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 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, to achieve the defined benefit, more contributions will be required, creating a higher tax deduction.

The 412(e)3 Plans allow for significantly more tax-deductible contributions annually. For example, if you are 50 years old and make over $290,000 per year and you are just starting to make contributions to a newly formed Defined Benefit Plan — you could make up to $219,000 of tax-deductible contributions per year.  With a 412(e)3 Plan you could make substantially larger tax-deductible contributions ($265,000 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 need only the most highly trained advisors to guide you through these, and other treacherous waters in retirement planning.