Advisors urge caution on 412(i) retirement plans

Small business owners playing catch-up on retirement savings might reach their goals with 412(i) plans, if they are aware of possible IRS pitfalls and tax savings in those programs.

That is an overview from several financial advisors who say that some but not all age 50-plus business owners should consider those plans.

The main advantage is that 412(i) plans permit larger tax-deductible contributions than other defined benefit retirement plans.

As in other defined benefit plans, the business owner must put in the same percentage of annual salary for each participating employee of the same age.

In 412(i) plans, percentages are often very high and businesses must be certain they can meet ongoing requirements. If cash flow of a business slows, some owners might have trouble making contributions and could be subject to IRS penalties for early termination of a plan.

Another downside is that 412(i) plans can invest only in whole life insurance policies and annuity contracts. Thus, the programs are what advisors consider relatively safe and stable, but they don’t offer the bigger potential gains of stocks and some other investments.

In addition, some advisors note that the IRS is increasing its reviews and audits of 412(i) plans to see if contributions are producing total benefits that exceed its limits for retirement plans.

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