What Are The Common Types Of Qualified Retirement Plans?
A qualified retirement plan is one that receives favorable tax treatment under federal tax laws. These plans are set up by employers for the benefit of their employees. Generally, employers receive tax deductions for these plans while employees receive deferred tax status on the money they save in their qualified retirement accounts. This means that employees are not taxed on their contributions or the interest they earn until they begin taking distributions from their retirement accounts.
At the broadest level, employers can offer a defined contribution plan or a defined benefit plan. In a defined contribution plan, the employer contributes a set amount of money each month to the employee’s retirement account. The employee also may contribute to this account, usually through a pre-tax wage contribution made each pay period. At retirement, the employee gains access to the account, after adjustments are made for any expenses, losses or additional income to the account total. These plans do not offer a fixed level of benefits at retirement, and the employee will not know how much he or she will have from the account until retirement.
The defined benefit plan is defined under the US Tax Code as any type of plan that is not a defined contribution plan. The distinguishing feature of these plans is that the employee will receive a determinable amount of money each month at retirement. Defined benefit plans are usually pensions or annuities. Some employers also offer a combination of the defined contribution and defined benefit plan to their employees.
Some of the most common types of vehicles used by employers to set up retirement accounts for their employees are the 401(k), 403(b), Keogh or SIMPLE Plan.
- The 401(k) is the most popular type of retirement account. It offers tax deductions for employers and tax-deferred status on employees’ contributions. Many employers also will offer to match the employees’ contributions up to a certain percentage. If an employee leaves the company, the money vested in the 401(k) can be rolled over into another qualified retirement account offered by their new employer or into an Individual Retirement Account (IRA).
- The 403(b) is a tax-sheltered annuity (TSA) that is available only to employees in certain fields. Currently, employees of the public education system, Indian tribal governments, self-employed ministers and charitable organizations with tax-exempt status may contribute to 403(b) plans. While some employers also will make contributions to 403(b)s for their employees, these plans are mainly funded by the employees themselves through automatic pre-tax contributions from their paychecks.
- Keogh plans are for self-employed workers. Workers make pre-tax contributions to the plan and these contributions are not taxed until the worker begins taking distributions from the account at retirement. Under the requirements of the U.S. Tax Code, those with a Keogh are required to make the same percentage of a contribution each year, regardless of whether or not they made a profit that year.
- The SIMPLE Plan (Savings Incentive Match Plan for Employees) is designed for small businesses to provide retirement accounts for both the business owner and his or her employees. SIMPLE plans must be set up as an IRA, 401(k) or deferred compensation arrangement.
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