Your 412(i) Source
Defined Benefit Plans such as the 412(i) plan have been around for a long time, but have only recently been given the ability to provide large tax savings and investment opportunities.
Until 1987, tax planners routinely used a Defined Benefit plan as a part of many retirement portfolios. Doctors in particular benefitted from the tax deduction these plans provided.
Older doctors who were starting to fund these plans could contribute large sums to these plans, all while taking very sizeable tax deductions. These large tax deductions equated to more money to invest, and ultimately more return from income dedicated for investment.
This lasted until Congress passed the 1987 Tax Act, which severely curtailed the viability of defined benefit plans. Tax planners did not understand how to overcome the "full funding limitations" on defined benefit plans, which reduced or eliminated deductions for contributions.
Section 412 of the 1987 Act required quarterly contributions to the defined benefit plans and imposed strict penalties for improper funding. Furthermore, the actuarial assumptions used to design the plans became far more complex.
| 412(i) Provides a Solution |
Section 412(i) provided the solution that ensured the viability of the defined benefit plan as a tax shelter. If a defined benefit plan can live up to certain requirements, the plan is exempt from the onerous requirements of Section 412 in general.
By ensuring that a defined benefit plan is fully insured, premiums are paid from the time the plan is entered until retirement, and loans are not taken from plan funds, defined benefit plans gain the strength that they had prior to the 1987 Tax Act. Furthermore, the second requirement can, in some cases, be met with a partially self-funding policy.
Through 412(i), the defined benefit plan has reemerged as a powerful tool for any serious tax planner. The large tax deductions allowed and the ability to avoid the "excess asset problem" make it an ideal tax shelter for many individuals. Contact us today to find out if a 412(i) plan is right for you.
