Defined Benefit Plans 

One of the best retirement vehicles can combine a life insurance policy with a retirement account -commonly known as a defined benefit plan (sometimes referred to as a “412i plan” because of the related IRS code). Under this kind of plan, an actuarial determination of one’s future earnings and required retirement funding needed are calculated. A licensed actuary is needed to determine the minimum and maximum amounts of funding needed each year. In some cases, one’s funding of his/her pension amount can actually exceed the amount of the salary paid (as when one is close to retirement age). Certain non-discriminatory rules regarding wage amount, age and tenure must also be strictly followed. Properly structured, the defined benefit plan can save a taxpayer significant tax dollars over the course of many years, despite the expenses of establishing and maintaining such a plan.

The amount set aside each year is then deducted as an expense of the employer in 2016 up to a maximum pension amount of $210,000 ($215,000 for 2017) per highly compensated individual whose salary maximum is $265,000 for 2016 and $270,000 for 2017. This reduces the overall tax liability of the business entity, which can be a corporation or an LLC. An owner of a business could set aside as much as $210,000 each year for himself alone, into this pension plan (based on maximum salary limit of $265,000 for 2016). However, any additional employees must also be provided with pension plan contributions by the employer and will again vary, based on employee’s wage amount, age and length of employment with that employer. Due to the nature of this defined benefit plan, large sums can be accumulated over a relatively short period of time. Upon retirement, predetermined amounts are withdrawn each year and the tax is paid on the amount withdrawn based on the life expectancy of the taxpayer, typically at a much lower post-retirement income tax bracket.