Retirement Options

                                                             Retirement Options

                                                                        By: Amy McCann

 

                This paper presents a general overview of some common retirement plans. This paper will touch upon defined benefit plans, 401(K) plans, Profit Sharing Plans, Employee Stock Ownership (ESOP), and Money Purchase Plans.

            A defined benefits plan is also known as a traditional pension plan. This plan guarantees a specific benefit amount at the time of retirement in either the form of an exact dollar amount or the exact amount is calculated based on salary and the number of years of service (Types of Retirement Plans). Generally employers contribute to these plans (Choosing a Retirement Plan). Upon retirement an individual may choose to receive payments periodically (monthly, quarterly) for the rest of their life or the individual may choose to take a lump sum upon retirement. There is also a survivor option in which if the policy holder dies, the surviving spouse may continue to receive a portion of the benefit amount for the rest of their life (Pensions: Defined Benefit Plans).

            Within a 401(k), employees often make contributions directly from their paycheck to their 401(k) accounts. This is known as elective deferral contributions and the benefit of contributing via elective deferral is that the contributions are tax deferred and do not have to be paid until the time of distribution (Choosing a Retirement Plan: 401(k)). Employers have the option of contributing to 401 (k) plans as well, either by match the amount the employee has contributed or matching a portion of that amount (Types of Retirement Plans). Employee contributions to a 401(k) are completely flexible, in that an individual may choose the percentage of their paycheck they would like to contribute to the plan (Choosing a Retirement Plan:401(k)).

            There are three general types of 401(k) plans, the traditional 401(k), the safe harbor 401(k) and the SIMPLE 401(k). In a traditional 401(k), employees contribute a certain amount of their own money to the plan and the employer contributes to the account as well (401(k) Resource Guide).. With this plan, the money the employer contributes is subject to a vesting schedule, which specifies how much of that money you are entitled to after a certain number of years of service within the company (401(k) Resource Guide)..

            In a safe harbor 401(k), all employees who choose to make contributions via elective deferral will receive matching contributions from the employer, although all employees will receive contributions from the employer even if they do not contribute through elective deferral. The employer contributions are 100% vested in the safe harbor 401 (k) (401(k) Resource Guide).

            The SIMPLE 401(k) provides a means for small business owners to provide retirement benefits for their employees. Within this plan employers match employee contributions and these contributions are fully vested (401(k) Resource Guide). In each of these plans, upon retirement, 401(k) distributions will be made to the account holder.

            A profit sharing plan is a plan in which a company chooses to share a percentage of their earnings with their employees. The employer has flexibility in regards to the percentage of earnings shared (What You Should Know About Your Retirement Plan). The benefit allocated to an employee’s account are generally based on salary (My Company has a Profit Sharing Plan. How do these work?). Typically, the contributions are subject to a vesting schedule of 3-6 years (My Company has a Profit Sharing Plan. How do these work?). The funds within an employee’s account are available upon retirement or an employee may receive the benefits after a certain number of years of service with the company.

            An example of a profit sharing plan is employee stock ownership or ESOP. ESOP is when employees receive shares of stock within a company (What You Should Know About Your Retirement Plan). The shares of stock are set aside in individual employees’ accounts and as the time an employee vests within a company increases, the right to those shares increases as well (How an Employee Stock Ownership Plan (ESOP) Works).

            In contrast to a profit sharing plan, within a money purchase plan an employer is required to make an agreed upon contribution to an employee’s account annually, regardless of the company’s profits or lack thereof (Choosing a Retirement Plan: Money Purchase Plan).  The amount contributed is typically a percentage of an employee’s salary or wages.        

            This is a very general outline of these retirement plans and each is more complex than portrayed above. When deciding upon retirement plans it is wise to consult a professional who can offer guidance, knowledge and experience within the financial realm. Don’t be afraid to ask plenty of questions in deciding upon a retirement option and know all of the benefits as well as the risks associated with each plan.

                                                                                  

 

By: Kelsey Lubin

 
 

The following information gives a brief overview of various retirement plans and options. The plans mentioned below are the Governmental Plan 414(d), 403(b), 457(b), 409A, Designated Roth Accounts, and automatic enrollment plans. The information provide should be taken lightly, being that its purpose is to give a general idea of the available options.

