Key Points
- Understanding various retirement plans like the 401(k) Plan, 403(b) Plan, Money Purchase Plan, Employee Stock Ownership Plan, and Defined Benefit Plan.
- Contributions to 401(k) and 403(b) plans are deducted from your paycheck, often pre-tax.
- Money Purchase Plans require employers to make contributions on behalf of the employees.
- Employee Stock Ownership Plan allows employees to own a stake in the company.
- Defined Benefit Plan, also known as a pension, pays benefits from a trust fund upon retirement.
They say that retirement is the world's longest coffee break. After years of laborious toil in the workplace, employees will soon retire. But before this happens, it is but wise to know the most common retirement plans so that you can choose which you think is best for yourself. There are a number of alternatives to choose from but still the final decision as to what retirement plan you will pursue lies in your hands.
- 401(k) Plan
401(k) plan is the most common among the retirement plans in USA. This is usually made available through an automatic enrollment of the employee by the employer for an investment in the default fund through default rate. As generally defined, 401(k) plan is a system of a qualified profit-sharing plan that allows employees to appropriate a portion of their salaries for a retirement investment account. You can also avail a loan from your account through this plan. The proceeds of the loan can either be used to purchase your house or for emergency purposes. There must be an agreement between you and your employer as to the contributions that are to be deducted from your paycheck more likely monthly. Moreover, your tax bill will then be lowered if you avail of this plan because your taxable income is reduced.
- 403(b) Plan
People who are not qualified to avail 401(k) plan can opt to have 403(b) plan. This is the 2nd most well-known retirement plan. In some aspects, 401(k) and 403(b) plans are similar to each other. Both of them demand a percentage of contributions from employees. However, 403(b) plan is offered in public schools, non-profit employers, and other cooperative organizations. It is also provided that you may only obtain a 403(b) annuity under an employer's TSA plan. The contributions collected for employees' investment are on a pre-tax basis. In connection with the salary reduction agreement,, your employer must agree to the amount of your contributions which will be deducted from your paycheck.
- Money purchase plan
Money purchase plan is quite different because the employer is required to make a contribution on behalf of the plan participants, the employee. This is done on a yearly basis. This plan is more favorable to the employees. There is also a required contribution percentage to be observed. Your money purchase plan, for example, has a contribution of 10% of each eligible employee's pay. As a consequence, the employer is obliged to make a contribution of 10% of each eligible employee's pay to their separate account. According to the authorities, a participant's benefit is based on the amount of contributions to their account and the gains or losses associated with the account at the time of retirement. Money purchase plans had higher deductible confines than profit-sharing plans.
- Employee stock ownership plan
An employee stock ownership plan, also known as ESOP is a qualified defined contribution plan that is a stock bonus plan. The purpose of employee stock ownership plan is to invest primarily in qualifying employer securities. Every so often, some firms throw in shares from the company's treasury. The goal of the throwing in of shares is to acquire outstanding shares of company stock to employee accounts using an employee stock ownership plan (ESOP). Furthermore, ESOP favors employees more because they are given a chance to purchase stock or share from the company where they earn their living. It's like hitting two birds in one stone.
- Defined benefit plan
A defined benefit plan is also known as pension. It is used to pay benefits from a trust fund using a certain method provided by the plan sponsor. The plan specifically grants a benefit which will be compensated at the moment you retire. The pension plans which are offered by prominent businesses and government agencies are final average pay plans. The settle formula is this: monthly benefit is equal to the number of years worked multiplied by the member's salary at retirement multiplied by a factor known as the accrual rate. The benefits are payable in normal form. For single participants, the form is called Single Life Annuity (SLA). For married, the form is named Qualified Joint and Survivor Annuity (QJSA). The forms are paid when you retire, typically at the age of 65.
Again, there are many options as to retirement plans in USA. Most of them are within the means of the employees to pursue. All of the enumerated plans guarantee a secure retirement since financial lack is considered by all as a disadvantage. In choosing your retirement plans, it is advisable that you opt what you think is best and the one which fit your budget. You should be practical in doing this so that your retirement plan will not be a burden to you.
