A 401k plan and a nonqualified deferred compensation plan both allow individuals to make contributions to an account meant to help fund future needs and goals, including retirement. This article provides an overview of the key differences between 401k plans and attorney non-qualified deferred compensation plans.
What are the Limits of 401k Plans and Deferred Compensation Plans?
A 401k plan has certain limitations on the amount that an individual can contribute each year. A deferred compensation plan, on the other hand, has no maximum contribution limit in any given year.
This means that if an attorney wants to defer all or most of their fees on a big case, they are probably not going to be able to within the confines of the limits of a 401k plan due to the limitations, but they can with a deferred compensation plan.
What are the Distribution Rules of a 401k Plan?
401k plans also have certain limitations on when an individual can start receiving payments. Specifically, the account owner cannot start receiving payments from their 401k before age 59 ½. People who withdraw their savings from their 401k plan before the age of 59 ½ will typically incur a 10% withdrawal penalty.
In addition, individuals who are on 401k plans have to start taking the required minimum distributions at age 70 ½. With a deferred compensation plan, however, individuals can start taking payments out of the plan before the age of 59 ½, and there are no required minimum distributions at age 70 ½.
What are the Distribution Rules of a Deferred Compensation Plan?
With a non-qualified deferred compensation plan, an individual can’t necessarily access all of the money in their plan at once. Generally, the quickest that they can receive all of their money back out of a deferred compensation plan is over a 5-year period in quarterly payments. They can, however, always start and stop those payments and continue to re-defer, which means they can spread out their money over their entire retirement if they want to.
Which is Better: a 401k Plan or a Deferred Compensation Plan?
For attorneys looking to defer more than what a 401k plan allows, contributing to a deferred compensation plan might be in their best interest. That being said, it is probably smart to have both.
Do you have questions about 401k plans or deferred compensation plans designed specifically for contingency fee-based attorneys? Give us a call now and we will help walk you through the differences and see which one makes the most sense for you and your firm.