11 Financial Mistakes Lawyers Make


The financial services industry pours millions of dollars into advertising in an attempt to convince you that you need their services. Luckily, most of us are repeating the same mistakes over and over again (myself included). Here's the most common mistakes that I've seen.

Twenty-six thoughts on 11 Financial Mistakes Lawyers Make


  1. Nice article. I agree with the point “Over-Entertainment”, it is true that lawyers spent a stressful life, but they can check unnecessary expenditure like this.

    1. Exactly – it’s so easy to over entertain yourself. That’s not to say that entertainment is bad, but you’ve got to think about the marginal utility of the next entertainment $1 you spend. We all have a certain point where no more entertainment spending is needed and we’re still having a good time.

  2. I think you have this sentence backwards: “Because a lawyer’s marginal tax rate is always higher than his effective tax rate, by contributing to retirement accounts he can save his effective tax rate today and pay his marginal tax rate tomorrow in retirement.”

    Should be “…he can save his MARGINAL tax rate today and pay his EFFECTIVE tax rate tomorrow in retirement.”

      1. I recently discovered this blog – great first article. Just one thing to point out on retirement accounts and taxes. You save at the marginal rate when you contribute and pay at the marginal rate when you withdraw. Any tax analysis should be done using the marginal rate, not the effective rate. The article below gives a thorough explanation with examples (warning – the article is technical).

        https://www.kitces.com/blog/Understanding-Marginal-Tax-Rate-Vs-Effective-Tax-Rate-And-When-To-Use-Each/

        The benefit of retirement accounts is that you don’t pay tax on interest and dividends each year that you otherwise would in a taxable account.

        1. Thanks Eric and apologies if I’m the source of the confusion with the original typo.

          For retirement accounts, you should use the marginal rate when calculating your savings for contribution and you should use the effective rate when calculating your savings for withdrawals.

          That seems counter-intuitive doesn’t it? If you save a dollar today by putting it in a retirement account, you save at today’s marginal tax rate. I think everyone will agree that this makes sense. If I’m taxed at a 45% marginal rate, if I reduce my income by $1.00 I will save 45 cents.

          On the flip side, when I’m in retirement and withdrawing money from a pre-tax account, it’s true that the last dollar I withdraw from the account will be taxed at my marginal tax rate in retirement. For example, if my marginal tax rate is 25% in retirement and I withdraw an additional $1.00 from a pre-tax account, I will expect to pay 25 cents in taxes.

          But what about all of the other dollars I withdrew during retirement? I paid significantly less taxes on the dollars as I filled up the tax bracket buckets. For the first few dollars, I paid no taxes at all (thanks to a standard deduction and a personal exemption). After that, I paid taxes at the 10% and 15% rates before I made it up to the 25% tax bracket.

          For that reason, I need to look holistically at my tax burden in retirement to understand the taxes I’m paying, which is why using your effective tax rate in retirement is the right metric.

          Let me see if one example will clear this up. Let’s say that your marginal tax rate today is 45%. If I contribute $18,000 to a retirement account today, I’ll save $8,100 in taxes. Let’s further say that in my first year of retirement I have no other income. I withdraw $18,000 from my retirement account. Although that will put me in the 10% tax bracket (my marginal federal income tax rate), I’ll only pay $744 in tax for an effective rate of 4.13%! So by contributing today, I save $8,100 and pay $744 in the future.

          Hope that clears it up.

          1. This is not correct. I’m sorry to push on this, but I am a CPA who specializes in helping clients determine whether a Roth (after tax) or Traditional (pre tax) retirement contribution is the correct choice (just want to give you some credentials). Generally we recommend Roth contributions to clients at the beginning of their career who expect to significantly higher income (and thus significantly higher tax rates) in retirement. Under your calculations, it would never make sense to make a Roth contribution, because your effective tax rate at retirement will always be lower than your marginal rate when working (because the tax code is progressive). This is not accurate.

