Qualified Plans

One of the benefits of owning a business is that you have tax-favored options to save for retirement that non-business owners don’t have. Your business can sponsor a qualified plan which may be designed to drive the majority of the benefits to you. This is a classic way to shift business dollars to you for retirement.



Qualified Plan Decision Tree
   

Benefits of a qualified plan include:

  • Contributions to the plan are tax deductible to the business.
  • Contributions are not currently taxable to the participants.
  • Contributions made on behalf of employees can be paid with dollars that would have otherwise been spent on taxes.
  • Earnings on contributions grow tax deferred.
  • Qualified plans are protected from creditors.
  • Provides a valuable benefit to employees and helps to attract and retain employees.
  • Taxation of benefits are deferred until taken in the future.

There are essentially two categories of qualified plans - Defined Contribution Plans and Defined Benefit Plans.

With defined contribution plans, you define how much money you want to contribute to the plan. What is available for retirement will depend on the contributions actually made and the earnings on those contributions.

With defined benefit plans, your retirement benefit is defined under the plan. (For example 75% of the highest five consecutive years' salary over the last 10 years.) The contribution amount will be based on a number of factors, including the benefit being promised, the number of years until retirement and an interest rate assumption.

Types of Defined Contribution Plans

 

Profit Sharing Plans

There are many defined contribution plan options, but they generally fall into three distinct categories - profit sharing plans being one of them. One well known profit sharing plan type is the 401(k).

The General Advantages of Profit Sharing Plans:

  • Allows you to change the plan contribution each year or even decide not to make a contribution in certain years.
  • You can establish eligibility requirements that employees must meet to receive a contribution.
  • Can be designed to favor select employees, including you.

Within the Profit Sharing category there are a number of design options. Which profit sharing plan is best for your business? Learn more

401(k) Plans

The advantages of 401(k) plans:

  • Allow employees to save money for their retirement.
  • Employee salary deferrals may be made pre-tax, post-tax, or a combination of both.
  • Employees have flexibility in how much they contribute up to certain limits.
  • Employers may choose to match some of the employees' contributions.

Within the category of 401(k) plans, there are a number of plan options. Which 401(k) plan is best for your business?Learn more

Types of Defined Benefit Plans

The advantage of Defined Benefit plans:

  • Allows for substantially larger, tax deductible contributions
  • Retirement benefit is known in advance

Which Defined Benefit plan is best for your business?Learn more

 

Purchasing Life Insurance Through Your Qualified Plan

 

Planning for your retirement may also impact someone else in your life, such as a spouse or partner.

Life insurance can help “self-complete” your retirement plan, helping to make sure that your goals for their retirement can be met.

Buying life insurance inside your qualified plan may be an affordable, tax-efficient way of meeting both your business and personal insurance needs.

The advantages of purchasing life insurance inside your qualified plan include:

  • Premiums are paid for with tax-deductible plan contribution dollars, freeing up personal dollars
  • Should death occur before you've had time to accumulate your retirement account, the life insurance proceeds can help complete your retirement savings for your family
  • At retirement, the policy can be transferred to you to personally own, providing continuous personal protection for you and your beneficiaries

How does life insurance in your plan free up money for you?

If you were to purchase the same amount of life insurance outside your qualified plan, you would need to gross up your income in order to net the same premium paid from qualified plan dollars.

For example, assuming you’re in a 34% personal income tax bracket:

 

Qualified Plan:  

Out of Pocket:  

Gross Amount to Pay Premium:

$12,500

$18,939

Taxes Due:

$        0

$ 6,439

Net Amount to Pay Premium:

$12,500

$12,500

 

How it works:

  • The policy is applied for and owned by your pension trust, however, you name who the beneficiary will be of the insurance proceeds
  • A portion of your deductible plan contribution is used to pay the insurance premium
  • The life insurance cash value is attributed to your retirement savings ,and because it is accumulated using pre-tax dollars, is subject to income taxes when received either through distribution at retirement or upon death
  • The death benefit in excess of the cash value is received by your beneficiary income-tax free
  • Because your pension is providing a tax-free benefit to your beneficiary, you will need to pay a small annual tax on this "economic benefit" which may be recovered at retirement
  • At retirement, the insurance policy can be transferred to you as part of your retirement distribution
  • Once you personally own the life insurance policy, you may choose to access the policy cash value, through loans and withdrawals, to help supplement your retirement income**

If you have a need for life insurance, you may want to consider purchasing it through your qualified plan.

 

 

* Guarantees are dependent on the claims paying ability of the issuing company.

**Policy loans and withdrawals reduce the policy's cash value and death benefit and may result in a taxable event. surrender charges may reduce the policy's cash value in early years.

 

 

TC85040(0515)P

 

The companies of National Life Group® and their representatives do not offer tax or legal advice. For advice concerning your own situation, please consult with your appropriate professional advisor.