Is your business doing well enough that you are looking for ways to contribute larger amounts of tax-deductible money into your retirement accounts? A 412(e)(3) plan might be the answer—a fully-guaranteed pension account that can be funded to completely replace your current compensation!
As the video above describes, this type of retirement plan may be the most overlooked opportunity in the world of retirement planning. The 412(e)(3) plan can enable highly-compensated business owners to receive tax deductions of up to $350,000 per year while funding their own retirement. It is a unique form of defined benefit pension plan. Simply described, “Defined benefit pension” means that you create a specific amount of future retirement income, to be paid out based on calculations set forth in a customized plan document. The benefits can be received in retirement either as a guaranteed lifetime income or a lump sum representing the present value of the income stream.
Just how high can the deductions go? The calculations are complex and depend upon age and income, but in 2013 the maximum allowable limit was about $350,000 per year per individual. Additionally, you have the option to maintain a 401k and a profit sharing plan alongside the pension plan, providing additional opportunities to save for retirement.
A 412(e)(3) plan uses a combination of guaranteed pension annuity contracts and pension life insurance policies specifically designed for insured pension plans. The business contributes enough money to create a guaranteed income stream for each participant during retirement. Contributions are allocated between the life insurance policy and the annuity based on actuarial formulas and plan design preferences. Both assets receive guaranteed minimum rates of interest, allowing you to determine the exact income that will be available at a given future retirement date.
Keep in mind that the guaranteed income is interest-rate based. One detail you should carefully consider is that a 412(e)(3) plan is funded by interest-bearing investments and not by growth investments. The longer you have before retirement, the more you may need to utilize some growth investments to outpace inflation. A 412(e)(3) plan can be combined with both a profit sharing plan and 401(k) plan to provide growth-oriented retirement investment alternatives.
The 412(e)(3) plan works best for well-established companies that have excess cash available for making large annual contributions. Ideal candidates include small, closely-held business with few employees, or highly compensated self-employed professionals (such as physicians groups or dental practices). Businesses can have other retirement plans (including other defined benefit plans) along with a 412(e)(3) plan. If you are getting a late start on your own retirement (like many professionals and business owners do), then a 412(e)(3) plan could be a great fit. However, if your income is very erratic or unpredictable year to year, this type of plan is probably not for you.
The important questions to ask yourself are these: Am I willing to fund a pension plan at very high levels until it will provide the retirement income I need? Am I willing to make substantial contributions every year no matter how the business performs? See the Sample Case Studies on our site for typical plan examples.
If a 412(e)(3) plan seems like a potential fit for you, contact a pension consultant to discuss your particular situation. Be aware that not all pension providers or financial advisors know how these plans work, so you may receive bad advice if you ask someone who is uneducated about them. Ask specifically how many 412(e)(3) plans the advisor has personally helped establish. Ask which insurance companies they would use for the plan investments. If they do not know right away, then they have probably not put a successful plan together. Not all insurance companies will work with insured pension plans like these. Be sure you ask enough questions to feel comfortable with your advisor’s experience. With the large deductions being reported to the IRS, you want to work with an expert.
National Pension Partners has the resources and the experience to help you implement your plan successfully. We have more than a decade of experience designing and maintaining these plans, and we employ tax attorneys, CPAs and enrolled actuaries in house.
Contact Us to learn more about Our Services, or submit a Request For Proposal today.