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 Thrift Savings Plan (TSP) is a defined contribution retirement savings plan specifically designed for federal employees and members of the uniformed services, including the Ready Reserve. Established under the Federal Employees’ Retirement System Act of 1986, the TSP provides participants with a means to save for retirement on a tax-advantaged basis, similar to 401(k) plans available in the private sector. Participants can choose between traditional (pre-tax) and Roth (post-tax) contributions, allowing for flexible retirement planning based on their financial goals.
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 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a portion of their salary to the plan on a pre-tax or Roth basis, with the savings growing tax-deferred until withdrawn in retirement.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 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 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.
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.