DB Plans Funded with Insurance-Continued

I hope you all had a fun filled and safe holiday weekend. Let’s get back to my discussion of fully insured defined benefit plans, as I mentioned in previous article a 50 year old could contribute either $205,ooo(3% rate of return) or $161,000(5% rate of return) to their DB Plan and the benefit would be the same, question then becomes why spend the additional $44,000? The only reason I can think of is you are in love with a larger deduction and you feel contributing an extra $44,000 will save you an additional $18,000 in federal tax…lets break this down, contribute an extra $44,000 to save $18,000???? On top of that your end of the line pension benefit is the SAME!!! Sorry, this does not make alot of financial sense to me. Let’s add some insult to injury, there are some other issues one should consider before implementing a fully insured DB Plan. The maximum amount of annual income the DB can provide is $195,000(IRC 415) and you cannot over fund this plan, again the maximum lump sum funding amount is around $1.9M. (Hey, you could adopt a defined contribution plan, contribute $49,000 plus $5000 catch up, plus $90,600 of additional after tax cash flow, stay with me, this all adds up to the $205,000 you would of spent on the DB Plan, with a 6% projected rate of return, and get to the same place, I agree your tax deduction is not as a large, however you have alot more investment and plan provision flexibility andless administration hassle, plus you can withdraw whatever you wish and have no maximum funding problem. Another issue is what do you do with the death benefit once you terminate the DB Plan?

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