A Timely Tip for Business-Owning Attorneys: How the TCJA Can Help You Plan for Retirement
Let’s take a little journey today, you and I, to visit a popular tourist destination called Ideal Island. You’ll find it just north of Real World, where most of us spend most of our time.
The Busy Life of a Business-Owning Attorney
In Real World, perhaps you’ve left a large, but constraining law firm to start your own boutique practice. You’re starting to reap tangible rewards from the transition, with an appreciable income just shy of $415,000 for your annual joint filing.
That’s nice, but it’s hard to see past the daily grind to that shiny vision you had when you made the switch. The financial sacrifices you made to become your own boss have definitely set you back. Everyone else seems to be on track for a timely, if not early retirement, while you’re still chipping away at your heavy load of law school debt, and still working 60+ hours almost every week.
What happened to all those plans you had – such as working a little less, volunteering to mentor law students, or doing a bit of pro-bono work for your favorite charity? Will your college debt ever disappear? Will your eventual retirement ever come into view?
Good news. Your greatest goals haven’t disappeared. They’re still waiting for you over on Ideal Island. Even better, our own greatest goal at Cogent Strategic Wealth is to help you find your way there.
There’s so much involved, we couldn’t possibly cover it all in one short post. But let’s take a look at some steps you can take, and one relatively new possibility you may not have considered yet.
Making the Most of Retirement Plans and a QBI Deduction
Sorry about the all-caps, but we want to help you make the most of this post:
TO GET STARTED, TAKE A HOLISTIC LOOK AT YOUR FINANCIAL SITUATION. DETERMINE YOUR BIGGEST SAVINGS GOALS, AND ANY FUNDING GAP FOR EACH. RETIREMENT IS ALMOST CERTAINLY ONE OF THESE GREATEST GOALS, SO DON’T GIVE IT SHORT SHRIFT.
Depending on whether you have any employees, there are various retirement plan vehicles available for maximizing the various forms of tax-favored retirement plan contributions you can make. For example, there are SEP IRAs, Solo 401(k) plans, and other defined contribution and defined benefit plans for tax-deferred savings. You also may be able to layer on elective profit-sharing contributions as a deductible business expense. There are more choices to consider, but this suggests the general lay of the land.
What else is available in the tax code for you as a self-employed, business-owning attorney? You may have heard: As part of the 2017 Tax Cuts and Jobs Act (TCJA), Congress created a new section of the tax code, IRC Section 199A, with a new 20% Qualified Business Income (QBI) deduction for the owners of various pass-through businesses. With a few caveats, this is just about any business entity that is not a C corporation – including S corporations, LLCs, partnerships, and sole proprietorships. (By the way, financial advisory firms like ours are excluded. The motivation for the new deduction is clear: to allow these entrepreneurial business owners to keep pace with the significant corporate tax cut also provided by the TCJA.)
This offers substantial new tax-break possibilities for many business-owning attorneys. That said, the QBI deduction is also one of the most complicated provisions of the new law. While many of the details fall straight into your CPA’s area of expertise, you stand to make the most of this new opportunity if you also look out for your total wealth interests – the ones that include, but go well beyond merely ensuring you’ve got a properly prepared tax return.
The QBI: A Closer Look
How might you benefit? An attorney is entitled to a deduction equal to 20% of their "qualified business income" earned in a "qualified trade or business." If your business income is $315,000, you can take a 20% deduction right off the top. Your income just dropped by $63,000.
But the QBI deduction is not just 20% of your business income. It’s on your net business income, minus related items such as health insurance costs and retirement contributions. Thus, besides making optimal retirement contributions toward larger defined benefit or defined contribution plans, it’s also in your best interest to review whether you are maximizing your deductions in general. By the way, as one CPA commented to me, “Not only is the QBI deduction more complicated than just calculating 20% of the business income, guaranteed payments from a partnership won’t qualify for it.”
That’s a lot for you and your advisors to keep an eye on, but it may well be worth the effort. In especially good years, you and any other earning members in your firm can potentially contribute massive amounts of income to your tax-friendly retirement savings while also possibly deducting up to 20% of your business income. Here’s what we’re getting at:
You may be able to leverage your retirement plan contributions to lower your annual income, while also taking advantage of the QBI deduction.
Are you following how nifty this could be? You might now be able to score some significant additional tax savings as a “reward” for doing something you’d love to be doing anyway: saving for retirement.
Ultimately though, perhaps the most important point is this: The complexities in Section 199A go far beyond just calculating the potential deduction itself. There are ripple effects that warrant your taking a fresh look at every element of your overall tax plan – including which type of retirement plans offer the best chance to obtain your first-class ticket to Ideal Island!
Are You Ready for a Cogent Conversation?
To help you benefit from this, and many other tax-wise wealth strategies, Cogent Strategic Wealth can review your firm’s structure, sources of income, existing retirement plans, owner and employee arrangements, and more. So informed, we can leverage our seasoned team of professionals to suggest a course toward achieving those greatest life goals you set out for in the first place.
To learn more about saving for your goals, the QBI deduction in particular, and strategic wealth planning in general, we invite you to sit down with us today for a Cogent Conversation.® We’ll listen to what success looks like to you, build a plan tailored for you, and help you execute that plan every step of the way.