Tax Planning for a Successful, Financially Secure Retirement

Over the course of your working career, you have been saving for retirement. If you are able to participate in a qualified retirement plan, such as a 401(k) plan, you obtain the advantage of a current federal income tax deduction and the deferral of federal income taxation on any earnings on the contributions to the plan. (“Qualified” refers to the fact that the plan satisfies the requirements of the Internal Revenue Code to permit these tax benefits.) The value of these tax aspects of qualified retirement plans is demonstrated by recent proposals in Washington to limit the amount individuals may accumulate in such plans.

There are limits to the amount that can be contributed to qualified retirement plans. Those limits were increased during the George W. Bush administration and the limit on contributions to 401(k) plans is, for 2015, $18,000. For those who have reached age 50, an additional $6,000 may be contributed each year. If you have that much compensation or earned income, you may contribute those amounts each year. If you have the ability to make such contributions, but are not contributing the full amount, then I doubt you are saving anything outside of the qualified plan, which offers few, if any, tax benefits. Statistically, many people fall short of the statutory maximum contribution. This is significant, and particularly so for lawyers, whose incomes are generally well over the median income in the United States. And here’s why: At lower income levels, retired individuals who receive Social Security benefits will be able to continue their standard of living with far less in retirement plan benefits. But as income levels increase, Social Security replaces a declining percentage of income earned while working. So more is needed from retirement plans to retain the same standard of living. It might be possible to do so if an individual contributed the maximum to a 404(k) plan each year of his or her work life. But most people fail to do so, because they have other expenses at the beginning of their careers, and sometimes college expenses for children later in their careers. Consequently, relying on a 401(k) deferral will often be an inadequate substitute for income levels and needs during work life. For those at higher income levels, even saving the 401(k) maximum, with the catch-up provision beginning at age 50, will not be sufficient.