Have you ever wondered if there were tax strategies to help you increase your retirement contributions and recognize tax benefits? For some, this is a matter of figuring out how to get more income to cover more investments. For others the problem comes in the form of contribution limits.
If you’re part of that latter category, we have some good news for you. There is actually a way to increase your retirement income potential even if you’ve reached retirement contribution limits. It comes through code 412(e)(3) defined benefit plans.
What are code 412(e)(3) defined benefit plans
A 412(e)(3) plan is a type of defined benefit retirement plan offering higher than usual tax-deductible contributions. It is most suitable for businesses with small owner-only, or with fewer than five employees where the owner is materially older than the other staff.
These defined benefit plans allow you to purchase retirement assets through annuities and life insurance policies. While also allowing you to recognize tax savings by deducting the cost of premiums. So long as you meet the requirements.
What are the requirements, you may ask?
- Level annual premium payments from eligibility to retirement age
- Funding only through annuities and life insurance contracts
- Benefits provided by the plan are equal to benefits at normal retirement age according to the plan (i.e. no excess benefits) and are guaranteed by the insurance carrier
- No policy loans outstanding during the year
- Timely premium payments
- No abusive policies that fund only with life insurance instead of a balanced combination of life insurance and annuities (note: these policies are more heavily scrutinized to prevent this)
- No security interests in the rights of the plan
That last one actually serves as a benefit It guarantees these policies have protection against creditors and bankruptcy claims.
These policies aren’t perfect for everyone. In fact they make the most sense if you own a successful small business with less than five employees and you as the owner of the business are materially older than other employees. But if you fit that category, this may be the next strategy you should add in your tax planning.
Explore Unique Tax Strategies for Your Business
We hope this information will be useful to you as you manage your business’ tax planning. Always remember that reasonable tax planning is smart business practice and an essential part of being a good steward of the money entrusted to your business. If you have any questions or need assistance, we invite you to contact us at Wasatch CPA Services LLC at (801) 609-3119. Our team is ready to assist you! Tax planning around state and local taxes will vary from state to state, so be sure to work with a professional.