            Let’s say in a similar example to one you proposed, that we make $18,000 in taxable income today. Our marginal rate is 10%, so if we save $1,000 now, I save $100 in taxes today. Let’s say when I retire, my taxable income is also $18,000 before retirement distributions (with same marginal rate). If I withdraw an additional $1,000 from my retirement account, I will pay an additional $100 in taxes (marginal rate, NOT effective rate). The savings difference you discuss is because the marginal tax rates are lower in your example because income is lower. This is why if tax rates when contributing are the same as those when distributing, a Roth and Pre-tax contribution give the same result. You can re-do this calculation at any level (e.g. $200,000), and you will get the same result.

          2. Just to further clarify, when you cross tax brackets or are dealing with exemptions and deductions, you WOULD use an effective tax rate, but only the effective rate on the marginal income or deduction, not your effective rate on all income. In your example, because there is no other income at retirement, the effective rate on all income = the effective rate on the marginal income.

          3. I think there’s a serious flaw in your argument. You’re assuming a retirement income of $18,000. Where did that income come from? If you’re like most lawyers, you will have a significantly lower income in retirement than you will during your peak earning years. A lawyer making $400,000 today would need a portfolio of $10,000,000 being withdrawn at 4% to generate that kind of money. If that ends up not being you, well that’s a good problem to have but I wouldn’t plan for that scenario.

            In choosing Roth over Traditional, you’re also ignoring the state tax implications. Many lawyers are working in big cities with high state and local taxes (like NYC and SF). They may retire to sunny climates like Florida or Texas with no state income taxes. If that’s you, it’s another strong argument for taking the tax break today since you’ll never pay those city or high state income taxes.

            There’s a few more reasons to pick a Roth 401(k) over a Traditional 401(k) but I don’t find any of them convincing. That said, the main challenge is just to get people to max out the accounts.

            Related:Revisiting Roth Contributions

          4. My argument was not regarding the merits of a Roth vs Traditional contribution. In fact, I agree that most high earning individuals will be better off making a Traditional contribution because they will have a lower income and thus lower tax rate in retirement (and also possibly because of moving to lower tax states).

            I assumed a retirement income of $18,000 to match what you used in a previous response to my comment. I then used the same income of $18,000 while working to show that Traditional and Roth contributions give identical results at retirement if tax rates are the same. There is no inherent tax advantage to the Traditional IRA.

            To circle back to my original point, you use the marginal tax rate at retirement and not the effective tax rate to analyze which type of contribution is better. If this is not clear to you, I recommend confirming this with other financial professionals. While this statement may not invalidate your argument that Traditional contributions are preferable for most attorneys, it is not an accurate statement. I think this is a good blog that can really help out its readers. I don’t want you to have an inaccurate statement regarding what is one of the most important financial considerations – retirement account contributions. An attorney with knowledge of taxes would pick up on the mistake regarding marginal vs effective tax rates.

          5. Sorry for the 2nd comment. Just to add another reference to my post, the Bogleheads wiki on Traditional vs Roth (which you reference in other posts) states:

            “The main reason to prefer one type of account over the other is the comparison of marginal tax rates. If your marginal tax rate now is higher than your estimated marginal tax rate at retirement, then the traditional account is better; if it is lower, then the Roth account is better. ”

            https://www.bogleheads.org/wiki/Traditional_versus_Roth

          6. I still think you’re missing the boat here, although it now sounds like we agree that pre-tax is the right choice for most high earners. If there is a big point of disagreement, maybe we should turn it into a Pro/Con article. I’m sure readers would find it interesting.

            The fact is that absent any other income in retirement (you still didn’t answer where that $18,000 came from in your example), your marginal tax rate is 0% on the first dollar you earn. If your first dollar of income is from a pre-tax account, you’ll pay $0 in taxes on it.

            As you fill up the tax brackets, that marginal rate will increase since the tax rate is progressive. So yes, if your point is that in thinking about each particular dollar, you should compare marginal rate saved today vs marginal rate paid tomorrow, I agree with you.

            But to look at it that way would a massive example of missing the forest for the trees.

            What an investor really wants to know is if I save today at my marginal rate, what will be the average tax rate I’ll pay in retirement on the dollars I withdraw (i.e. the effective rate). The tax arbitrage is real, thanks to the need to fill up the other brackets.

