Retirement:
Employer Based Plans
There are many more types of "employer" based plans than "individual" based
plans. These plans can be very complex and might require the assistance of
financial planners and tax attorneys. It is beyond the scope of this text to
attempt to define or explain in detail the inter workings of these plans but
rather to outline the basic plans that do exist and the primary characteristics
of each.
Pension Plans:
Defined Contribution - Plan As the name implies, contributions to these
types of plans are predetermined or "defined" based on a formula set forth in
the plan. This formula could be a specific percentage of profits or employee
earnings. Irrespective of which factor is used, the contribution limits are the
same; 100% of income, up to $41,000 per year.
Money Purchase - Plan Money purchase plans are based upon a percent of
salary contribution. The amount of the contribution must be deposited
annually. Naturally, the longer an individual is with the company, the higher
the salary. As the salary increases, so does the dollar amount of the
contribution, therefore, this type of plan benefits the long term employee much
more than the short term employee.
Defined Benefit - This type of plan seeks to provide a certain "benefit"
to the plan participant at retirement. The contributions are determined by using
actuarial tables. The longer one has to retirement, the lower the contribution;
the shorter the term to retirement, the greater the contribution. Remember, this
plan seeks to provide a fixed "dollar amount" at retirement irrespective of the
individuals age. This plan is much more beneficial to, relatively speaking, an
older employee.
Unfunded Pension - Liability In a perfect world, this category would not
exist. A corporation is not required to fund 100% of its pension requirement on
an annual basis. It must only meet minimum percentages set forth by law.
Obviously, this "unfunded" portion (money due employees) of pension benefits
should be of the utmost concern for employees.
Non-Pension Retirement
Plans:
Profit Sharing - Plan Again as the name suggest, profit sharing plans
allow the corporation to share the profits with its employees. Actual
contributions, while based on company profits, are typically determined by the "plan
trustee". Contributions made by the employer are tax deductible; some plans
also allow for contributions by the employee which are also deductible. The
maximum contribution for the profit sharing plan is 15% of employee compensation
up to $30,000. The account grows tax deferred.
Deferred Compensation - Plan Under this type of plan, a portion of the
employee's compensation is "deferred" until retirement or death. A contract is
drawn between employee and employer specifying the deferred amounts and the
requirements for receiving the deferred payment. If the requirements are not
met, no payment is made. This plan is "non-qualified" and requires no IRS
approval, nor is it subject to federal legislation governing retirement plans.
(This plan, in my opinion, is lacking in several areas, most notably its lack of
federal legislative oversight) Remember, its YOUR money in these plans!!!
Tax-Deferred Annuities (TDA) 403b Plans - All plans listed previously,
cover "for profit" entities. However, there are many employees in the U.S who
are employed by "non-profit" organizations. Recognizing the need for
retirement plan options for these employees, congress enacted legislation giving
certain annuities and mutual funds, structured in a particular way, tax deferred
status. These plans are referred to as "403b" plans. They are today very
widespread and are used by schools, hospitals, and most non-profit foundations.
The contributions
are tax deductible, and the earnings grow tax deferred. Generally, the maximum
contribution for 403b plans is 25% of income, up to $13,000 per year. (this is
very similar to the 401k program). For those age 50 or older, you can contribute
up to $16,000 per year.
Payroll
Deduction
(401k) Plan:
Under this type of plan, which is offered by most "for profit"
corporations, the employee is allowed to make contributions of a specified
percent of compensation. The contributions are limited to a total of 25% of
compensation up to $13,000 per year. These contribution limits are periodically
adjusted for inflation. As of this writing, $13,000 is the yearly maximum
contribution.
Also, these plans offer the employee the
additional advantage of having the employer "match" a portion of, or
all of the employee's contribution. Most employers have guidelines stating
what percentage of the employee's contribution they will match and the time
parameters, if any, for the vesting period. Make no mistake, any
"matching" by the employer is FREE MONEY. Any employee which is employed
by a firm with a matching 401k plan, must find a way to participate, and should
try to participate to the maximum allowable extent.
Another benefit of the 401k plan, is the
provision which allows employees to "borrow" their own money for any
purpose, including home ownership. When the loan option is utilized, the plan
administrator will set up a repayment schedule using payroll deductions to
service the loan. The loan must be repaid within a 5 year period unless the
loan proceeds were used to purchase a home; in that event the repayment term may
extend to 30 years.
Of all retirement plans available to the
average employee, the 401k, in my opinion, is the most beneficial. If you are
fortunate to have an employer that matches 100% of your contributions, so much
the better. However, I want to impress upon you the most salient point herein
discussed, any employer match is FREE MONEY and should be taken advantage of
fully.
Lastly 401k plan contributions are tax
deductible and earnings grow tax deferred. The plan is regulated by federal
retirement income legislation.
Next-->>
More information on
401(k)
Related Articles:
Qualified Plans
Table of Contents:
-
What Are Retirement Accounts?
-
Employer Based
Retirement Plans
-
401(k) Plans
-
Individual Retirement Accounts (IRAs)
-
Roth IRA
-
What is a Rollover IRA?
-
Converting and
Recharacterizing of an IRA
-
Education IRA & SEP IRA
-
Self Employed Retirement plan: Keogh
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