                A governmental plan, under Code section 414(d), is a plan that is in place for the employees of the United States or its agency, a state or political division, and those belonging to an Indian tribal government. One type of governmental plan is a 403(b) which is a tax sheltered annuity plan (TSA). A TSA plan involves an employee putting contributions of his income into a retirement plan. These contributions are not taxed until they are withdrawn from the retirement plan. The employer can also make contributions to this fund. There is a maximum amount of income that an employee is allowed to contribute to a TSA plan per year. This type of plan is similar to a 401(k). A 403(b) is often offered by public schools and certain tax-exempt organizations.

                 A 457(b) plan refers to a plan of deferred compensation. This plan is available to state and local governments as well as some tax-exempt entities. Deferred compensation plans allow employees of these organizations to defer the income tax on their retirement savings to later years. This type of plan allows employees to set aside a sum of their income to be directly added to their retirement savings without this portion of income being taxed. As of 2012 the maximum amount income that could be tax deferred was $17,000.

                Nonqualified deferred compensation plans, also referred to as a 409A, refers to income that is earned by an individual in one year, but is not paid until the following year. This is most often seen with teachers who work 10 months out of the year, but elect to have their income deferred over a 12 month period. Based on the amount of compensation that is deferred, the individual may be required to pay a greater income tax on the deferred portion of compensation. This plan differs from elective deferrals that are then placed into a qualified account such as a 401(k), 403(b), or 457(b).

                A designated Roth account is a separate account in a 401(k), 403(b), or 457(b). It allows an individual to transfer eligible rollover compensation to a separate account in the same plan. It is required that a Roth contribution program be in place in order to have a designated Roth account. The plan is also required to accept elective deferrals that the participant elects to include in his gross income. The records of the in-plan rollover account must be kept separate from the accounting records of all contributions.

                An automatic enrollment plan involves an employer automatically deducting an elective deferral from an employee’s income, and placing it in a qualified account. The employee has the opportunity to elect to make no contribution or to contribute a different amount. An example of a plan that qualifies for this feature is a SIMPLE IRA or a 401(k), this feature is available for any plan that allows elective salary deferrals. An employer is required to provide his employees with the option to contribute a different amount or not to contribute at all. Depending on the employer’s plan, the employee may have the option to withdraw the compensation up to 90 days after the automatic deferral.

                The information that is provided above is meant to provide one with a simplified overview of a few options that may be available. This is aimed at giving a general idea of retirement plans, and should be taken cautiously when deciding on retirement options.

 

                                                             Works Cited

Choosing a Retirement Plan. IRS, January 5,2012. Web. 17 February 2012 . http://www.irs.gov/retirement/article/

Choosing a Retirement Plan: Money Purchase Plan. IRS, October 21, 2011. Web. 22 February    2012. http://www.irs.gov/retirement/article/0,,id=108949,00.html

Choosing a Retirement Plan: 401(k). IRS, October 4,2011. Web. 17 February 2012.

            http://www.irs.gov/retirement/article/0,,id=108942,00.html

 

How an Employee Stock Ownership Plan (ESOP) Works. NCEO. 2012. Web. 21 February 2012.        http://www.nceo.org/articles/esop-employee-stock-ownership-plan

 

My Company has a Profit Sharing Plan. How do these work? Axa Equitable. 2011. Web. 20         February 2012.                                        http://www.axa-equitable.com/retirement/how-do-company-profit-sharing-plans-work.html

Pensions: Defined Benefit Plans. The Free Dictionary, 2012. Web. 19 February 2012.                                                                                                 http://legal-dictionary.thefreedictionary.com/Defined+benefit+plan

Types of Retirement Plans.  United States Department of Labor. Web. 17 February 2012.             http://www.dol.gov/ebsa/EAQS/Faq_

What You Should Know About Your Retirement Plan. United States Department of Labor. Web.   20 February 2012. http://www.dol.gov/ebsa/publications/wyskapr.html#ProfitSharingPlan

401(k) Resource Guide. IRS, April 23, 2012. Web. 17 February 2012

            http://www.irs.gov/retirement/sponsor/article/0,,id=151800,00.html

 

 

 

 

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Amy McAdoo,
Apr 28, 2012, 1:04 PM
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