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412(i) Plans

A 412(i) plan is a defined-benefit pension plan that is designed for small business owners in the U.S. This is a tax-qualified benefit plan, so any amount that the owner contributes to the plan becomes available immediately as a tax deduction to the company. Guaranteed annuities or a combination of annuities and life insurance are the only things that can fund the plan.

How a 412(i) Plan Works
Notably, 412(i) plans were developed for small business owners who often find it difficult to invest in their company while trying to save for employees' retirement. The 412(i) plan is unique in that it provides fully guaranteed retirement benefits. An insurance company must fund it, and it provides the largest tax deduction possible.

Due to the large premiums that must be paid into the plan each year, a 412(i) plan may not be ideal for all small business owners. This plan tends to benefit small businesses that are more established and profitable.

For example, a startup that had just raised several rounds of funding would be in a better position to create a 412(i) plan than one that is bootstrapped and/or has an angel or seed funding. These companies also often don’t generate enough free cash flow or FCF to put away consistently for employees’ retirement. Instead, the founding team members often re-invest any profits or outside funding back into their product or service to generate new sales and make updates to their core offerings.1


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