Definition A 401(k) plan is a company-sponsored retirement account that employees can contribute to, often with matching contributions from the employer. The plan allows for tax-deferred growth of investments.
Importance of 401(k) Plans 401(k) plans are a critical component of retirement planning, offering employees a tax-advantaged way to save for their future while reducing their current taxable income.
Contribution Limits As of recent IRS guidelines, you can contribute up to $19,500 annually if you’re under 50.
Definition A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations and certain ministers. It allows employees to make tax-deferred contributions from their salary to invest in retirement savings.
Importance of 403(b) Plans 403(b) plans provide a valuable benefit for employees in the nonprofit sector and education, offering a way to grow their retirement savings on a tax-deferred basis, similar to the benefits of a 401(k) in the private sector.
Definition A 457 Plan is a type of tax-advantaged, non-qualified retirement savings plan offered to employees of state and local governments, as well as certain nonprofit organizations. Similar to 401(k) and 403(b) plans, the 457 Plan allows participants to contribute a portion of their salary to the plan on a pre-tax or Roth basis, with the savings growing tax-deferred until withdrawn in retirement.
Importance of 457 Plan The 457 Plan is crucial for government and nonprofit employees as it provides a flexible and beneficial way to save for retirement.
Definition A Cash Balance Plan is a type of employer-sponsored retirement plan that combines elements of both defined benefit and defined contribution plans. Unlike traditional defined benefit plans, where the retirement benefit is determined by a formula based on salary and years of service, Cash Balance Plans define benefits in terms of individual account balances. Each employee has a hypothetical account that grows annually based on a specified interest crediting rate and contributions determined by the employer.
Definition A Deferred Compensation Plan is an arrangement between an employer and an employee that allows the employee to defer part of their income until a later date, typically until retirement. This can be a strategic financial tool for high earners who want to minimize their current tax burden while saving for the future.
Components of a Deferred Compensation Plan Deferral Amount: Employees choose how much of their income they wish to defer, which can be a fixed amount or a percentage of their salary.
Definition A Defined Benefit Pension Plan is a type of employer-sponsored retirement plan that guarantees a specific retirement benefit to employees based on a predetermined formula. This formula generally considers factors such as the employee’s salary history, years of service and age at retirement. Unlike defined contribution plans (e.g., 401(k)), where the final benefit depends on investment performance, a defined benefit plan provides a fixed, predictable income in retirement, which is usually paid out as a monthly annuity.
Definition An Employee Stock Ownership Plan (ESOP) is a type of employee benefit plan that provides workers with an ownership interest in the company. It is a form of employee ownership that is designed to align the interests of employees and shareholders, motivating employees to contribute to the company’s success. ESOPs are unique because they are not just a retirement plan; they enable employees to own shares of the company, often at no upfront cost.
Definition A Money Purchase Pension Plan (MPPP) is a type of employer-sponsored retirement plan that requires fixed contributions to be made by the employer, usually expressed as a percentage of an employee’s salary. Unlike other pension plans that may have benefits tied to the employer’s financial performance, MPPPs offer a more predictable savings approach for retirement, as the contributions are predetermined.
Components of a Money Purchase Pension Plan Employer Contributions: Employers are required to make annual contributions to the plan, which is usually a fixed percentage of each participating employee’s salary.
Definition Non-Qualified Deferred Compensation (NQDC) Plans are arrangements that allow employees to defer a portion of their salary or bonuses until a later date, typically retirement. Unlike qualified plans, such as 401(k)s, NQDC Plans do not have to comply with IRS contribution limits or ERISA regulations, providing both employers and employees greater flexibility.
Key Components Deferral Amounts: Employees can choose how much they want to defer, which can be a percentage of their salary or a specific dollar amount.
Definition A pension fund is a type of investment pool that collects and manages funds contributed by employers and employees to provide retirement income. Essentially, it serves as a safety net, ensuring that individuals have a reliable source of income once they retire. The money is invested in various assets to grow over time, providing a sustainable income stream for beneficiaries.
Components of a Pension Fund Understanding the components of a pension fund can help decipher how they operate: