Law Firm Partner Retirement: Creating $2M Tax-Advantaged Savings
Executive Summary
Law firm partners face unique financial planning challenges, including high incomes, complex partnership agreements, and the need for sophisticated retirement strategies. Golden Door Asset worked with a partner at a large law firm to design and implement a customized retirement plan incorporating defined benefit and defined contribution components, alongside estate planning considerations. This comprehensive approach resulted in an estimated $2 million in additional tax-advantaged retirement savings for the partner over a 10-year period, providing significant financial security for their future.
The Challenge
Law firm partners often find themselves in a high-income bracket, facing a significant tax burden. This high income, while advantageous, presents a challenge in maximizing retirement savings in a tax-efficient manner. Standard retirement plans, like 401(k)s, often have contribution limits that are insufficient for partners earning upwards of $750,000 annually. Our client, a senior partner at a large corporate law firm, earned an average of $800,000 per year. After taxes and living expenses, he was able to contribute the maximum $22,500 (in 2023) to his existing 401(k). While this was a good start, it represented less than 3% of his income – far below what was needed to secure a comfortable retirement comparable to his current lifestyle.
Furthermore, his partnership agreement presented additional complexities. The agreement dictated specific vesting schedules, capital account requirements, and the process for exiting the firm. These factors needed to be carefully considered when designing his retirement plan. A key concern was ensuring that the retirement plan integrated seamlessly with the partnership agreement, avoiding potential conflicts or unforeseen tax consequences.
Finally, the partner was concerned about estate planning. He wanted to ensure that his assets would be distributed efficiently to his heirs, minimizing estate taxes and maximizing the value passed down to future generations. His existing estate plan was outdated and did not adequately address his current financial situation.
His existing investment portfolio, valued at $1.2 million, was primarily invested in taxable accounts, leading to significant capital gains taxes each year. He felt he was leaving too much money on the table by not optimizing his tax situation.
The Approach
To address these challenges, Golden Door Asset adopted a multi-faceted approach focusing on maximizing tax-advantaged savings through a combination of retirement plan design and estate planning strategies.
First, we conducted a comprehensive financial analysis to understand the partner's current financial situation, including his income, expenses, assets, liabilities, and risk tolerance. We then developed a customized retirement plan that incorporated both a defined benefit (DB) plan and a defined contribution (DC) plan.
The defined benefit plan was designed to allow for significantly larger contributions than a typical 401(k), enabling the partner to shelter a substantial portion of his income from taxes each year. Actuarial calculations were performed to determine the optimal contribution level, taking into account his age, projected retirement date, and desired retirement income. The DB plan was structured to provide a target benefit of $275,000 per year at retirement.
In addition to the DB plan, we implemented a customized defined contribution plan that allowed for additional contributions on top of the standard 401(k) limits. This plan included features such as profit sharing and employer matching, further boosting the partner's retirement savings. The employer match was designed to incentivize contributions, rewarding the partner for prioritizing his retirement savings.
We then worked closely with ERISA (Employee Retirement Income Security Act) attorneys to ensure that the retirement plans were fully compliant with all applicable regulations and that the plan documents were properly drafted. This collaboration was critical to minimizing the risk of any legal or tax issues down the road.
Finally, we reviewed and updated the partner's estate plan to ensure that it aligned with his retirement goals and that his assets would be distributed efficiently to his heirs. This included strategies such as establishing trusts, gifting assets to family members, and utilizing life insurance to provide liquidity for estate taxes.
Technical Implementation
The implementation of the retirement plan involved several technical steps, including actuarial calculations, plan document drafting, and coordination with the client's existing financial advisors.
The defined benefit plan required sophisticated actuarial calculations to determine the optimal contribution level. We utilized specialized retirement planning software to project the partner's future retirement income and calculate the annual contribution needed to reach the target benefit of $275,000 per year. These calculations took into account factors such as investment returns, inflation, and mortality rates.
The defined contribution plan was customized to include features such as profit sharing and employer matching. The profit sharing component allowed the firm to contribute a percentage of its profits to the plan, while the employer match incentivized partner contributions.
We also worked closely with ERISA attorneys to ensure that the plan documents were properly drafted and that the plans were fully compliant with all applicable regulations. This included drafting plan summaries, conducting annual compliance testing, and filing required reports with the IRS and Department of Labor.
The integration with the client’s existing financial advisors was paramount. We provided them with detailed information about the retirement plans and worked collaboratively to ensure that the client’s overall financial strategy was aligned. This coordinated approach allowed for a seamless transition and ensured that all aspects of the client’s financial life were working together effectively. We utilized specialized reporting tools to provide the client and his other advisors with consolidated views of his portfolio, demonstrating the impact of the retirement plan contributions.
Furthermore, we modeled various "what-if" scenarios, including changes to contribution levels, investment returns, and retirement dates. This allowed the client to understand the potential impact of different decisions and to make informed choices about his retirement planning strategy. We also incorporated tax planning software to model the impact of different withdrawal strategies in retirement, minimizing his future tax liabilities.
Results & ROI
The implementation of the customized retirement plan yielded significant results for the law firm partner.
- Increased Tax-Advantaged Savings: Over a 10-year period, the partner accumulated an estimated $2 million in additional tax-advantaged retirement savings through the defined benefit and defined contribution plans. This represented a significant increase in his retirement savings compared to simply relying on a standard 401(k) plan.
- Reduced Tax Burden: The DB plan allowed the partner to deduct substantial contributions from his taxable income, significantly reducing his annual tax burden. He experienced an average tax savings of $80,000 per year, translating to a cumulative tax savings of $800,000 over the 10-year period.
- Enhanced Estate Planning: The updated estate plan ensured that the partner's assets would be distributed efficiently to his heirs, minimizing estate taxes and maximizing the value passed down to future generations. The creation of strategic trusts protected $500,000 in assets from potential estate taxes.
- Improved Financial Security: The comprehensive retirement and estate planning strategies provided the partner with greater financial security and peace of mind, knowing that he was well-prepared for retirement. He was able to confidently project a retirement income that would maintain his current standard of living.
- Portfolio Growth: The diversified investment portfolio within the retirement plans generated an average annual return of 8%, further contributing to the growth of the partner's retirement savings.
Key Takeaways
- Customization is Key: High-income earners require customized retirement plans that go beyond standard 401(k)s. Define benefit plans can be powerful tools for maximizing tax-advantaged savings.
- Integrate with Partnership Agreements: Carefully review and integrate retirement plans with partnership agreements to avoid conflicts and unforeseen tax consequences.
- Collaboration is Essential: Work closely with ERISA attorneys and other financial advisors to ensure compliance and a coordinated approach to financial planning.
- Estate Planning Matters: Don't overlook estate planning. It's a critical component of a comprehensive financial plan, especially for high-net-worth individuals.
- Model Different Scenarios: Use financial planning software to model different retirement scenarios and help clients make informed decisions about their retirement planning strategy.
About Golden Door Asset
Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors design and illustrate complex retirement solutions, automate compliance workflows, and deliver personalized financial planning insights to their clients. Visit our tools to see how we can help your practice.