Posted on by JMF

Can Starting a Law Firm Ruin Your Retirement?

As you will notice by the title of this post, I am always a little paranoid about my retirement plan. Then, this morning, I read this SmartMoney article about whether starting a business can ruin your retirement plan and I got a little more nervous.  Thus, the post here for all you paranoid start-up lawyers.

Ok, if you go to the article you will notice that it discusses baby-boomers who are risking their retirement plans to invest in their own new businesses.  I’m not a baby-boomer.  I’m young and if I liquidate my retirement account I might get be able to buy a 6-pack and a burrito.

All kidding aside, I do have a small retirement plan.  My prior law firm did not have health insurance but it did have a nice little SEP IRA program where the firm would match 10% of whatever I earned and put it into a non-taxable retirement account.  It was pretty sweet.

I’ve been meaning to do an post about simplified-employee-pension-plans (SEP) IRA’s and solo attorney retirement planning.  I’m not sure this is that post, but go check out the IRS website article on SEP IRA’s for further information.  Here is the basic gist of the IRS Article:

What is a SEP?

A SEP is a simplified employee pension plan. A SEP plan provides employers with a simplified method to make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP-IRA). See Publication 560 for detailed SEP information for employers and employees.

How is a SEP established?

A SEP is established by adopting a SEP agreement and having eligible employees establish SEP-IRAs. There are three basic steps in setting up a SEP, all of which must be satisfied.

  • A formal written agreement must be executed. This written agreement may be satisfied by adopting an Internal Revenue Service (IRS) model SEP using Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. A prototype SEP that was approved by the IRS may also be used. Approved prototype SEPs are offered by banks, insurance companies, and other qualified financial institutions. Finally, an individually designed SEP may be adopted.
  • Each eligible employee must be given certain information about the SEP. If the SEP was established using the Form 5305-SEP, the information must include a copy of the Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. If a prototype SEP or individually designed SEP was used, similar information must be provided.
  • A SEP-IRA must be set up for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. The SEP-IRA is owned and controlled by the employee and the employer sends the SEP contributions to the financial institution where the SEP-IRA is maintained. 

Despite knowing about SEP’s, guess what – when I stared my law firm, out went the retirement plan.  I’ve saved nothing specifically towards retirement in the last year.  I hate that.

I don’t have a lot more to say about this other than go read the SmartMoney article and then figure out how to get a SEP IRA going for your law firm.  I know that is what I will be doing in the next few weeks.  Cheers!