Retirement Plans

Definitions:

  • 401k Plans
  • Employee Financial Education
  • Individual Retirement Accounts (IRAs)
  • Keogh/Self-Employment Plans (SEPs)
  • Profit Sharing Trusts
  • SIMPLE Retirement Plans

Qualified Retirement Plan – A pension, profit-sharing, or qualified savings plan that is established by an employer for the benefit of the employees. These plans must be established in conformity with IRS rules. Contributions accumulate tax deferred until withdrawn and are deductible to the employer as a current business expense.

Defined Benefit Plans – A qualified retirement plan under which a retiring employee will receive a guaranteed retirement fund, usually payable in installments. Annual contributions may be made to the plan by the employer at the level needed to fund the benefit. The annual contributions are limited to a specified amount, indexed for inflation.

Defined Contribution Plans – A retirement plan under which the annual contributions made by the employer or employee are generally stated as a fixed percentage of the employee’s compensation or company profits. The amount of retirement benefits is not guaranteed; rather, it depends upon the investment performance of the employee’s account.

Employer-Sponsored Retirement Plans – A tax-favored retirement plan that is sponsored by an employer. Among the more common employer-sponsored retirement plans are 401(k) plans, 403(b) plans, simplified employee pension plans, and profit-sharing plans.

401(k) Plans -A defined contribution plan that may be established by a company for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 401(k) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½.

403(b) Plans – A defined contribution plan that may be established by a nonprofit organization or school for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 403(b) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½.

Simplified Employee Pension Plan (SEP) – A tax-deferred retirement plan for small businesses with fewer than 25 employees and the self-employed. The employer contributes to an employee’s IRA. Contributions may be made up to a certain limit and are immediately vested.

Keogh Plans – A tax-deferred retirement plan for the self-employed, partnerships, and small businesses. A Keogh is usually a better bet than a SEPfor a self-employed individual with high, stable earnings. There are two kinds of defined-contribution Keoghs: profit-sharing plans and money-purchase plans. Profit-sharing plans give you the most flexibility. You are allowed to contribute up to 15% of self-employment income, and you can vary the percentage of income you want to sock away from year to year. Since the earnings ceiling is $160,000, the maximum contribution is $24,000 annually. You can put away more money with a money-purchase Keogh; as much as 25% of your income up to $30,000 annually. But you must contribute the same percentage of income every year. You can combine both plans to boost your contributions and to retain some flexibility.

Another type of Keogh is very complicated to administer because an actuary must determine the deduction for contributions every year. The benefit is determined by averaging the participant’s highest earnings in three consecutive years. The maximum payout is $130,000 a year.

In all cases, Keogh contributions are fully deductible. The plans generally follow IRA rules for penalties and withdrawals.