contributing around $31K Pre-tax. This amount seems to be fixed and I cannot increase it.
• 401K deferral plus match – which I am contributing $24,700 Pre-tax. Not currently in Roth.

Are there other additional tax-deferred retirement tools such as a SEP IRA that I could use? My understanding is that small employer retirement plans are limited by a $55K contribution limit which applies separately each type of employer contributions such as the Profit Sharing Plan and the Cash Balance Plan.

My understanding is that the $55K cumulative contribution limit applies, unless the accounts are for businesses that are not related (i.e. the profit sharing retirement plan is for the law practice and I create a SEP IRA for Uber driving/landlording)

Are there other considerations or options that I am failing to consider? Thanks!

Spirit Rider
Posts: 11875
Joined: Fri Mar 02, 2007 2:39 pm

Re: Attorney looking for tax-deferred retirement options

Post by Spirit Rider » Mon Dec 02, 2019 10:47 pm

Even if you were not maximizing the annual addition limit through the law firm. Only the partnership can adopt and make contributions to an employer retirement plan. A partner is an employee and can not adopt an employer retirement plan for any partner income.

As you noted, if you had an unaffiliated business you could adopt an employer retirement plan for that business. If you already maximized your employee deferral, no more deferrals would be possible, but employer contributions up to a separate annual addition limit would be possible with sufficient income.

User avatar
whodidntante
Posts: 6662
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Attorney looking for tax-deferred retirement options

Post by whodidntante » Mon Dec 02, 2019 11:07 pm

You could think like a poor person and do an HSA and a backdoor Roth. Series I bonds, and series EE bonds. Also, do not underestimate the tax deferral of a treasure room with traps.

CoastalWinds
Posts: 566
Joined: Sat Apr 06, 2019 8:28 pm

Re: Attorney looking for tax-deferred retirement options

Post by CoastalWinds » Mon Dec 02, 2019 11:53 pm

beaverclea wrote:
Mon Dec 02, 2019 10:03 pm
Thanks in advance for your thoughts/advice!

I'm a new partner at a law firm seeking additional tax deferred retirement tools beyond what is currently offered in my firm. Overall household income is $600K in Denver, and spouse and I are both 38. Currently I have maxed out the existing options.

• Cash Balance Plan – which I am contributing around $25K Pre-tax. This amount seems to be fixed and I cannot increase it.
• Profit Sharing – which I am contributing around $31K Pre-tax. This amount seems to be fixed and I cannot increase it.
• 401K deferral plus match – which I am contributing $24,700 Pre-tax. Not currently in Roth.

Are there other additional tax-deferred retirement tools such as a SEP IRA that I could use? My understanding is that small employer retirement plans are limited by a $55K contribution limit which applies separately each type of employer contributions such as the Profit Sharing Plan and the Cash Balance Plan.

My understanding is that the $55K cumulative contribution limit applies, unless the accounts are for businesses that are not related (i.e. the profit sharing retirement plan is for the law practice and I create a SEP IRA for Uber driving/landlording)

Are there other considerations or options that I am failing to consider? Thanks!
What is a “cash balance” plan? Is this part of the $56K total contribution limit for defined contribution to 401(k)?

User avatar
unclescrooge
Posts: 3955
Joined: Thu Jun 07, 2012 7:00 pm

Re: Attorney looking for tax-deferred retirement options

Post by unclescrooge » Tue Dec 03, 2019 3:21 am

Not sure if I'm doing the math right, but it seems to me if you save $80k/year for 30 years, you will probably end up with $8 million in tax deferred accounts.

If tax rates go up won't you end up paying higher taxes in retirement?

