Very few people are aware of the attractive provisions of IRS-approved 412(i) plans. Never heard of a 412(i)? That is because only experts in the field of income and asset planning know how to use these plans.
Over the years most employers have gotten away from defined benefit plans for their employees to 401(k) and similar plans. With the defined benefit plan, the employee was guaranteed an amount of income for retirement. With a 401(k), there are no guarantees -you get whatever the 401(k) investments will produce at retirement. In other words, you now take all the risk that there will be enough there for a retirement.
Now, a 412(i) plan is more like a defined benefit plan since it guarantees an amount of retirement income -and the income is guaranteed lifetime. As a matter of fact, these plans come under the control of ERISA as a defined benefit plan, so they have the additional benefit of being protected from creditors under federal law.
Who can benefit from these plans? The ideal candidate is someone who self-employed or owns their own small business and compensates himself/herself fairly highly. Ideally, the person should be between the ages of 40 and 75 or perhaps 15 or so years from a planned retirement, regardless of age. Further, the person should have few employees since there are employee participation rules.
Given the right circumstances, someone around age 50 who pays (or should pay) themselves around $200,000 per year could perhaps put $70,000 (or even more) into a 412(i) each year until retirement. The amount of retirement income available for a lifetime would be known at the time the plan is put together and would be a guaranteed amount.
Pros. This is an ideal method to get money fast into a retirement plan. It is also ideal as an asset protection strategy since large amounts can be removed from creditor actions. There are no limitations on the amount that can be contributed each year and they cannot be overfunded or underfunded which could result in IRS penalties with some other types of plans.
Cons. Most employees have to participate in the plan, although they can certainly be arranged in such a way that the person contributing gets the lion’s share. The relative ages of the employees is also important. This is not an issue for someone without employees or where the employees are persons that you would want to share in the benefit.
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