Retirement plans for small businesses offer a blend of tax advantages and long-term wealth-building opportunities that every law firm owner should at least explore. The question is: where do you begin?
Let’s look first at how a retirement plan can strengthen your firm’s financial future. Then we’ll walk through the common options available so you can determine which one best fits your practice.
Why Retirement Planning Matters for Your Firm
1. Building Wealth for the Long Term
One of the most significant benefits of offering a business retirement plan is the ability to save far more for the future than with a personal IRA alone. While IRAs are valuable, their contribution limits are relatively low. By contrast, business retirement plans allow much larger annual contributions, enabling you to grow a retirement portfolio more quickly.
Importantly, these savings don’t just prepare you for retirement — they also diversify your financial security beyond the value of your firm, creating passive wealth that grows independently of your business.
2. Substantial Tax Advantages
Business retirement plans carry multiple tax perks:
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Contributions are deductible as business expenses, lowering taxable income.
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Employer contributions aren’t subject to FICA taxes, saving 7.65% per dollar contributed.
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Tax-deferred growth allows investments to compound without immediate tax consequences.
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Contributions may help reduce taxable income enough to qualify for the Qualified Business Income (QBI) deduction, which can be restricted for law firms with high income.
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Startups may qualify for tax credits of up to $5,000 for the first three years to offset setup costs.
Together, these tax breaks make retirement plans a powerful tool for managing both your personal and business tax burdens.
3. Attracting and Retaining Legal Talent
A retirement plan isn’t just about money — it’s a recruiting and retention advantage. Competitive benefits packages appeal to associates choosing between firms and signal your investment in their long-term financial well-being. For younger attorneys especially, a retirement plan can be a deciding factor.
Common Retirement Plan Options for Law Firms
SEP IRA
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Highlights: High contribution limits ($69,000 in 2024), simple setup, low administrative costs, flexible contributions, no annual filings.
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Considerations: Employer must contribute the same percentage for all employees, only employer contributions allowed. Best for solo firms or those with few employees.
Solo 401(k)
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Highlights: Highest contribution potential ($69,000 in 2024), Roth options, loan provisions, spouse eligibility.
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Considerations: Restricted to firms with no full-time employees other than owners and spouses. More complex administration, with filing required once assets exceed $250,000.
SIMPLE IRA
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Highlights: Easy to administer, both employer and employee contributions allowed, no annual filings, suited for firms with up to 100 employees.
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Considerations: Lower contribution limits ($16,000 in 2024), mandatory employer contributions, and higher early withdrawal penalties.
Traditional 401(k)
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Highlights: High contribution limits, customizable design (match structures, Roth options), loan provisions, suitable for firms of all sizes.
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Considerations: Higher setup and administrative costs, annual testing and filing required.
Choosing the Right Plan
The right option depends on:
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Firm size and growth trajectory
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Number of employees
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Desired contribution levels
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Willingness to handle administrative complexity
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Budget for ongoing costs
Many firms begin with a simple SEP or SIMPLE IRA, then transition to a traditional 401(k) as they expand.
Next Steps
If you’re considering a small business retirement plan, consult a financial advisor who specializes in law firm benefits. With the potential tax savings, accelerated wealth-building, and employee retention benefits, a retirement plan isn’t just a perk — it’s a smart investment in your firm’s future.
As a law firm owner, you dedicate your career to safeguarding your clients’ interests. Take the same care with your own financial security — and that of your employees — by establishing a well-structured retirement plan.