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Private Pension Plans as an Alternative

Guest BobParks

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Guest BobParks

This is a duplicate of a posting on the Small Business board.

As an alternative to a qualified plan some planners have recommended a "private pension plan" using life insurance products. I have several cases where nothing: integrated, age weighted, cross tested, ageless etc., "works" but the owners need and want to start setting money aside. An article touting the "private pension" in lieu of a qualified plan caught my eye.

The Business Journal of San Jose carried an article entitled "Plan wisely for retirement" "Small business may benefit from private pension plans" by David Burros, CPA, CFP. The URL is http://www.amcity.com/sanjose/stories/0427...98/smallb1.html

Life insurance policies in Texas enjoy the same creditor protection as a qualified plan and everywhere insurance enjoys income tax deferral. However the consumer press reported many sales presentations have been marginally within the law. In response Texas passed strict rules requiring clear labeling of illustrations as being life insurance policies.

I'd be interested in seeing what other planners think of the technique and what alternatives are available.

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  • 2 weeks later...

I looked at one of these arrangements for myself a few years ago. I had a big problem with two issues:

1) contributions are after-tax

2) absurdly high annual fees on the investment vehicles (insurance company separate accounts or whatever they are) - like upwards of 2.5%!

I invest on a totally non-sheltered basis and I can select my investments (stocks, mutual funds) to minimize current taxes. For example, there are many equity mutual funds out there which are managed to minimize annual distributions and I have been very pleased with their performance.

Also, a major part of the distribution I eventually take from these mutual funds will qualify for cap gain treatment, whereas the distributions from these variable insurance products will be (I think) all ordinary income.

It was a no-brainer to reject the "private pension plan" concept.

[This message has been edited by LCARUSI (edited 09-14-98).]

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Guest BobParks

As I understand the "private pension" the distributions in retirement begin with a recovery of the after tax basis which of course is tax free.

Then with a careful eye towards maintaining the insurance policy as "insurance" cash loans are taken, again income tax free. By "insurance" I mean the deferral of inside buildup and the ability to taken loans without tax penalty.

At death, if handled properly, the loans are repaid from the death proceeds. If carelessly handled, the loan could cause the policy to lapse and then the entire loaned amount would be ordinary income.

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