Your Financial Future:
Types Of Retirement Plans
Find out which types of retirement plans are best for you.
Defined Contribution Plans
Retirement plans in which contributions are made by the employer, employee or both. The final payout depends on how much is invested and the success of the investments.
- 401(k) Plan: Plan that allows workers to make voluntary, tax-deductible contributions to the plan up to certain limits; contributions may be matched by the employer. These plans are also called salary reduction plans.
- ESOP: An Employee Stock Ownership Plan is a plan whose contributions consist mainly of the stock of the employer company. The value of ESOP benefits is determined by how well the stock of a company does.
- Money Purchase: Plan that provides for the employer to make a fixed annual contribution to the plan. For example, a percentage of a worker’s compensation.
- Profit-Sharing: Plan that bases contributions on business profits or a percentage of pay. “Discretionary profit sharing” plans generally allow employers to decide each year whether to contribute.
- Stock Bonus: Like a profit-sharing plan, but contributions are not necessarily tied to employer profits and benefits are payable in the form of employer stock.
Pension Plans for Small Businesses
- Keogh Plan that allows self-employed persons to set aside tax deductible sums in pension accounts for themselves and their employees.
- Payroll Deduction Although not a pension plan, an employer can provide a way for eligible IRA employees to contribute each pay period to an Individual Retirement Account. Individuals can contribute up to $5,000 in 2009 and 2010, or $6,000 if over age 50. Anyone not covered by a company-sponsored pension plan can fully deduct the contribution. Individuals with a pension plan and an adjusted gross income of $56,000 or less (families with $89,000 or less) can fully deduct the contribution. Partial reductions are available for individuals with up to $66,000, and families up to $109,000.
- SEP A Simplified Employee Pension is a defined contribution pension plan that does not have the same reporting and disclosure requirements as more complicated plans.
- SIMPLE Savings Incentive Match Plan for Employees of small employers with 100 or fewer employees. The employees contribute a percentage of their salary up to $11,500 a year, and an additional $2,500 is allowed for employees age 50 and over. The employer either matches that or contributes 2% of the employees’ wages.
Defined Benefit Pension Plan
Plan that promises a certain benefit at retirement, usually calculated through a formula based on a combination of years of service and amount of pay. Money is paid into the plan for all participating employees, but some will not qualify for (and therefore will not get) benefits. The employer assumes the investment risk.