Tony Novak profile picture
  "AskTony" column archive        


Most Popular

AskTony Archive

This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

Content is the opinion of the author and does not represent the position of any other person or entity. Information is from sources believed to be reliable but cannot be guaranteed.

The author is paid for product endorsements and has an ownership or other financial interest in the businesses related to the topics covered.

New questions

Submit consumer finance questions at and health insurance questions at

Sponsored by: Insurance Exchange - your source of valuable information on state and federal health reform benefits.

Core Health Insurance - America's favorite mini-med insurance  with affordable premiums, freedom to choose providers, optional PPO discounts and guaranteed eligibility regardless of medical conditions.

Please support the Web sites that make publication of AskTony services possible.

412(i) vs more traditional retirement plans

originally posted: 6/17/2007  revised: 11/23/2010

Q: For the past 18 years I have owned a for profit senior service organization which has finally established a relatively predictable profit margin. I have been advised to start a 412(i) plan but am very skeptical.

A: You have good reason to be skeptical. A 412(i) plan is specialized type of pension plan that is rarely the best choice for a one person business unless your goal is to deduct a large annual contribution (for example, more than $50,000) each year on a long term basis AND are willing to accept lower rates of
net investment return in exchange for the guaranteed performance of an insured pension plan. Otherwise, there are easier, safer and higher yielding retirement plans available.

If you plan to contribute a lower amount - up to 25% of your salary - then a SEP plan usually works best. If you plan to contribute If you plan to make higher annual contribution then a combination of two different plans - a SIMPLE 401(k) - also known as a "Solo 401(k)" for one person businesses - and a Profit Sharing Plan gives great results. Using the combination allows both the employer and the employee make separate contributions so that the total contribution could be over $60,000, depending on your salary. All of these options can be set up at minimal cost and funded with investments from any major investment firm.

In contrast, a 412(i) plan required to be funded exclusively with insurance products - annuities and life insurance. This is an expensive way to go when considered only as a retirement savings tool unless you specifically want the huge tax deductible contributions as well as the insurance.

Consider that part of the enthusiastic endorsement of 412(i) plans by the commission-based financial might be based on compensation. The first year compensation for setting up a 401(k) retirement plan with a $15,000 contribution into a mutual fund might be about $100. The compensation for setting up even a 412(i) plan at the same amount of contribution could be more than $5,000. So it is not surprising that financial firms promote 412(i) plans more than Solo 401(k) and Profit Sharing Plans.

412(i) plans do have an appropriate place in retirement planning. The classis example of an appropriate use is an older professional who wants to play "catch up" with retirement savings and deduct almost all of a $100,000+ salary in the last decade of work. Insured investments and guaranteed returns may be valuable in this situation. In these cases, however, I suggest using a low expense annuity to fund the pension plan and skip the life insurance altogether. If additional life insurance is needed, it is better to keep it outside of the retirement plan.

412(i) pension plans are best used for only a very limited number of special situation.

More small business retirement plan resources:

IRS Publication 560 - Small Business Retirement Plans