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Looking for Large Deductions In a Qualified Plan
Answer the following by choosing which investment you or your clients would purchase. Assume you invest $100,000 and let it grow for 20 years. At the end of 20 years, Investments A and B have the following balances:
Investment A: $200,000
Investment B: $300,000
Of course, the answer is B. Why? Because both investments cost the same amount and after 20 years, B was worth $100,000 more. The decision is a no-brainer.
Read the rest of this article with the understanding that I am discussing what is appropriate when helping small to medium size business owners who are looking for large deductions into a qualified plan for themselves.
LIFE INSURANCE IN A QUALIFIED PLAN
If you have a life insurance license, the chances are significant that you have been solicited by a major insurance company, IMO, FMO, GA, etc. to have you pitch profitable small business owners 412(i) defined benefit plans funded 50 percent with life insurance. If you are a CPA/accountant/EA, attorney, financial planner, the chances are significant that one of your clients has or will be pitched a 412(i) DB plan funded 50 percent with life insurance.
What is a 412(i) DB Plan? It is a qualified retirement plan that, by law, has to be funded with life insurance or annuity contracts. With a 412(i) DB (or non-412(i) DB plan), the employer is funding the retirement plan to provide a specific retirement benefit for the employees at a specific retirement age. The retirement benefit is based on assumed growth rates on the money invested in the plan. The lower the assumed rate of return on the investment when the plan is set up, the more the employer must contribute to be able to provide the guaranteed retirement income for employees.
Therefore, most advisors will use a very low assumed rate of return on the investments of 2-3 percent to "jack-up" the deduction. Also, the closer a client is to retirement, the more money needs to be contributed to the plan. (For a free 9-page detailed summary of how412(i) plans work, e-mail [email protected]).
How is a 412(i) plan different...