          7. Here’s an example of why you use the marginal rate at retirement rather than effective. You have a partner who made $500k a year at her peak. She maxed out her 401k each year and puts some additional amount away in a taxable account. She also gets a pension from the law firm (not sure if big law firms do this like the Big 4 CPA firms do). Between her 401k, taxable account, pension, and social security, she projects that she will have $250k of taxable income when she retires at 62 (Federal marginal rate of 33%, effective of 27%). She’s 57 right now and decides she has enough saved and wants to ease into retirement. She cuts back to part time and has taxable income of $150k a year (Federal marginal rate of 28%, effective of 23%). Her analysis of whether to make Traditional or Roth contributions comes down to comparing the marginal rate at retirement of 33% to her marginal rate now of 28%. Therefore, she chooses to make a Roth contribution. She does not compare her marginal rate of 28% now to her effective rate of 27% at retirement.

            The statement that you save at the marginal rate and withdraw at the effective rate may be a useful mental shortcut to most of your readers to emphasize WHY their marginal rate will be lower at retirement (because there are lower tax brackets to fill up) , and thus why they should make Traditional contributions vs Roth. It’s just not technically accurate, and that’s why you won’t see that argument being made on the Bogleheads forum or another technical website.

            The simple argument that is used is that you will most likely be in a lower tax bracket at retirement than you are while you are working, because your income will be lower. As long as that is the case, it is better to make a Traditional contribution.

            I understand that you are trying to make the argument that Traditional contributions will be better than Roth, which I agree with completely for your readers. However, the “save at the marginal rate, withdraw at the effective rate” argument is an oversimplified (and not technically accurate) way of restating the main consideration in the analysis, which is marginal tax rates now versus marginal tax rates at retirement. From what I see in your article regarding the Traditional vs Roth analysis, you are interested in getting the technical details correct (ex. effectively higher contributions in Roth).

        2. Sorry, didn’t see the Bogleheads link until just now. Thanks for posting it. Clearly we’re both into this stuff since we’re devoting an entire Tuesday morning to the discussion. I hope the readers will find it interesting!

          Here’s the quote you posted from the Bogleheads:

          “The main reason to prefer one type of account over the other is the comparison of marginal tax rates. If your marginal tax rate now is higher than your estimated marginal tax rate at retirement, then the traditional account is better; if it is lower, then the Roth account is better. ”

          On this, we absolutely agree. With respect to the marginal dollar, if your marginal tax rate now is higher than your estimated marginal tax rate at retirement, then the traditional account is better. But if it’s the reverse, go with the Roth.

          The problem with this quote out of context is that it doesn’t take into consideration all of the other dollars of retirement income. Those dollars had much lower marginal tax rates as they filled up the buckets.

          I’m surprised you didn’t quote some other parts of the article, which on an initial read appear even more damning. Here’s more from the article:

          “A common misunderstanding about traditional accounts is “contributions are taken from the top while withdrawals come from the bottom”: in other words, that one saves a marginal rate when contributing but pays only an average rate (starting at 0% for the first dollar withdrawn) when withdrawing.”

          Yikes, I hate to disagree with the Bogleheads but this seems to undercut what I’ve been saying through this thread. Luckily, I won’t have to make a counter-argument because immediately after the author wrote the above sentence, he or she says:

          “That is true in a limited sense – limited, that is, to the very first traditional contribution one makes. After that, subsequent contributions will be withdrawn on top of the withdrawals due to previous contributions. One must therefore calculate the marginal withdrawal tax rate due to those subsequent contributions.”

          Those sentences don’t make a lot of sense. I suggest the Bogleheads clean them up. You shouldn’t say something is a common misunderstanding and then immediately say that the common misunderstanding is in fact true. Plus, the couple of sentences on subsequent contributions don’t really clear anything up and just add to the confusion.

          Since you’ve been so kind to reference Kitces and the Bogleheads, I figured I should return the favor. First, we’ll start with The Finance Buff (an important Boglehead himself).

          He starts with the standard line:

          “If the marginal tax rate is higher now than in retirement, one is better off contributing to a Traditional 401k. If the current marginal tax rate is lower, one is better off contributing to a Roth 401k.”

