Real Estate

A 412 may be the answer

Perhaps you are like many small business owners approaching retirement wondering how you are going to get enough money in your 401 (k) to be able to afford to retire. A few years ago you didn’t have this dilemma because your portfolio looked great. But today is a different story. And now with less than 10 years to go to retirement, you may be worrying a little.

Or perhaps, despite your best intentions, you forgot to save a lot, if at all, for your retirement over the years. In the midst of growing her business, she also had to buy a home and office space, send the kids to college, pay for a wedding or two, and possibly even care for elderly parents.

In essence, life got in the way of any savings.

Fortunately, there is a solution. Consider starting at 412 (i).

Since most people are not familiar with a 412 (i), this is how it works:

Designed for small business owners with 20 or fewer employees, a 412 (i) is a defined benefit plan that allows you to accumulate significant retirement assets in a short period of time.

For example, if you are 55 and want to retire at age 60 or 65, you could start a 412 (i). By meeting with a qualified pension planner, you will determine how much monthly income or lump sum you want upon retirement. Your planner can then structure a 412 (i) that guarantees you’ll get that amount on the penny.

How is this possible? The 412 (i) is a fully insured plan, which means you cannot lose the money you have invested. Also, it is guaranteed to provide a certain minimum interest each year. Any money you contribute goes towards a combination of fixed annuities or fixed index annuities, and you can also have life insurance on the plan.

Because your contributions are in fixed accounts and fixed life insurance, your planner can “work the numbers” based on interest rates and tell you exactly how much you will have when you retire. In fact, you’re also buying life insurance on a pre-tax dollar.

Before you sell out and open a 412 (i) yourself, get the facts about the plan and how best to use it.

WHO IS ELIGIBLE? A 412 (i) is ideal for small business owners in their peak income years. Since the plan allows for significant savings, your business or professional practice must be highly profitable and have a steady stream of income and cash. You should also plan to retire in 10 years or less and seek a significant income tax deduction to offset your high tax liability.

HOW MUCH CAN I CONTRIBUTE? Contributions to your 412 (i) are based on your age and income. The exact figure you can contribute can be as high as $ 350,000 per year, depending on your situation. In general, the older you are, the more you can contribute. If you are incorporated, you can even contribute more than you make in a year, such as through lottery winnings or inheritances. And every penny you put into your 412 (i) is tax-protected, just like your 401 (k).

WILL I LOSE MONEY? The 412 (i) plan is fully insured. That means it is funded by a combination of life insurance and annuities, or just annuities. Therefore, the guarantees of the 412 (i) plan are derived from the life insurance contracts and / or annuities that finance it and depend on the ability to pay claims of the issuing life insurer. Therefore, you and your planner should choose reputable companies with superior financial strength. In addition to protecting your money from market fluctuations, you are also protected from claims or judgments, such as bankruptcy.

WHAT HAPPENS WHEN I NEED THE MONEY? The money you contribute to a 412 (i), as well as the interest it generates, is tax deferred. When you retire, you can draw a monthly income from your 412 (i) or you can take the available lump sum and roll it into an IRA. All the money you take out as income is taxed at the current tax rate. But the money you transfer to a new IRA is not taxable. You only incur taxes when you actually take the money out for your use.

WHAT ABOUT LEGALITY? Many CPAs are often unfamiliar with 412 (i). Those in the know remember how the plan was abused in the past, so they don’t recommend it today. After the stock market crash in 2000, some planners abused 412 (i) by including more life insurance in the plan than the law allowed. Since then, the IRS has refined how the plan works. A trained pension professional who specializes in defined benefit planning can provide further advice on this.

Bob Falisey, president of Falco Consulting Services, Inc., Los Angeles, California, who has over 30 years of pension experience recently outlined the progression of 412 (i), “Section 412 (i) of the Internal Revenue Code. has not been well known in the past for various reasons during the Reagan years, taxes were lowered significantly and people were reluctant to use tax-advantaged pensions; during the Clinton years, stock market performance was excellent and equity products that contain risk are not allowed in this plan. Now it is becoming very popular and I see it being used more and more by business owners. “

LOOK AT IT Once small business owners understand the benefits of a 412 (i), they can’t wait to set one up. So, if you’ve seen your retirement portfolio shrink in recent years, or if you were too busy growing your business and neglected to increase your savings, the 412 (i) may be the “second chance” you’ve been waiting for.

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