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Why Every Small Business Owner Needs to Consider 412E3 Retirement Plans

Written By: Barry Goldwater | Goldwater Financial Group

A study entitled “Financial Viability and Retirement Assets: A Look at Small Business Owners and Private Sector Workers,” done by the advocacy department of the Small Business Administration found that smaller and more financially vulnerable business owners (those with fewer than 25 workers) have less invested in retirement assets than their larger or financially stronger peers.

The percentage of self-employed business owners with retirement plans is surprisingly low. Another report conducted by Jules Lichtenstein of the office of Advocacy for the Small Business Administration states that only 2 percent of small-business owners have a Keogh plan (a type of retirement plan for the self-employed) and only 18 percent have a 401(k) plan.

Also Scott Shane, professor at Case Western University points out “Entrepreneurs are more optimistic than the rest of the population, researchers have found. While that optimism has many virtues, it leads small-business owners to believe that their companies’ futures will be rosier than they actually turn out to be. Small-business owners think their businesses are less likely to fail, will generate greater profits and will sell for more than they actually do. These over optimistic projections about the value of their companies lead many small-business owners under invested in their retirements.”

Saving for retirement is a mindset, and like anything else, there needs to be more good reasons than just the obvious ones to do so. Let me present the 412E3 retirement plan for small business owners and their key employees. This 50 year old IRS sanctioned pension plan is the ideal savings and asset protection vehicle for successful small business owners and high income earners because it allows one to save large tax deductible contributions for retirement and is the only plan that has built in tax deductible life insurance. The 412E3 is a guaranteed defined benefit plan that only invests in life insurance and annuity portfolios. It is the most cost effective way to purchase life insurance protection because of the tax deduction and here is an example why that is.

A 44 year old owns a business which earns $500,000 after expenses. The owner would like to put away between $100,000 and $150,000 per year for retirement. Because a 412E3 pension is made up of annuity and life insurance contracts only, it is the plan’s owner who decides the allocations. For an annuity only contribution, the contribution amount is $99,514. To fully insure the plan with life insurance, the contribution jumps to $114,538, a $15,000 difference by adding the life insurance component. But what is staggering about this example is the amount of life insurance purchased with a $15,000 greater contribution was $3,886,000.

In a 40% tax bracket, a business saves $45,815 in taxes not paid when they contribute $114,538 to a 412E3 plan. Total cost to put away $114,538 to the business therefore is $68,723. The cost for $3,886,000 of life insurance was $15,000 pre tax. In a 40% tax bracket, the cost of this insurance is $9,000 which means for $9,000 more, Mr/Mrs business owner can purchase $3,886,000 of life insurance. Outside of a pension plan, it costs a 44 year old male between $27,000-$40,000 depending on the company chosen. In a 40% tax bracket, the company has to earn $50,000 to pay an after tax premium of $30,000. In a 412E3, the company pays $15K pre tax for the same insurance. It is very powerful to see these comparative numbers side by side. In a pension plan, $3,886,000 of life insurance is 66% less expensive.

About the Author: Barry Goldwater is an insurance specialist practicing in Newton, MA. He works with CPAs and financial planners designing appropriate risk management strategies for their clients. He can be reached at 617-527-9736 or

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