          But then he makes the critical point (emphasis his):

          “But that applies only to the marginal dollar, which is the last dollar you can shift between Traditional and Roth 401(k). It is not necessarily the case for the entire contribution or the average dollar.”

          And then he repeats the “common misunderstanding” that is in fact true:

          “Because the way a Traditional 401(k) works, the dollars they contribute come off from the top, in the highest tax bracket for their income. After they retire, the dollars they receive from their Traditional 401(k) pour into an empty or shallow bucket.”

          Concluding:

          “Even if we assume their marginal tax bracket in retirement will be higher due to tax increases, a large portion of the 401(k) withdrawal may still be taxed at a lower rate than what it was when they contributed the money.”

          https://thefinancebuff.com/case-against-roth-401k.html

          Next, we’ll look at Jim Dahle, who wrote the chapter on retirement accounts in the Bogleheads book.

          He says:

          “The most important consideration in the Roth vs Traditional debate is your tax rate and how it will change when you retire. Most importantly, remember that your contributions are made at your MARGINAL tax rate (i.e. the rate at which the last dollar you made is taxed) but withdrawals may be taken at much lower rates.”

          He then gives examples of those withdrawals being taxed at lower rates as the fill up the buckets.

          And concludes (emphasis mine):

          “Obviously, if you are saving taxes at 33% when you contribute money, and paying taxes at 33% when you withdraw money, then it doesn’t matter which account you use. But thanks to the fact that not only are you likely to have a lower marginal rate in retirement, but also the fact that you contribute at your marginal rate and withdraw at your effective tax rate, most doctors in their peak earning years are going to be better off deferring taxes whenever possible.”

          https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/

          1. Looks like we posted at the same time. Thank you for the very detailed and thoughtful comment. It seems we are mostly on the same page. The difference is mostly with regards to precision – see my last comment.

  3. Dead on, and would also emphasize that investment advisors themselves often charge percentages for managing money, in addition to the mutual fund fees (which they also derive income from). Lawyers and other professionals often fall into these high-cost investments because they don’t want to spend time on basic investing, when they may well be far better off with a few index funds.

    I’ll add one more thing to your list: lawyers ignore their student loans and pay the minimums. Or they pay a small amount, rather than taking the guaranteed return (of 6-9% in most cases) by repaying their loans quickly. It also allows more career freedom.

    1. They will definitely be far better off with a few index funds rather than those high-cost investments. For a lot of lawyers though, I just don’t think they’re aware of how much they are paying for the financial advice. Once they understand, most immediately want to move away from the high fees.

      Good point on paying the minimum on your student loans. You know what kind of people don’t have student loan balances? Rich people.

  4. Another mistake I see people making is deferring loans by continuing with higher education.

    Yes, your loans can be deferred while you’re working on a graduate or doctorate degree, but they are still incurring interest, and you’re probably taking out new loans for the higher degree, which just adds to your overall debt.

    So not worth it unless you have a very specific career plan that requires a higher degree. This post is very much helpful and a lot of students didn’t know where they are getting themselves into and then regret it afterwards.

    Hopefully more students would be able to reach this post for them to be reminded. Thank you for sharing this list!

  5. Great article. But I’m curious: “Then read a book about taxes.” Which ones do you recommend?

    (I see that your “Books” page recommends J.K. Lasser’s “Your Income Tax,” but I wonder if you have something different in mind here.)

    1. The problem with any book about taxes is that it’s going to be out-of-date thanks to the recent changes to the tax code. That said, there’s still some that are worth reading:

      The Overtaxed Investor by Phil Demuth.
      https://www.biglawinvestor.com/the-overtaxed-investor/

      Taxes Made Simple by Mike Piper
      https://www.amazon.com/Taxes-Made-Simple-Income-Explained/dp/0981454216/ref=sr_1_1?ie=UTF8&qid=1517964767&sr=8-1&keywords=taxes+made+simple

      J.K. Lasser’s is a great companion guide as you do your own taxes.

  6. Being a professional lawyer myself, the article was such a truth mirror. I mostly agree on the point “Not Having a Written Financial Plan” as I never had one.

    Thanks for putting it up here 🙂

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