Qualified Retirement Plans to the Rescue

The Need for Retirement Plans

The decline in the stock market and the delay in saving for retirement have created a greater need for Physicians and Business Owners to save large amounts for retirement.

Although there are many ways to save for retirement, Physicians and Business Owners have a unique opportunity to establish Qualified Retirement Plans for their business. These IRS-approved plans offer tax and other advantages that far exceed any other method of savings. Qualified plans can be designed to fit into both your personal savings strategy and your company’s goals. Some advantages are:

• Plan assets are not subject to the claims of creditors
• Plan assets grow on a tax-deferred basis
• Favorable tax treatment when assets are distributed
• Contributions are tax-deductible
• Qualified plans help to attract capable employees and reduce employee turnover
• IRS provides incentive for establishment of qualified plans by allowing for a tax credit of up to $500 for start-up and administration expenses for the first three years of the plan

Defined Benefit Plans

There are basically two types of qualified plans, Defined Contribution and Defined Benefit. Defined Benefit plans establish a monthly retirement benefit in advance and the contributions are actuarially designed as the amount needed to provide that benefit. Defined Benefit plans generally allow much higher deductible contributions than Defined Contribution plans and may be the only way that older business owners can save enough for a comfortable retirement.

412(i) Defined Benefit Plans

412(i) is a type of Defined Benefit plan that has surged in popularity as Baby Boomers find the need to save large amounts of retirement assets in an abbreviated timeframe. 412(i) plans allow for large deductible contributions and retirement benefits are guaranteed by insurance and annuity products¹. A 412(i) plan is ideally suited for older, highly compensated Physicians and Business Owners who are looking for a guaranteed retirement, large contributions/tax deductions in the early years of the plan, and smaller contributions as they approach retirement.

Why a 412(i) Plan?

412(i) plans are inexpensive and easy to administer — the ideal plan for a business with between one and 10 employees. 412(i) plans shield the participants from the ups and downs of the stock market, and are fully guaranteed. 412(i) plans are exempt from Section 412 minimum funding requirements and may provide a deduction two times greater than a traditional Defined Benefit plan and eight times more than a Defined Contribution plan².

The example below shows how much an employer can contribute to various types of plans. For a male employee, age 55, who would receive the maximum benefit at age 65:

Assumes the maximum compensation of $225,000 (2007)