Is there some sort of calculator to figure out the break even point for contributions based on tax rates?

ivk5
Posts: 980
Joined: Thu Sep 22, 2016 9:05 am

Re: Attorney looking for tax-deferred retirement options

Post by ivk5 » Tue Dec 03, 2019 5:36 am

whodidntante wrote:
Mon Dec 02, 2019 11:07 pm
You could think like a poor person and do an HSA and a backdoor Roth. Series I bonds, and series EE bonds. Also, do not underestimate the tax deferral of a treasure room with traps.
+1 although maybe minus EE bonds. (Heavy penalty for holding less than 20 years; and you may still be working and in top tax bracket when they mature.)

Note that there may be some tax deferral built into firm accounting if accrual-basis earnings / distributions exceed tax-basis earnings. If so you need to bear in mind the deferred tax liability you may be accumulating due to growing difference between tax basis and accrual basis of capital account.

Some professional services partnerships have voluntary capital contribution programs and/or non-qualified deferred compensation (NQDC) schemes that may provide some tax deferral, at the expense of credit risk: in the event of insolvency you may become an unsecured creditor, last in line behind most other creditors (perhaps including required capital contributions). Personally I would avoid for now; might reconsider within a couple years of retirement.

Otherwise just follow tax-efficient fund placement and smart capital gains mgmt: TLH, use your most appreciated shares to fund your charitable giving (may be easiest to use DAF), etc. And don’t neglect insurance, estate planning, etc.

Needless to say, assuming there’s another earner in the household (you mentioned overall HHI), make sure you’re maximizing his/her workplace plans and such too.

Edited to add: don’t forget 529 if you have kid(s) and get a state income tax benefit (and perhaps even if you don’t, just to shelter LTCG, though the prioritization and cost/benefit analysis is less of a no-brainer and hotly debated in other threads).

gjlynch17
Posts: 59
Joined: Wed Apr 15, 2015 12:32 pm

Re: Attorney looking for tax-deferred retirement options

Post by gjlynch17 » Tue Dec 03, 2019 6:52 am

We are in a similar situation and here are some additional ideas, some of which are discussed above.

1. Backdoor Roth: You and your spouse can convert $12,000 in after-tax income to a Roth

2. HSA: $7,000.

3. Cash Balance Plans are a potentially significant deferral opportunity. Many law firms have them and there is a tradeoff between maximizing tax deferrals and administrative complexity. You should talk to your firm's retirement plans committee to better understand your firm's approach to your Cash Balance Plan. For example, is the allocation solely based on partnership ownership and age or are there other factors they consider in determining Cash Balance allocation.

4. Tax Placement of Investments. I do not know how much of a bond allocation you have but tax placement is important at high tax brackets. As I learned from this forum, at current rates, persons at the highest tax rates are often better with equities in tax deferred or tax free accounts (401(k), Roth, HSA) and with municipal bond funds in taxable accounts. I find Vanguard's High Yield Municipal Bond fund (VWALX) particularly appealing. It is an investment grade bond fund (similar to a corporate bond fund) that currently yields 2.36% tax free at the federal level (no AMT at your income). This recommendation is contrary to that of many on these forums who advocate Treasuries but IMO at higher tax brackets the additional tax free yield more than compensations for the incremental credit risk.

zlandar
Posts: 186
Joined: Wed Apr 10, 2019 8:51 am

Re: Attorney looking for tax-deferred retirement options

Post by zlandar » Tue Dec 03, 2019 7:49 am

The $25k CBP is low. The max contributions are age-based and start at $58k:

https://www.cashbalancedesign.com/resou ... on-limits/

The admin costs of the plan do not change with more money deferred. That’s assuming you are not using financial planner charging an AUM.

I would ask whoever is in charge of the CBP what the plan is invested in, the target investment return rate, fee structure, and how to increase contributions. Unlike a 401k everyone in the CBP has the same investment pooled together. You are discouraged from changing contribution amounts though you can specify max contribution adjusted by age.

I am in a company with a CBP and 2/3 of the partners are putting in the max amount by age with a target return of 4%. It’s great for tax-deferring income but the drawback is the added complexity vs a 401k.

