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a portion of their salary to the plan on a pre-tax or Roth basis, with the savings growing tax-deferred until withdrawn in retirement.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 529 Plan, officially known as a Qualified Tuition Plan is designed to foster savings for future educational expenses under favorable tax conditions. Governed by Section 529 of the Internal Revenue Code, these plans are typically sponsored by states or educational institutions and offer two types: prepaid tuition plans and education savings plans.
Importance of 529 Plan These plans are integral for families gearing up for the hefty financial burden of educational costs.
Definition An annuity is a financial product designed to provide a steady stream of income, typically used for retirement planning. When you purchase an annuity, you make a lump-sum payment or a series of payments to an insurance company, which then promises to make periodic payments back to you at a later date. This can be a great way to secure your financial future and ensure you have a reliable income during your retirement years.
Definition A Coverdell Education Savings Account (ESA) is a tax-advantaged savings account designed to help families save for educational expenses, including elementary, secondary and higher education. Contributions to a Coverdell ESA are made with after-tax dollars, but the earnings grow tax-free and withdrawals are tax-free when used for qualified educational expenses. The Coverdell ESA offers greater flexibility in terms of how funds can be used compared to other education savings plans, such as 529 Plans.
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.