412(e)3 Defined Benefit Plans

A New Twist On An Old Friend

A 412(e)3 Plan is a special type of Defined Benefit Plan.  This plan works almost exactly the same way as the typical Defined Benefit Plan, except for one important twist.  The benefit in retirement is Guaranteed!  That’s right.  If you construct a 412(e)3 Plan to provide you with a monthly benefit of $10,000 per month in retirement, it is guaranteed to be at least that high.

The 412(e)3 Plan purchases annuities from insurance companies that offer guarantees of 3%, 4%+ a year. With a 3% return guaranteed, the IRS allows you to use the 3% return in your calculation of the future value of the plan. With a regular Defined Benefit Plan, the amount of tax-deductible contributions the owner can make assumes a non-guaranteed return of 5%-7%. However, with a 412(e)3 Plan, the amount of tax-deductible contributions the owner can make uses a  much lower 3% return.  Because the interest rate is lower, in order to achieve the defined benefit, more contributions will be required, creating a higher tax deduction.

In fact, the 412(e)3 Plans allow for significantly more in tax-deductible contributions annually.  For example, we mentioned what you, at 50 years old, could contribute with a regular Defined Benefit Plan in the section on Defined Benefit Plans.  In that situation, you could deduct $125,000.  With a 412(e)3 Plan you could make substantially larger tax-deductible contributions ($190,000 a year or more) into a 412(e)3 Plan annually.

Note that your annuities most likely will make more than the 2-3% guaranteed return. But the amount of your contributions is based upon the guaranteed amount. These plans have pumped new life into Defined Benefit Plans, but you must be careful. The IRS has already commented on abuses of 412(e)3 Plans, so you should have an experienced advisor to guide you through these and other treacherous waters in retirement planning.

Cash Balance Defined Benefit Plans

If you think Defined Benefit Plans sound interesting, you need to learn about the even more powerful and flexible Cash Balance Plan. To learn more, please click here.

Index or fixed annuities are not designed for short-term investments and may be subject to caps, restrictions, fees, and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

This example is for illustrative purposes only and does not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to project the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.