I’m not sure if there is something in the air, but I’ve been getting a bunch of questions from doctors who have recently been pitched Section 79 Plans. It’s odd because these plans are year-end income tax planning tools. Since I have not sent a newsletter with my opinion on Section 79 Plans in over two years, I figured now was as good a time as any to send one.
Before I start, if you have been pitched one of these plans and want help understanding the math behind why it isn’t any good or if you have one of these plans and wonder how you can get out of them, feel free to e-mail me.
What is the sales pitch with a Section 79 Plan?
1) Partially income tax deductible to business owners.
2) Once funded money can grow tax-free and come out tax-free (creating a nice retirement nest egg ).
3) Low cost when including employees.
Unfortunately, for unsuspecting business owners, what they don’t know is that, not only are Section 79 Plans not the “best” wealth-building tool they can use, they are not even a “good” wealth-building tool.
I rail against Section 79 plans for several reasons including the following:
1) You have to lie to employees to implement them.
2) The life illustrations given by ignorant or crooked insurance agents are not realistic (most use today’s historically low lending rates with 2-3% loan spreads on variable loans on EIUL policies (ones that do not have a fixed lending rate)).
3) You have to be a C-Corporation to use them.
4) The life policies sold in these plans are so bad that the companies don’t want them sold unless they are in Section 79 plans (the policies are designed to have poor performance so the deduction is increased).
5) Another very good reason not to use these plans is because there are better alternatives like Captive Insurance Companies
6) And the best reason not to use a Section 79 plan is because when you run the real numbers the client would be better off not funding the plan, taking his/her money home after taxes, and funding a “good” EIUL policy.
Section 79 Plans do not offer the benefits of those who sell them. If you are being told by an advisor that should use a Section 79 plan to build wealth for retirement, please refer them to this newsletter and tell him/her no thanks.