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a portion of their salary to the plan on a pre-tax or Roth basis, with the savings growing tax-deferred until withdrawn in retirement.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 The Child and Dependent Care Credit is a valuable tax credit designed to assist families in managing the costs associated with caring for children under the age of 13 or dependents who are physically or mentally incapable of self-care. This credit is particularly beneficial for working parents, as it helps reduce the financial burden of child care, making it easier to balance work and family responsibilities.
Key Components The Child and Dependent Care Credit consists of several important components:
Definition The Child Tax Credit (CTC) is a tax benefit designed to assist families in managing the financial responsibilities of raising children. It can significantly reduce the amount of tax owed and in some cases, it can even result in a refund.
Key Components The CTC has several important components:
Amount: As of 2023, the credit can be up to $2,000 per qualifying child under the age of 17.
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 The Disability Tax Credit (DTC) is a non-refundable tax credit available in Canada, designed to assist individuals with disabilities in reducing their taxable income. This credit can provide significant tax savings to those who qualify, making it an essential financial tool for many.
Who is Eligible? Eligibility for the DTC is determined based on specific criteria:
Individuals must have a severe and prolonged impairment in physical or mental functions.