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412(i) - What is it?
Introduction
One typically has several major objectives in tax planning, all of which one
would ideally like to accomplish. These objectives include:
1) Significantly reduce income taxes;
2) Enjoy asset protection;
3) Avoid investment risk;
4) Avoid tax risk; and
5) Integrate the strategy with other life and estate issues
With most strategies, there are substantial tradeoffs with regard to their advantages. One strategy may offer attractive tax savings but with high tax risk. Another may have low tax risk but be at the expense of high investment risk or low liquidity levels. Yet another may offer low investment risk and low tax risk but requires the taxpayer to give a substantial portion of the assets away to charity or to employees.
Fortunately, one strategy allows all the major objectives listed above. This is a 412(i) qualified retirement plan. This strategy allows one to enjoy the following benefits:
• Pre-Approved by Internal Revenue
• Large tax deductible contributions
• Tax Deferred Growth of Invested Assets
• Guaranteed investment returns
• Large tax-free death benefits
• Asset Protection
The following supports this strategy:
• Determination Letter from the IRS
• Underwritten by AA rated carrier
• Guarantee of plan acceptance by the IRS
What Is A 412(i) Plan?
A 412(i) Plan is a retirement plan which allows clients to generate large
tax deductible contributions, enjoy steady, tax-free earnings, while minimizing
the amount of contributions that must be allocated to the employees.
Under the Internal Revenue Code, a Section 412(i) Plan is a defined benefit retirement program that is, as required by law, funded with life insurance and annuity contracts. Section 412(i) allows current contributions to be calculated using the guaranteed cash values and annuity purchase rates of life insurance products. This allows a taxpayer to fund contributions on a tax deductible basis in amounts greater than are typically allowed for other qualified plans.
In addition, under regulations promulgated under Section 401(a)(4), “cross testing” of benefits among plan participants allows taxpayers to effectively skew the benefits in the client’s favor, as the requirements allow the benefits, rather than the amounts contributed to the plan, to be the relevant benchmark in ensuring that discrimination rules are not violated.
Comparison to Other Defined Benefit Plans
Most successful small businesses do not have a defined benefit plan. This
is due to several factors. First, traditional defined benefit plans cannot
fund enough for the owner to warrant the perceived complexities and costs.
Second, traditional plans require high matching contribution levels for employees,
thereby making the plan relatively more expensive for the owner. Because of
the advantages applicable to our 412(i) Plans, we are able to structure a
retirement plan which substantially increases the contributions that go to
the owner, decrease the ongoing costs and complexities, and structure the
plan to otherwise benefit the owner.
Following is a sample of the maximum deductions available for a 55 year old business owner under different qualified plans:
Table 1 – Comparison of Qualified Plans
Plan Type |
Owner’s |
 |
|
| Profit Sharing | 44,000 |
| Money Purchase | 44,000 |
| Comparability | 44,000 |
| Traditional Defined Benefit Plan | 145,201 |
| 412(i) Plan | 339,857 |
How It Works
Because situations differ, each 412(i) Plan must be customized to meet your
specific objectives. Following, however, are the major steps in establishing
and implementing these strategies.
Structure
Determining the proper structure is the first crucial element to a successful 412(i) Plan. While one typically wants to maximize tax deductibility, a host of variables must be analyzed in order to ensure tax compliance while accommodating other goals. These variables include age and health status, company structure(s), income levels of proposed plan participants, number and roles of employees, existence of other qualified plans, post-retirement goals, current and future income needs, among other issues.
As with any other qualified plan, the 412(i) Plan must adhere to plan participation and anti-discrimination requirements. Therefore, in order to ensure that one can maximize the amount of contributions, several planning options may be employed. These may include such tactics as 1) imposing vesting requirements for employees; 2) establishing nonaffiliated entities from a pension plan perspective from which the plan is funded; 3) excluding employees based on the existence of other qualified plans; 4) and other techniques.
Funding and AdministrationOnce the proper structure is determined, a retirement plan is established and submitted to the IRS for approval on its tax deductible and tax exempt status. Meanwhile, plan contributions begin with the contributions going towards the funding of a combination of interest sensitive whole life insurance and annuity products.
Legal Status
As indicated above, this plan receives a Favorable Determination Letter from
the IRS specifically granting it tax-exempt status.
Conclusion
A 412(i) Plan can be the ideal solution for owners of small and medium sizes
businesses and professional practices. This strategy allows one to maximize
tax deductions while minimizing the amounts contributed for employees. In
addition, with the 412(i) Plan, one can minimize investment risk and tax risk
without having to get into the usual convoluted tax shelter schemes. As a
result, one can greatly increase post-retirement income while procuring a
substantial current income tax deduction and other benefits previously mentioned.
Securities
offered through Ogilvie Security Advisors Corp.
71 South Wacker, Suite 3025, Chicago, IL 60606
Tel: 312.335.5476
Member FINRA www.finra.org
/ SIPC www.sipc.org
Ogilvie Security Advisors Corp and 412i Plans, Inc. are independently
owned and operated.
License numbers: California (0A09141) and Wisconsin (1045269) |
