How to Unwind 412i

[rex]

im a 39 year old self employed individual. My company has no other employees. Although i make a lot of money currently, i may only keep the company for 3-5 years and then either join a group. Sadly i allowed an individual whom i thought i trusted to creat a defined benefits prg for me. He created a 412i made up of whole life and annuities with contributions of about 80k per year. I believe he did this bc of the tremendous commission he received but that's another matter. Ive learned that 412i is more appropriate for someone much older, closer to retirement, and someone who wants to put closer to 200k in bc of the large fees. once i started seeing the fees and other issues i questioned him about this plan and his response is look at that great deduction you are getting and the guaranteed returns. Im especially very worried about the whole life part of the plan bc it has zero cash value for 2 years and doesnt catch up to premiums for at least 12-14 years (much longer than ill likely keep the company). ive spoken to other insurance folks but unfortunately 412i is so uncommon nobody seems to really know what to do. I also have a 401k/PS that i deposit about 33k in per year.


Can anyone give me advice on how to unwind a 412i with whole life making up 49% and 51% annuity?

Is the cost of buying out the whole life, the net interpolated terminal reserve, the PERC value, or some other figure?

Are there any IRS or other issues i need to worry about?

Thank you for your time,

 

[arnguy]

I would suggest that you consult a CPA to discuss this. In general many financial planners consider a 412(i) defined benefit plan simple and perhaps the ideal solution for someone who wants to maximize his current tax deduction and secure guaranteed retirement income. Usually works better for those over 40 because of the IRS tables used in the determination of the maximum deductible contribution. However, it seem to work best for those within 10 years or so of retirement.

Unfortunately, there have been abuses in which life insurance agents had 100% invested in life insurance policies to secure higher commissions. The IRS issued rulings in 2004 to quash what is called "pension rescue," an abuse of Sec 412(i). I can't help you with the extrication from such a plan inasmuch as I haven't been in the life insurance market for quite a few years. I think a CPA/Tax Attorney would be your best bet for advice.

 

[rex]

thank you for the reply

ive found unfortunately that most cpa folks just dont know about 412i (mine doesnt) and neither does several i asked. its so rarely used it seems nobody knows much about it.

some of the prbs i have with this situation is that he did it before taxes go up and im not likely to ever again be in a low situation given when im starting to save, the fact that i told him i want to work until age 70, and just where any logical person might guess where taxes are in the future (obviously nobody knows for certain but given the demographics likely there arent going to be less in my lifetime). Also as the cash value in the whole life goes up, the cost to get the plan out also goes up however it lags behind by 70k or so for a few years and doesnt even equal premiums paid until 12-13 years. thus if i close my business before the whole life really matures in 20-25 years but after the 3 years when i might be able to afford buying it out, im screwed big time. i have no excessive reason to put more away at this time. im just trying to do what makes sense. like u said, older folks who have zero saved then it seems better although id do it with annuities only in order to avoid all this mess of buying out the whole life.

again thanks for trying

Finally i asked him to put my number one priority to pay for my kids education and thus putting more money into this so that the excessive fees dont eat away at the low return would make it so i cant do my number 1 goal.

 

[Franz Kafka]

Sadly i allowed an individual whom i thought i trusted to creat a defined benefits prg for me. He created a 412i made up of whole life and annuities with contributions of about 80k per year. I believe he did this bc of the tremendous commission he received but that's another matter.

There aren't any "tremendous commissions" that are unique to life insurance and annuities inside a qualified plan.

Ive learned that 412i is more appropriate for someone much older, closer to retirement, and someone who wants to put closer to 200k in bc of the large fees.

It may be more appropriate for older folks because they have less time to save for retirement and because they usually have more income.

The fees are paid to the trustee and the administrator just like any other company sponsored qualified plans. There are no large fees unique to 412(i)s.

Im especially very worried about the whole life part of the plan bc it has zero cash value for 2 years and doesnt catch up to premiums for at least 12-14 years (much longer than ill likely keep the company).

That is very typical of any lifetime paid whole life policy.

ive spoken to other insurance folks but unfortunately 412i is so uncommon nobody seems to really know what to do.

That seems to be your only problem - you have talked to insurance folks who trashed your current plan without knowing anything about it.

421i is just a defined benefit pension plan. Although less common now than before, pension plans are not so uncommon.

I also have a 401k/PS that i deposit about 33k in per year.

Congratulations! You are a responsible saver!

Can anyone give me advice on how to unwind a 412i with whole life making up 49% and 51% annuity?

Is the cost of buying out the whole life, the net interpolated terminal reserve, the PERC value, or some other figure?

Are there any IRS or other issues i need to worry about?

Thank you for your time,

Unwinding or terminating 412i is easy. You rollover the annuity portion to an IRA or another qualified plan. You rollover the life insurance to another qualified plan that accepts life insurance or you can purchase for either interpolated terminal reserve or PERC value minus any economic gain you may have reported on the insurance.
In your case, (since you're complaining about the low cash value) both must be very low.

IMHO you are reacting emotionally to hearsays of others of conflicting interest and not on facts. 412i can be a very good plan for those who can afford it. E.g. your beneficiary can receive the death benefit above the cash value tax-free. That's a great deal IMO.

