412(i) Plans Have Allure
For Eligible Boomers
For boomers who own a small business and are becoming edgy about not having enough money set aside for their senior years, a little-used retirement option may be the answer. The 412(i) plan is a kind of defined benefit pension plan but without the usual costs and administrative headaches associated with pension plans.
Named after a section of the Internal Revenue Code, a 412(i) plan is exempt from IRS funding rules that apply to other types of defined benefit plans because it is backed by life insurance or annuity contracts.
Benefits are funded using level premiums for all benefits, which continue until the retirement date stated in the plan.
A 412(i) plan is considered appropriate for the owner of a very small business, and top executives who work for him, and for self-employed individuals.
Because it does not have the limitations on tax-deductible contributions that are common to other types of retirement plans, such as 401(k)s, the 412(i) lets the individual set aside the most cash possible for retirement.
“The 412(i) favors people in the 45 to 70 prime age group, where you want a maximum possible tax deduction, and the company has the cash flow to take care of it,” says Keith Baumgarn, vice president of pension sales, Lafayette Life Insurance Company, Lafayette, Ind.
Whether a 412(i) is a solution for a given client depends on the situation, he says.
“We would stress selling the client on doing a feasibility study first to see if its right,” he says. “Use it as a door opener and do a complete study to see if it fits because there are other types of plans that might be a better fit.”
A recent change in the tax laws allows a company to have both a 401(k) plan and a 412(i), so its not an either/or type of decision for the employer or advisor, he points out.
John Oliver, vice president of strategic marketing for Transamerica, Los Angeles, says a prime prospect for the product is the small-business owner in his late 40s through 50s who hasnt had time to build up significant retirement money.
“Theyve been doing a 401(k) but are 10 to 15 years from retirement and need the ability to sock a lot of money away,” Oliver says.