Different Retirement Plans
Making a decision about your futureThe majority of people, when they retire, rely primarily upon three revenue streams to help them pay for their expenses: Social Security, personal savings and company retirement plans.
The plans, which have become common in the workplace during the past 25 years, are not very well understood by the participants. There are two basic types of plans, defined benefit plans and defined contribution plans.
Defined benefit plans promise a specific monthly benefit during retirement, either a set amount or a benefit calculated based on a preset formula, often based on years of service and salary.
With defined contribution plans, either or both the employer and employee pay into an individual account for each employee, usually at a set rate such as 5 percent of annual salary. The contributions are usually invested. Defined contribution plans include 401 (k) and 403(b) plans, employee stock ownership plans, and profit sharing. The total amount of benefits is determined by the contributions and the performance of the investments.
Here is a brief overview of the types of plans offered in many workplaces and the benefits of each from the U.S. Department of Labor:
Simplified Employee Pension Plan: These plans allow employees to contribute into individual retirement accounts (IRAs).
Profit Sharing Plan of Stock Bonus Plan: This is a defined contribution plan under which the employer makes annual contributions, and has a formula for distribution to participants.Individual retirement arrangement (IRA): This is a personal retirement savings plan available to anyone, regardless of age, who receives taxable compensation during the year. There is no minimum or required IRA contribution, and all earnings on the amounts in an IRA are untaxed until withdrawn. According to fool.com, here are some different types of IRAs that you can set up:
401(k) Plan: Employees defer a portion of their income, pre-tax, to a plan; employers may match a portion of the employee's contribution. This is typically invested. There are limits on how much an employee can contribute each year.
Employee Stock Ownership Plan: This is a type of defined contribution plan in which the contributions are mainly invested in the employer's stock. Money Purchase Pension Plan: Employers contribute a fixed annual amount into an employee's account.
Cash Balance Plan: This is a defined benefits plan, but the benefits are in an allotted account. The employer makes annual contributions and interest payments to the account.
Individual Retirement Account: Set up with a financial institution, in which contributions may be invested in many types of securities such as stocks, bonds, etc.Source: The Motley Fool, U.S. Department of Labor.
Individual Retirement Annuity: Set up with a life insurance company through the purchase of a special annuity contract.
Employer and Employee Association Trust Account, or Group IRA: A traditional IRA set up by employers, unions and other employee associations for employees and members.
Roth IRA: Contributions are not deductible; qualified distributions are not taxable; and earnings on the account are taxable and subject to early withdrawal penalty only when a withdrawal is not a qualified distribution.
Spousal IRA: A traditional or ROTH IRA funded by a married taxpayer in the name of his or her spouse who has less than the maximum allowable annual contribution limit in annual compensation.
Education IRA (EIRA): An account established to provide funds that will allow a beneficiary to attend a program of higher education.
Traditional IRA: Available to those under 70 who have earned income. Earnings with a traditional IRA grow tax-deferred until withdrawal.
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