Some examples of situations where 412(i) plans are not suitable or should be used with caution include:
1) The principal or key employee is under age 40. Other traditional retirement plans will generate the same tax results with lower administrative costs and lower tax risk.
2) The desired total annual contribution is less than $50,000. In these cases traditional retirement plan designs are available. Just as above, other traditional retirement plans will generate the same tax results with lower administrative costs and lower tax risk.
3) The plan will be heavily funded with life insurance. Yes, I know it irks some financial marketers when I say this but qualified retirement plans were never meant to be a way to sell a ton of life insurance and the IRS seems intent on proving this point.
4) Where income fluctuates broadly and this might be an isolated "good year" for the owner. Although I have never seen it happen, the IRS can disqualify a plan for not meeting the "permanency" requirements. If a business sets up a pension plan and then discovers that business situation has changed for the worse, the adviser should take extra care to deliberately document the plan termination and rollover to a more suitable plan. A business owner who lets a pension plan die a quiet death is probably at greater tax risk than one who takes proactive measures to terminate a pension plan that no longer fits the current situation.
Some examples of situations where 412(i) plans are not suitable or should be used with caution include:
ReplyDelete1) The principal or key employee is under age 40. Other traditional retirement plans will generate the same tax results with lower administrative costs and lower tax risk.
2) The desired total annual contribution is less than $50,000. In these cases traditional retirement plan designs are available. Just as above, other traditional retirement plans will generate the same tax results with lower administrative costs and lower tax risk.
3) The plan will be heavily funded with life insurance. Yes, I know it irks some financial marketers when I say this but qualified retirement plans were never meant to be a way to sell a ton of life insurance and the IRS seems intent on proving this point.
4) Where income fluctuates broadly and this might be an isolated "good year" for the owner. Although I have never seen it happen, the IRS can disqualify a plan for not meeting the "permanency" requirements. If a business sets up a pension plan and then discovers that business situation has changed for the worse, the adviser should take extra care to deliberately document the plan termination and rollover to a more suitable plan. A business owner who lets a pension plan die a quiet death is probably at greater tax risk than one who takes proactive measures to terminate a pension plan that no longer fits the current situation.