Topic Author
beaverclea
Posts: 6
Joined: Sun Sep 17, 2017 11:12 pm

Re: Attorney looking for tax-deferred retirement options

Post by beaverclea » Tue Dec 03, 2019 6:08 pm

unclescrooge wrote:
Tue Dec 03, 2019 3:21 am
Not sure if I'm doing the math right, but it seems to me if you save $80k/year for 30 years, you will probably end up with $8 million in tax deferred accounts.

If tax rates go up won't you end up paying higher taxes in retirement?

Is there some sort of calculator to figure out the break even point for contributions based on tax rates?
It's a good point, but my hope in being somewhat FIRE/Mustachian is save/invest $200K per year for the next 5 years and then try to retire at a much lower level of income probably around $80-100K. So I planning on having significantly lower marginal tax rates upon "retirement." Unfortunately, much of the $200K (about $120K) is simply going to an after-tax investment Vanguard account in VTSAX/VTIVX, which is obviously not terribly tax efficient.
Last edited by beaverclea on Tue Dec 03, 2019 6:34 pm, edited 1 time in total.

Topic Author
beaverclea
Posts: 6
Joined: Sun Sep 17, 2017 11:12 pm

Re: Attorney looking for tax-deferred retirement options

Post by beaverclea » Tue Dec 03, 2019 6:14 pm

zlandar wrote:
Tue Dec 03, 2019 7:49 am
The $25k CBP is low. The max contributions are age-based and start at $58k:

https://www.cashbalancedesign.com/resou ... on-limits/

The admin costs of the plan do not change with more money deferred. That’s assuming you are not using financial planner charging an AUM.

I would ask whoever is in charge of the CBP what the plan is invested in, the target investment return rate, fee structure, and how to increase contributions. Unlike a 401k everyone in the CBP has the same investment pooled together. You are discouraged from changing contribution amounts though you can specify max contribution adjusted by age.

I am in a company with a CBP and 2/3 of the partners are putting in the max amount by age with a target return of 4%. It’s great for tax-deferring income but the drawback is the added complexity vs a 401k.
Thanks, I touched base with our Firm Financial Controller who replied that the contribution is $2000 minimum plus 15% of any income over $275K. So I am putting about $24K, which is far from the $56K statutory maximum. But your point is well-taken that this is set by the company/firm.

Topic Author
beaverclea
Posts: 6
Joined: Sun Sep 17, 2017 11:12 pm

Re: Attorney looking for tax-deferred retirement options

Post by beaverclea » Tue Dec 03, 2019 6:31 pm

gjlynch17 wrote:
Tue Dec 03, 2019 6:52 am
We are in a similar situation and here are some additional ideas, some of which are discussed above.

1. Backdoor Roth: You and your spouse can convert $12,000 in after-tax income to a Roth

2. HSA: $7,000.

3. Cash Balance Plans are a potentially significant deferral opportunity. Many law firms have them and there is a tradeoff between maximizing tax deferrals and administrative complexity. You should talk to your firm's retirement plans committee to better understand your firm's approach to your Cash Balance Plan. For example, is the allocation solely based on partnership ownership and age or are there other factors they consider in determining Cash Balance allocation.

4. Tax Placement of Investments. I do not know how much of a bond allocation you have but tax placement is important at high tax brackets. As I learned from this forum, at current rates, persons at the highest tax rates are often better with equities in tax deferred or tax free accounts (401(k), Roth, HSA) and with municipal bond funds in taxable accounts. I find Vanguard's High Yield Municipal Bond fund (VWALX) particularly appealing. It is an investment grade bond fund (similar to a corporate bond fund) that currently yields 2.36% tax free at the federal level (no AMT at your income). This recommendation is contrary to that of many on these forums who advocate Treasuries but IMO at higher tax brackets the additional tax free yield more than compensations for the incremental credit risk.
Excellent recommendations - thank you for your input!

Post Reply