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 Individual Retirement Account (IRA) is a tax-advantaged investment tool designed to help individuals save for retirement. IRAs can be established at a financial institution, allowing investors to hold a range of assets, including stocks, bonds, ETFs and mutual funds.
Importance of IRAs IRAs offer significant tax benefits that can accumulate over time, helping to maximize retirement savings. They are critical for financial planning, especially for those without access to employer-sponsored retirement plans.
Definition A Keogh Plan, also known as an HR-10 plan, is a tax-deferred retirement savings plan designed for self-employed individuals and unincorporated businesses, such as sole proprietorships and partnerships. The Keogh Plan allows for significant contributions, enabling business owners and their employees to save for retirement while enjoying tax advantages.
Importance of Keogh Plan The Keogh Plan is particularly important for self-employed individuals and small business owners who want to maximize their retirement savings while benefiting from tax deductions.
Definition A Rollover IRA is an individual retirement account designed to receive and hold funds rolled over from an employer-sponsored retirement plan, such as a 401(k), 403(b) or 457 plan. This allows individuals to consolidate their retirement savings into a single account while preserving the tax-deferred status of the funds. Rollover IRAs offer a wide range of investment options and greater control over retirement assets.
Importance of Rollover IRA Rollover IRAs are important for individuals who are changing jobs, retiring or simply looking to consolidate their retirement accounts.
Definition A Roth IRA is a type of individual retirement account (IRA) that allows individuals to contribute after-tax income, with the advantage that withdrawals in retirement are tax-free. Established by the Taxpayer Relief Act of 1997, Roth IRAs provide a flexible and tax-efficient way to save for retirement.
Importance of Roth IRA The Roth IRA is particularly beneficial for individuals who expect to be in a higher tax bracket in retirement.
Definition A SEP IRA (Simplified Employee Pension IRA) is a type of retirement savings plan specifically designed for self-employed individuals and small business owners. It allows employers to contribute directly to traditional IRAs (Individual Retirement Accounts) set up in the names of their employees, including themselves if they are self-employed. The SEP IRA offers the advantage of higher contribution limits compared to traditional and Roth IRAs, making it an attractive option for maximizing retirement savings.
Definition A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement savings plan designed specifically for small businesses with 100 or fewer employees. It allows employees to contribute a portion of their pre-tax salary to an Individual Retirement Account (IRA) and requires employers to make matching or non-elective contributions. SIMPLE IRAs offer an easy and low-cost way for small businesses to provide retirement benefits to their employees without the complexities of other retirement plans.
Definition A Solo 401(k), also known as an Individual 401(k) or Self-Employed 401(k), is a retirement savings plan designed specifically for self-employed individuals or small business owners with no full-time employees other than the owner and their spouse. This plan allows for higher contribution limits compared to other retirement accounts, offering both employee and employer contributions, making it a powerful tool for maximizing retirement savings.
Importance of Solo 401(k) The Solo 401(k) is particularly important for self-employed individuals because it combines the features of a traditional 401(k) with the flexibility and simplicity needed for sole proprietors.
Definition A Spousal IRA is a type of individual retirement account that allows a working spouse to contribute to an IRA on behalf of a non-working or lower-earning spouse. This strategy is designed to help couples maximize their retirement savings, even if one spouse has little or no taxable income. A Spousal IRA can be either a Traditional IRA or a Roth IRA, depending on the couple’s financial goals and tax situation.