Think back 10 or 11 months … remember your New Year’s financial resolutions? Save more, spend less, be smarter with taxes, and construct a succession plan for your practice — we all made them. Then, client demands, partner requests, deal closings, hearings and even the occasional trial helped make 2017 fly by. You’ll have to focus, but it’s not too late to make the most of the year financially.
Before we dive in, note the items below are presented for educational purposes only. Nothing here should be considered specific financial advice for you. As your situation is undoubtedly nuanced, you should seek the advice of financial and tax professionals before applying any of these strategies.
1. Max It Out
Whether you’re at the helm of your own firm, in the legal department of a Fortune 100 company, or a few weeks into your first year of practice, minimizing taxes and saving for eventually not working play key roles.
One of the smartest things to consider is maxing out your retirement plan. Even if you can’t contribute up to the IRS limits, you still have enough remaining pay periods to make a difference with increased contributions. This is especially true if you expect to receive a bonus before year’s end.
If nothing else, at least contribute enough to get your employer’s match, if one’s available. That’s free money! (Sorry Big Law associates, most of your firms don’t match your contributions.)
For 2017, you can contribute $18,000 to a 401(k). (It’ll be a 403(b) if you work for a nonprofit.) If you’re 50 or older, you can contribute an additional $6,000 as a “catch-up” contribution. That’s a total of $24,000 for someone 50 or older.
Why does this matter?
- Those contributions grow in a tax-advantaged fashion. You won’t have to pay taxes along the way on appreciation, dividends and/or interest. This allows your money to potentially grow faster.
- If you’re making pretax contributions, putting more in will lower your taxable income.
Work for yourself? Even better.
Solos may use an (aptly named) solo or one-participant 401(k). (Further details: IRS One-Participant 401(k))
The solo 401(k) views you, the business owner, as both an employee and the employer.
The employee side is the same as described above. However, the business can make a 25 percent (20 percent in the case of a single-member LLC or sole proprietorship) annual profit-sharing contribution up to a combined maximum, including the employee deferral, of $54,000. That’s a lot of money.
2. Review Your Transition and Succession Plan
I know, I know, you’re going to work forever. And that’s true … until it’s not. You don’t want to scramble to line up a successor when you’re “ready” to (or must) transition out of your firm.
Solos likely have a material portion of their net worth tied up in their law practice. Attempting a hurried sale will almost ensure that you receive a fire-sale value.
Finding a suitable successor, either in a younger lawyer or via a sale to another firm, will probably take years. Accurately valuing your firm and creating a reasonable succession plan greatly enhance the likelihood that you’ll be able to monetize your practice, boosting your savings.
Reflect honestly on your personal timeline. When do you want to wind down your hours? When do you want to fully transition out of your practice? These timelines will undoubtedly shift, but you need to start planning now.
You also need to incorporate the financial structure of your succession plan into your retirement projections. For business owners, these are closely linked.
Don’t feel too bad if you haven’t done much yet, you’re in good company — physicians, accountants, dentists and financial advisors all struggle with turning over the reins.
Make sure you consider ABA Model Rule 1.17: Sale of Law Practice when exploring exit options.
3. Push and Pull
For solos and partners in smaller firms using cash basis accounting, if you’re experiencing a record year and will likely have a more tepid 2018, consider pushing revenue into 2018 and pulling expenses into 2017. The goal here is to defer taxable income to a year during which you’ll be in a lower marginal tax bracket.
To defer income, collection notices and invoices from November or December could be sent out in late December or early January, prompting client payments in early 2018. Legitimate firm-related purchases slated for January or February of 2018 could be made in November or December of 2017, lowering your 2017 taxable income.
Ryan McPherson is the founder of Intelligent Worth. He helps solo practitioners and partners in smaller firms align their personal and business finances to generate wealth and avoid missteps. Ryan is a Certified Financial Planner and an IRS Enrolled Agent. He is a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network.
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