Your 412(i) Source

We at Phillips and Associates are experts at providing asset protection, including 412(i) plans.

This time of year, the questions and comments are always the same. "Can't I put more into my retirement plan?" "Isn't there some way I can reduce my taxes?" With the changes in tax laws over the years, your choices have become more and more limited. In the process, you have probably become more and more frustrated. So, how about some good news on the subject? How about a bigger deduction for your retirement contributions? In other words, less income tax to pay and you keep more of what you earn for your retirement.

How do tax-deductible retirement contributions of $250,000, and even as high as $309,000 sound? Your CPA and tax advisors have been telling you for years that the most you can contribute and deduct each year is $35,000. Some plans might allow you to get as much as $135,000. But you've never had the option to contribute and deduct $200,000 to $300,000 toward retirement before now. And for those whose instant response is, "It sounds too good to be true," let me relieve your concerns by telling you that each and every plan comes with an IRS Determination Letter approving it – not a generic letter, a letter specific to your plan. It doesn't get much better than that!

The answer is a new twist on a retirement plan that has been around for ages – the 412(i) plan. The 412(i) plan is a kind of defined benefit pension plan that has been part of the tax law for many years. In the past, 412(i) plans have served a purpose, but for most small business people they didn't make sense. This year, in fact, only within the past few weeks, 412(i) plans have been substantially improved as a result of a business process so significant that it is protected by an application for a U.S. patent.

412(i) plans fit into the tax laws under the heading of defined benefit retirement plans. Defined benefit plans do what they say: they define the benefit you will receive when you retire. In other words, the plans are set up and reviewed at least annually to insure that the employer will put away enough money each year to guarantee that when you retire, there will be enough money available to pay the annual retirement income you have been promised – the defined benefit. In recent years the contribution limit on defined benefit plans has been $135,000.

This is very different when compared to the philosophy of an SEP, KEOGH, Simple or 401(k) plan. Those plans are called defined contribution plans. Instead of working toward a set amount at retirement, they specify the amount you are allowed to contribute each year, without regard to what that will generate at retirement. Generally, with a defined benefit plan, if you have a high annual income and you are closer to retirement than you are to starting your career, you can have a bigger tax-deductible contribution to your retirement plan every year than you could with a defined contribution plan.

Defined benefit plans cost more to operate than defined contribution plans. The costs include filing plan documents with tax authorities, annual reviews by actuaries and, of course, if you are putting away more for your retirement, you will probably have to put away more toward your employees' retirement as well. But for higher income taxpayers, a few thousand dollars of cost is a cheap way to buy tens of thousands of dollars in tax savings. When you can put tens (maybe hundreds) of thousands of dollars more each year into your retirement plan, that is money that will be growing tax-deferred. If you've never done the math on compounding tax-deferred growth, let's just say that's the way you can create great wealth.

So why haven't 412(i) plans been a part of your plan before now? The answer is simple. 412(i) plans are called "fully insured" plans. In the past they have been funded with insurance policies and annuities that paid very low rates of interest. Most taxpayers who looked at 412(i) plans could see the enormous tax advantages of getting a deduction of nearly $200,000 with old 412(i) plans, but they also decided that the deduction wasn't worth settling for a 3% - 5% rate of return. Economically, they decided they would be better off paying the tax and investing in their mutual funds. Except for the past couple of years in the stock market, they were right. So, 412(i) plans have been largely ignored, because while they made sense for income tax reasons, they made no sense in terms of basic economics.

Over the years, many people have said, "This would make sense if you could give me an option where the money in the plan could get mutual fund-type returns." But, the 412(i) by law had to offer minimum guarantees of returns in order to qualify. Until now, nobody could figure out how to give a client an insurance policy with mutual fund-type investments that would guarantee the retirement income.

Literally within the past weeks, an innovative group has worked with some of the world's largest insurers and created the Variable 412(i)ä. Suddenly, the 412(i) plan can make sense for a large segment of the professional business world.

The Variable 412(i)ä avoids the expensive actuarial calculations that other defined benefit plans require each year. Best of all, the plan offers investment-type performance potential while at the same time enjoying guarantees on the retirement income stream by an insurance company.

Because the plan is a qualified retirement plan, money in the plan enjoys the same asset protection other ERISA retirement plans enjoy. (ERISA protection is the reason O.J. Simpson's NFL pension can't be touched.) Even if you have been funding another retirement plan, you can begin to fully fund a Variable 412(i)ä plan. To get the tax deduction, the plan must be set up and adopted by December 31, but can be funded months later. Unlike other defined benefit plans, the Variable 412(i)ä doesn't have to be funded each quarter, but can be funded once a year.

The following are examples of the initial tax-deductible contributions that could be made to a Variable 412(i)ä plan:

Y e a r s t o R e t i r e m e n t--------------------/
Age 10         12           55           20
55 $265,475 $214,784
53 $267,103 $214,462 $166,906
50 $265,605 $213,806 $165,238
48 $297,091 $231,885 $170,616
45 $309,663 $241,343 $177,764 $116,984
43 $248,216 $185,630 $120,229
40 $190,828 $125,697
The Variable 412(i)ä plan is available to nearly any kind of business, including sole proprietorships, partnerships, LLCs, and corporations. Companies with existing defined benefit plans can convert to the Variable 412(i)ä plan and potentially increase their tax deductible contributions and eliminate the yearly actuarial costs of the plan.

Because of the newness of the Variable 412(i)ä plan, very few CPAs, attorneys or other advisors are even aware of its existence. Because the business process that ties investment-type potential with the 412(i) concept is patented, the distribution of these plans will probably remain limited.

In all, the Variable 412(i)ä offers large initial tax deductions that decrease over time, tax-deferred growth, asset protection, investment options, guaranteed income stream at retirement, income tax free death benefits, and IRS approval. In the area of taxes and keeping more of the money you make for retirement, the news is generally bad. In the case of the Variable 412(i)ä the news is, for a change, great.