Retirement Plans vs. Attorney Fee Deferrals: What's the Difference?

Sage Settlement Consulting

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
2023 maximum contribution is $22,500 ($30,000 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, 2022)

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 $6,500 ($7,500 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, 2022)

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 $66,000
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, 2022)

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.

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