The Solo 401(k) Plan for Attorneys
The Solo 401(k) plan (also known as the Individual 401(k) or Self-Directed 401(k) plan) provides self-employed individuals, such as attorneys, and small business owners the ability to use retirement funds for all IRS approved investments. In other words, you can make virtually any type of investment, excluding the prohibited transaction rules of a Solo 401(k), which are few.
As a sole practitioner attorney, you can take advantage of all the benefits a Solo 401(k) retirement plan has to offer. Additionally, you can diversify your retirement portfolio by investing in alternative assets that most likely will not move in the same direct as traditional investments. Alternative investments include real estate, tax liens, private placements, foreign currency and more. Since the 2008 financial crisis, more financial advisors favor the idea of diversifying investments. When the market takes a downturn, your investments will not get hit as hard.
Benefits of the Solo 401(k) Plan for Attorneys
In addition to having more investment opportunities, the Solo 401(k) retirement plan is easy and cost effective to administer. It also comes with a multitude of benefits that sole practitioner attorneys can take advantage of. Let’s take a look at four primary benefits.
1. High Contribution Limits
If you are eligible for the plan, one of the primary benefits is that you can reach your maximum contributions faster than a SEP IRA. The maximum contribution set the Solo 401(k) apart from the SEP IRA, another popular plan for self-employed individuals. A SEP IRA is only a profit-sharing plan. The Solo 401(k), on the other hand, is a profit-sharing plan, but it also has the employee-deferral feature.
An employee deferral allows Solo 401(k) investors, such as sole practitioner attorneys, to go dollar for dollar into their plan. Combine the employee deferral feature with the profit sharing feature of the Solo 401(k), and you will receive a higher maximum contribution limit.
- If you are under 50, your maximum contribution is $56,000 for 2019.
- If you are over 50, you have a $6,000 catch-up which sets your maximum contribution at $62,000 for 2019.
The SEP IRA is still very popular simply because tax professionals are more comfortable with the SEP IRA than the Solo 401(k). However, for small business owners and self-employed individuals, such as sole practitioner attorneys, the Solo 401(k) is the winning retirement plan.
2. Greater Asset and Creditor Protection
If your state opted into the 2005 Bankruptcy Act, your 401(k) will receive unlimited protection from creditors if you go bankrupt. Also, most states will protect your account outside of bankruptcy if it were to be attacked by creditors. With a Solo 401(k) retirement plan, you may receive more protection than with a Self-Directed IRA.
3. Special Exception for Real Estate Investors
If you’re a sole practitioner attorney who makes real estate investments, you will truly benefit from the Solo 401(k) exception for using leverage. You can take a nonrecourse loan, combine it with the Solo 401(k), use the leverage (a loan) to purchase property, and you will not trigger the UBIT (or UBTI) tax. If you were to use a Self-Directed IRA, you will be taxed.
4. Solo 401(k) Loan
The SEP IRA and SIMPLE IRA do not have a loan feature, however the Solo 401(k) provides you with a $50,000 loan or 50% of your account value (whichever is less). You can use this loan for any purpose. You can fund your law firm, make investments, or use it for personal reasons, such as paying off debt.
Ultimately, the Solo 401(k) Plan offers a sole practitioner lawyer far more retirement, tax, and investment options than a Traditional IRA, SEP, or SIMPLE IRA. A Solo 401(k) plan offers the same advantages as a Self-Directed IRA LLC, but without having to hire a custodian or create an LLC.
Example of the Solo 401(k) for Attorneys
Steve is a doctor earns a $100,000 a year. Steve is 45 years old and the sole shareholder of an S Corporation called ABC, Inc. Steve is the sole owner and employee of the corporation. Steve wishes to make the maximum amount of tax-deductible contributions allowed by law. If Steve uses a Traditional IRA, he can make a tax-deductible contribution of just $6,000. Whereas, if Steve uses a SEP IRA as the retirement vehicle, he will be able to make a tax-deductible contribution equal to $25,000 (25% of $100,000).
But if Steve establishes a Solo 401(k) Plan, he can make a tax-deductible contribution of $36,500 ($16,500 as an employee and a corporation profit sharing contribution equal to 25% of Steve’s compensation). Thus, it is clear that the Solo 401(k) plan offers a self-employed attorney the greatest retirement benefit. Steve can open his Solo 401(k) plan at any local bank, such as Wells Fargo or Chase. The next step will be to roll over his former 401(k) or IRA funds to the new Solo 401K Plan tax-free (only Roth IRA or after-tax 401K funds are not permitted to be rolled into a Solo 401K Plan).
Get in Touch
To learn more about the advantages of using a Solo 401K Plan, contact IRA Financial Group directly at 800-472-0646. You can also fill out the form to contact a certified 401(k) specialist at any time.