At one time in the late 1990s OnlineAdviserTM service received more questions on the topic of 412(i) plans than any other type of retirement plan. This is a bit odd because 412(i) plans are a tiny and relatively obscure method of designing a retirement plan. The simple most likely explanation for this level of activity is that we were one of the few firms offering independent advice on the topic and small business people were able to locate us easily. In more recent years 412(i) pension plans have primarily been marketed by few insurance companies that specialize in this product.
This article is meant to address some general questions surrounding the issues of usefulness and suitability of these retirement plans.
The term "412(i)" comes from the section of the tax code that allows a pension plan to be run without the usual rigorous accounting and documentation. In return for this concession, the plan investments must be completely held by an insurance company. In effect, these are "hybrid" plans, with some characteristics of defined benefit plans and some characteristics of defined contribution plans. The basic intention is to enjoy the benefits of a pension-type retirement plan without the usual costs and paperwork that usually characterize traditional pension plans.
The most common and most effective use of a 412(i) pension retirement plan is in a small business with one older high income employee. This individual has fewer years until retirement and therefore can design a pension plan that requires a high contribution. Higher contributions mean more of the earnings are tax-deductible. The tax deduction might be more than twice the amount allowed by other types of retirement plans. In financial planning lingo, this is the stereotypical "doctor's plan", envisioning one older high income professional with a few part-time employees with relatively high employee turnover.
Other situations where a 412(i) plan may be useful:
1) An investor wants to invest in fixed or variable annuities to access the insurance guarantees of principal and (in some cases) earnings. Requests for this type of investment multiply whenever the stock market stumbles. Recent 412(i) plan interest peaked in 2002 and has dropped off in 2003 as the stock market recovered.
2) A small business wants a pension-type retirement plan but balks at the cost of commercial pension services. This situation commonly arises in blue-collar family businesses where the employee/family members are not financially sophisticated and may not be well-qualified to handle their own investments. One business I advised was a father/son fish wholesaler where the son was mentally handicapped. The son did a great job running the sales counter, but his father made sure his son's pension plan was on auto-pilot before he retired. The son understood and could describe in one simple sentence what would happen when he eventually retired. "My paycheck will keep coming for the rest of my life even if I don't come to work".
At one time in the late 1990s OnlineAdviserTM service received more questions on the topic of 412(i) plans than any other type of retirement plan. This is a bit odd because 412(i) plans are a tiny and relatively obscure method of designing a retirement plan. The simple most likely explanation for this level of activity is that we were one of the few firms offering independent advice on the topic and small business people were able to locate us easily. In more recent years 412(i) pension plans have primarily been marketed by few insurance companies that specialize in this product.
ReplyDeleteThis article is meant to address some general questions surrounding the issues of usefulness and suitability of these retirement plans.
The term "412(i)" comes from the section of the tax code that allows a pension plan to be run without the usual rigorous accounting and documentation. In return for this concession, the plan investments must be completely held by an insurance company. In effect, these are "hybrid" plans, with some characteristics of defined benefit plans and some characteristics of defined contribution plans. The basic intention is to enjoy the benefits of a pension-type retirement plan without the usual costs and paperwork that usually characterize traditional pension plans.
The most common and most effective use of a 412(i) pension retirement plan is in a small business with one older high income employee. This individual has fewer years until retirement and therefore can design a pension plan that requires a high contribution. Higher contributions mean more of the earnings are tax-deductible. The tax deduction might be more than twice the amount allowed by other types of retirement plans. In financial planning lingo, this is the stereotypical "doctor's plan", envisioning one older high income professional with a few part-time employees with relatively high employee turnover.
Other situations where a 412(i) plan may be useful:
1) An investor wants to invest in fixed or variable annuities to access the insurance guarantees of principal and (in some cases) earnings. Requests for this type of investment multiply whenever the stock market stumbles. Recent 412(i) plan interest peaked in 2002 and has dropped off in 2003 as the stock market recovered.
2) A small business wants a pension-type retirement plan but balks at the cost of commercial pension services. This situation commonly arises in blue-collar family businesses where the employee/family members are not financially sophisticated and may not be well-qualified to handle their own investments. One business I advised was a father/son fish wholesaler where the son was mentally handicapped. The son did a great job running the sales counter, but his father made sure his son's pension plan was on auto-pilot before he retired. The son understood and could describe in one simple sentence what would happen when he eventually retired. "My paycheck will keep coming for the rest of my life even if I don't come to work".
419problems
ReplyDeleteMonday, April 13, 2015
Lance Wallach's expertise will protect you from IRS attacks
Lance Wallach's expertise will protect you from IRS attacks