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Get a Large Deduction With a 412(e)(3) Retirement Plan

By Lance Wallach

California Broker Magazine June 2008

Successful business owners need big deductions and benefits, which can only be accomplished through a defined benefit plan. Any business can use a 412(e)(3) plan to provide benefits and reduce taxes substantially. The 412(e)(3) plan allows the owner to get the largest legal deduction. At 45, an owner could deduct more than $200,000 per year for himself and more than $300,000 per year at age 55.

Most accountants have never heard of these types of plans, which were defined by the Pension Protection Act of 2006 and are regulated by the IRS and the Dept. of Labor.

The best fit is with companies that have highly taxed owners, but few employees, such as doctors, commercial real estate salespeople, consultants, and other small business owners. A larger business would be better off with a cash balance plan, which also allows owners and key employees to make large contributions. A 412(e)(3) is easy to administer and simple to explain. Other benefits can include asset protection and the ability to deduct life insurance.

Care must be taken with respect to who administers the plan. There have been abuses with the operation of some of these plans and the IRS has disallowed deductions for some abuses. It is important to know whom you are dealing with and that the administrator has the experience and integrity to run the plan correctly. Just because an insurance company may be involved does not make the operation of the plan legitimate.

There are many benefits of using a 412(e)(3) plan. In addition to the large tax deduction, the plan can even be combined with a 401k. This may be the ideal tax deduction for the profitable small business owner or professional.

Lance Wallach, speaks and writes extensively about retirement plans, estate planning, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for more than 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516-938-5007 or visit www.vebaplan.com

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

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