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What is a 412(i) Plan?

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412(i) Plan

The 412(i) plan is designed to be used for small United States business owners. These plans often suit the needs of those who might have problems saving for retirement while also focusing on building and investing in their company. These plans can provide the largest possible tax deduction, and are funded by an insurance company. All the money that is contributed to the plan by the owner immediately becomes available to the company as a tax deduction, which can offer significant financial benefits. The retirement benefits provided are fully guaranteed. However, there are large premiums to be paid yearly, so the 412(i) plan is best suited to small business owners who are already profitable and established.

What are the features of a 412(i) Plan?

These plans are completely funded with group or individual life insurance, or with annuity contracts. A participant entering into one of these plans will make payments on an ongoing basis, which extend only as far as the stated retirement date. An insurance company is required to guarantee these contracts.

What are the advantages of a 412(i) Plan?

These plans can be quite attractive for business owners who are over the age of forty who do not have many employees, or for those owners who have young employees, since their contributions would be lower. In these cases, the significant tax deductions offered by a 412(i) plan can be quite beneficial. The contributions typically allowed under these plans are much higher than would be possible utilizing a typical defined benefit plan. This makes it possible to make very high annual deductions for employees in some situations. These plans can allow business owners to move even hundreds of thousands of dollars out of their business into the plan, providing financial protection for these assets. They are also very secure, due to the fact that they offer such a high level of asset protection against the business’ creditors or the plan participants. This feature alone can make these plans very desirable for small businesses, as long as they are able to pay the large annual premiums. These plans are also impossible to overfund or underfund, because of how the contributions are based. 412(i) plans can be funded annually, without the required quarterly contributions of a traditionally defined benefit plan.

Are there any disadvantages to a 412(i) Plan?

As a general rule, a 412(i) works best if the business owner has only a few employees. It also works best if these employees are younger than the owner, and if the owner is within 10 years of their planned retirement date. These plans are not a good option if making policy loans is important, since taking out a loan against the funds would make the plan invalid. A 412(i) plan also does not offer the option of flexible investments, since these plans are completely funded by annuity and insurance contracts. Although some insurance agents may urge business owners who have a 412(i) plan to invest primarily in a life insurance policy, it is usually better for the owner’s retirement plan overall if approximately 50% is invested in annuities, as this makes for a more conservative plan. In recent years, guidance for these plans has been issued by both the IRS and the U.S. Treasury, to help avoid any abuses of these plans.


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