Kinds of Employer-Sponsored Retirement Plans
Many employees are offered with a variety of retirement plans to choose from on a platter by the employer. The selection must be based on the basis of the circumstances of the employee and what they employer has to offer. Some of the more popular methods are mentioned below:
401(k) The 401(k), 403(b) and 457 plans derive their names from the Internal Revenue Code sections. While 403(b) plans are similar to 401(k), only tax-exempt organizations are eligible for the same. 457 plans, on the other hand, are for governmental entities. The employees are given the chance to defer tax on a portion of their income by contributing the amount to a fund for retirement set under the plan. Employers providing 401(k) or 403(b) plans may hand over the option of a Roth version.
Typically, the legal restrictions to the annual contributions that can be made under these plans are higher than those imposed by IRAs. Moreover, employees aged fifty or above are given the additional option to make up catch-up contributions. Others enjoy an equivalent contribution by the employer, making it virtually free money!
401(k), 403(b) and 457 plans are expected to follow the minimum distribution rules similar to the IRAs. However, the difference lies in the fact that under certain conditions, you can continue to contribute to these plans even after you turn 701/2.
Solo 401(k) plans An individual who is self-employed can take advantage of the solo 401(k) plans. What was earlier denied is now offered by merging the features of 401(k) with other plans to assist in saving more for retirement.
Under it, a self-employed individual can add an amount up to the 401(k) limit including the catch-up amount wherever applicable, along with an additional figure that can be contributed to a SEP IRA. The solo 401(k) is applicable to those in the self-employed business who do not have employees. The presence of employees calls for the adoption of the traditional 401(k) plan. The plan also calls for the generation of income that can cover the amount of contribution, or else the administration and the cost of the plan will be lost.
SIMPLE IRA: SIMPLE (Incentive Match Plans for Employees) IRA plan is a scheme meant for employers with less than hundred employees. Under the plan, the employer is expected to make a contribution equal to that made by the employee or up to a certain limit, typically 3%, or a flat rate of 2% irrespective of the contribution by the employee.
The requirements imposed by the law on the contribution ceiling and the catch-up amount are lower than for 401(k) plans. Though the SIMPLE IRA rules and SIMPLE 401(k) plan rules are similar, the minor differences make the SIMPLE IRA preferable. For example, while limited testing is necessary for SIMPLE 401(k), discrimination testing is not called for in SIMPLE IRAs.
Defined contribution plans: It includes the profit sharing and money purchase plans. The general rules that restrict the employee and employer contributions are different under the defined contribution plans. Where the employer plans and that of the employee are merged, the employee's annual contribution excluding any catch-up amount pulls down the contribution made by the employer.
A defined contribution plan that is ideally suited for the owners of the closely-held business entities is the ESOP.
Defined benefit plan: Though not common as earlier times, one can still find the defined benefit plans even today. Under the plan, the employees are prevented from making contributions and the entire risk of the defined benefit plan is shouldered by the employer. The employer guarantees the annual retirement benefit to the employee under this program. While a defined benefit plan funds is often pooled, the defined contribution plan funds are generally segregated by the employee.
A well-structured defined benefit plans is more expensive to initiate, even though they may permit business owners to add significantly more than the customary defined contribution limits. It is on account of the fact that the contribution amount is defined by the benefit it has to generate. Understanding the income that gets generated out of the fund is less significant when compared to recognizing the factors that may affect the future inflow of benefits. Remaining knowledgeable about these basic facts can assist in making the best decision regarding retirement plans. - 23159
401(k) The 401(k), 403(b) and 457 plans derive their names from the Internal Revenue Code sections. While 403(b) plans are similar to 401(k), only tax-exempt organizations are eligible for the same. 457 plans, on the other hand, are for governmental entities. The employees are given the chance to defer tax on a portion of their income by contributing the amount to a fund for retirement set under the plan. Employers providing 401(k) or 403(b) plans may hand over the option of a Roth version.
Typically, the legal restrictions to the annual contributions that can be made under these plans are higher than those imposed by IRAs. Moreover, employees aged fifty or above are given the additional option to make up catch-up contributions. Others enjoy an equivalent contribution by the employer, making it virtually free money!
401(k), 403(b) and 457 plans are expected to follow the minimum distribution rules similar to the IRAs. However, the difference lies in the fact that under certain conditions, you can continue to contribute to these plans even after you turn 701/2.
Solo 401(k) plans An individual who is self-employed can take advantage of the solo 401(k) plans. What was earlier denied is now offered by merging the features of 401(k) with other plans to assist in saving more for retirement.
Under it, a self-employed individual can add an amount up to the 401(k) limit including the catch-up amount wherever applicable, along with an additional figure that can be contributed to a SEP IRA. The solo 401(k) is applicable to those in the self-employed business who do not have employees. The presence of employees calls for the adoption of the traditional 401(k) plan. The plan also calls for the generation of income that can cover the amount of contribution, or else the administration and the cost of the plan will be lost.
SIMPLE IRA: SIMPLE (Incentive Match Plans for Employees) IRA plan is a scheme meant for employers with less than hundred employees. Under the plan, the employer is expected to make a contribution equal to that made by the employee or up to a certain limit, typically 3%, or a flat rate of 2% irrespective of the contribution by the employee.
The requirements imposed by the law on the contribution ceiling and the catch-up amount are lower than for 401(k) plans. Though the SIMPLE IRA rules and SIMPLE 401(k) plan rules are similar, the minor differences make the SIMPLE IRA preferable. For example, while limited testing is necessary for SIMPLE 401(k), discrimination testing is not called for in SIMPLE IRAs.
Defined contribution plans: It includes the profit sharing and money purchase plans. The general rules that restrict the employee and employer contributions are different under the defined contribution plans. Where the employer plans and that of the employee are merged, the employee's annual contribution excluding any catch-up amount pulls down the contribution made by the employer.
A defined contribution plan that is ideally suited for the owners of the closely-held business entities is the ESOP.
Defined benefit plan: Though not common as earlier times, one can still find the defined benefit plans even today. Under the plan, the employees are prevented from making contributions and the entire risk of the defined benefit plan is shouldered by the employer. The employer guarantees the annual retirement benefit to the employee under this program. While a defined benefit plan funds is often pooled, the defined contribution plan funds are generally segregated by the employee.
A well-structured defined benefit plans is more expensive to initiate, even though they may permit business owners to add significantly more than the customary defined contribution limits. It is on account of the fact that the contribution amount is defined by the benefit it has to generate. Understanding the income that gets generated out of the fund is less significant when compared to recognizing the factors that may affect the future inflow of benefits. Remaining knowledgeable about these basic facts can assist in making the best decision regarding retirement plans. - 23159
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This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice or opinions and assumes no liability in connection with its use. Please contact Doeren Mayhew for more information.
posted by X - Men @ 6:50 AM
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