Qualified defined benefit plans funded with life insurance products have an especially attractive combination of features that may help baby boomer business owners realize significant retirement savings in the face of market volatility, bankruptcy or death.
This singular, satisfying mix of features includes tax deductions that are among the largest of any qualified plan and can create talk among boomers about a better way to save–a buzz about DB plans.
Boomer business owners can save tax favored and fast. DBs are only for successful, profitable business owners, as contributions are required each year. There is no proscribed limit on the amount of the contribution, but the size is controlled by certain factors, including age, years of plan participation, and a legal limit to the retirement benefit, ($195,000 a year life annuity in 2010).
DBs afford large tax-deductible contributions, potentially over $300,000 a year, and the added cost of life insurance makes them even larger. The substantial contributions and tax deductions can make CPAs happy, improve the bottom line and rapidly create or replenish a nest egg by offering the potential to contribute more than $2.2 million in 10 years.
Save confidently despite market volatility, bankruptcy or death. As the market rises and falls, as volatility causes concern for many about their retirement savings, DBs with the guaranteed cash value of whole life insurance and fixed annuities can help ease concerns about market risk and provide continued accumulation toward retirement goals.
DBs that cover at least one employee, other than the owners, partners and their spouses, can provide retirement savings that are guaranteed (by law) to be secure from creditors. Qualified retirement plans can provide this added, legal security to a business owner’s hard-earned savings.
Nobody knows better than a life insurance producer that the best-laid plans can be destroyed by an untimely death. As shown in the chart below, the guaranteed death benefit of whole life insurance can self-complete the DB and help assure the payment of a significant benefit, whether the business owner lives or dies. Whereas there are limits on the amount of life insurance that may be included, as you can see, the amount allowed can be substantial.
Buying With Discounted Dollars
In DBs, because the cash value of the life insurance helps fund the retirement benefit, only a small percentage of the premium can be the net, realized cost for the protection. A business owner can, in effect, get the guarantees of cash value life insurance at a bargain.
Outside of a DB, Boomer Bloomer, a 55 year-old florist, would pay $28,600 a year to get $1 million dollars of whole life insurance coverage. In a DB, Bloomer can increase his tax-deductible contribution by only $10,025 and get the million dollars of coverage. And since the $10,025 is fully deductible, in a 33% tax bracket the out-of-pocket cost for the $1 million dollars of whole life insurance is $6,716.
Saving Efficiently When Contributing
Business owners, boomers or otherwise, will generally want to maximize their share of the qualified plan contribution, so efficient plan design is critical. To that end, it is important to use an experienced provider who offers the full range of DBs: cash balance plans; fully insured 412(e)(3) plans (previously known as 412(i) plans; and traditional DBs with a tiered contribution formula.
Boomers Gloomer and Doomer, both dentists, used a tiered formula, which allows different contribution levels per class of employee, saving them $26,675 in employee contributions. The tiered formula could also have been used to equalize the dentists’ contributions if so desired.
DB Or Not DB: That Is The Question
With the above tiered formula, the contribution for the employees is $26,846. But based on a 33% corporate tax rate, the dentists saved $85,348 in taxes.
DB (compared to not DB) provided a net gain of $58,502.
Boomer business owners can save for an enriched retirement–and beyond. For business owners who may not need their DB accumulation, the significant savings afforded by the plan can be rolled into a traditional or Roth IRA, allowing a continuation of tax-deferred or tax-free growth, respectively; and producing income that may be stretched over the lives of children and grandchildren.
In these uncertain financial times, the guarantees, tax benefits and enormous contribution potential of defined benefit plans funded with life insurance products is an idea whose time has come. Let the buzz begin.