 

[rex]

thanks for your excellent post franz
while i am upset, let me try and explain why and hopefully u can explain if im correct

the way this guy set up the plan. it costs 1.5k per year (i know normal cost). he also set it up so i pay monthly and thus the whole life is charged about another 1.5k per year. this was done bc i had zero in the bank and i still am cash flow poor bc of this plan although my total economics are fine but still such that i cant just come up with the 80k per year all at once. thus im paying 3k per year of fees to make 3% on the annuity and of course there are no dividends the first 2 years on whole life. as i told him, i wasnt sure id be doing this business for many years after just 2 years ill need to have 70k on hand at the end of the year to buy the whole life out using the PERC formula. The IRS will require this bc the cash value is low (thats why i care about it not that i dont understand WL has an initial low cash value). I dont think they will allow the NITR (which is what he told me they use). Ill also likely need to use after tax dollars at a higher tax rate (likely 39%). If i went 3 years then i might not even be able to buy it out and would have to cash convert it since i would no longer be a company and not have a plan where i can put it in. my existing 401k/ira wont have enough funds to carry the whole life to completion and thus ill be forced to cash out for a loss. Thus i now feel forced to end it after 2 years and im worried the IRS will consider this an abusive tax shelter since it was only in place 2 years and that there will be all kinds of fees and penalties.

im not trying to paint a bad picture for all 412i but i dont see it as the best plan for my situation. The sadly part is i didnt know any of this PERC stuff before i signed on.

again thanks for your post and any info u have.

 

[scagnt83]

I agree with Franz on this one. You are acting way too emotionally and not rationalizing things out (yes I understand that we are talking about a lot of money)


A 412i can be a totally suitable retirement plan for a high income earner who is self employed.


You should ask whoever trashed the 412i what other tax advantaged business controlled retirement savings vehicle would have let you contribute $80K per year.....
I assume that you are maxed out in your 401K and Profit Sharing Plan....

There are not many options when you want to contribute that large of an amount.

And when you do, it usually goes into Permanent Life Insurance or some type of an Annuity.
(There are options other than a 412i, but 421i plans have their place)

The reason that 412i plans are usually better for older individuals is because they have less time to save for retirement, so they need to be able to contribute large amounts.

And since most higher income earners are older, this is why the stock phrase that "412i plans are best for older individuals" is heard a lot.
But what you are not hearing is the end of that statement "....and high income earners"

I would suggest finding a new advisor.
Your current one who is trashing the 412i seems to be out of their league, or is only focused on getting your assets and not necessarily doing the right thing.
(Be weary of agents who trash what you currently have too much)


The fees are in line with any other life insurance policy/annuity/401K.
So are the commissions.
(many times they are even less than if they had sold you individual life and annuity policies)

Did the broker who placed you in the 401K tell you all of this???


It sounds like you like your 401K. Am I correct in saying that?



As far as the life insurance goes, you are probably too heavily invested in it for it to make sense to liquidate the policy;
Whole Life accumulates Cash Value on a bell curve model.
There is just a little at first, but the farther along in the policy the greater the overall rate of return becomes.

Also, it will most likely be much more effecient paying out income to you in retirement vs. a non life insurance product.
It also has the Death Benefit which I imagine is a good bit, this will become more and more valuable over time.
It could very likely become a powerful retirement tool for you to utilize.


You most likely could rollover the Whole Life into your current 401K and fund it through that..... if not, you could roll the current 401K into a new one that does accept life insurance.


The annuity can be rolled over into the 401K as well if you like (most likely). If not this can also be changed by creating a new plan and putting an annuity provision in the 401K document.


The annuity could also be rolled over into an IRA.
With the amount of income your making, I would suggest looking at converting to a ROTH if you do this.
(A ROTH may or may not make sense for you, but it is something you should consider with your income level)


The tax deduction is nothing to turn your nose up at, it equals cash in your pocket!!


Break the fees out for us. What percentage is in life insurance?

Do you know what the total asset fee is on your current 401K?

 

[arnguy]

The above advice from Franz ans scagnt83 appear to be spot on. In particular pay attention to that part of scagnt's post where he mentions the high deductible amount that can be contributed to the 412(i) defined benefit plan. Socking away $80,000 is damn good. From what they are saying, it appears that you are better off staying with the plan, IMO.

 

[rex]

for some reason my posts arent coming through until reviewed so i apologize for any delay in answering your questions and again thanks for the advice.

You have 2 posts and threads.
» You are most active in Retirement Planning Forum with 4 posts.

 

[arnguy]

That's OK, Rex.

 

[BNTRS]

The best resource you can go after is the business owner planning department at one of the mutuals. I personally like Ohio National's advanced sales team and Guardian's Business Resource Center. They are both staffed with attorneys who can assist in answering questions. Honestly I think the best personal resource you should seek out is a tax attorney with a lot of ERISA experience. The notion that 412i's are rarely used is a myth. They are a very common tool in the correct market. That market is small, and your fact pattern doesn't appear to place you in this market.

I don't think an accountant is a particularly useful resource in this situation. They usually are not well versed in qualified plan implementation, though they enjoy a reputation for being an authority on the topic.