412(i) Defined Benefit Plans

 

Are you paying too much income tax?  Are you looking for a very large retirement plan contribution to help you save for your retirement?

Are you aware of the 412(i) Defined Benefit plan?  These plans allow for extremely large deductions to a small business or professional practice retirement plans.  They are particularly well-suited for people forty-five and older, companies of five employees or less, with a high consistent income, and high income tax levels.  The ideal type of clients for the 412(i) are business owners, or self employed individuals working as business brokers, celebrities, consultants, contractors, developers, financial services, manufacturer representatives, sales, medical, professional athletes, realtors, or those that have successful second incomes reported on Schedule C or some other form of earned income.

            412(i) is designed to maximize the deduction for the older small business owner and to enable him/her to accumulate funds for his/her retirement in a very short period of time.  The 412(i) can produce appealing results and solve some big tax and asset protection issues in the right situations.  The best situation is one in which there has been no previous plan(s) in existence.  Establishing a new fully insured plan can mean substantial deductions for the business and meaningful retirement benefits for the participants.  These plans allow the largest possible deduction for the business owner.  Please refer to the table below to see the maximum deductions at different ages.

 

MAXIMIZE FIRST YEAR DEDUCTIONS AVAILABLE AT SELECTED AGES

                                                            Table 1:  Life & Annuity

                                                                                INS.                                                                                                                                       

AGE                                        ANNUITY              PREMIUM                                             TOTAL                                                                 

Age 45                         181,741           138,828                                   320,569          

Age 50                         198,484           147,008                                   345,492          

Age 55                         252,384           187,849                                   440,233          

Age 60                         258,132           192,861                                   450,993                                                                                                      

Table 2:  Annuity ONLY

INS.                                                                                                                       

AGE                                        ANNUITY              PREMIUM                                             TOTAL                                 

Age 45                         198,107           0                                              198,107          

Age 50                         205,762           0                                              205,762          

Age 55                         262,999           0                                              262,999          

Age 60                         270,361           0                                              270,361          

 

Note:  The contributions above are based upon the guaranteed annuity purchase rates, the guaranteed insurance cash values, and the guaranteed annuity accumulation rates of a 412(i) qualified life and annuity products.  The numbers also assume the business owner at the selected ages has earnings of at least $175,000 and a normal retirement age of 65.  These numbers are for 2006.          

These plans are not “gray area”, and have been in existence for more than 25 years.  Congress codified fully insured plans under Internal Revenue Code Section 412(i) with ERISA, the Employees Retirement Income Security Act of 1974.  Code section 412(i) exempt these plans from requirements of traditional defined benefit plans since an insurance company must guarantee the plan benefits.  The fully insured plan is not subject to required quarterly contributions.  These plans are ideally suited to certain unique situations in many small businesses and yet are not very well known.

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