| A defined benefit
pension normally provides a specific monthly benefit from the time
you retire until you die. This monthly benefit is usually a percentage
of your final salary multiplied by the number of years you’ve been
with the company. Defined benefit pensions are usually funded completely
by your employer. |
| A money purchase
pension provides either a lump-sum payment or a series of monthly
payments. The size of this benefit depends on the size of the
contributions to the plan. Your employer normally funds money purchase
pension plans, although some will allow employee contributions. |
| Your employer funds a profit-sharing
plan; employee contributions are usually optional. Upon your
retirement, you will normally receive your benefit as a lump sum. The
company’s contributions — and thus your retirement benefit — may
depend on the company’s profits. If a profit-sharing plan is set up as
a 401(k) plan, employee contributions may be tax deductible. |
| A savings plan provides
a lump-sum payment upon your retirement. The employee funds savings
plans, although employers may also contribute. Employees may be
permitted to borrow a portion of vested benefits. If a savings plan is
set up as a 401(k) plan, employee contributions may be tax deductible. |
| Under an employee stock
ownership plan (ESOP), an employer periodically contributes company
stock toward an employee’s retirement plan. Upon retirement, employee
stock ownership plans may provide a single payment of stock shares. Upon
reaching age 55, with 10 or more years of plan participation, you must
be given the option of diversifying your ESOP account up to 25 percent
of the value. This option continues until age 60, at which time you have
a one-time option to diversify up to 50 percent of the account. |
| Tax-sheltered annuities
or 403(b) plans are offered by tax-exempt and educational
organizations for the benefit of their employees. Upon retirement,
employees have a choice of a lump sum or a series of monthly payments.
These plans are funded by employee contributions, and these
contributions are tax deductible. |
| Individual retirement
accounts are available to virtually any wage earner at any salary.
They are funded completely by individual contributions. IRAs are usually
held in an account with a bank, brokerage firm, insurance company,
mutual fund company, credit union, or savings association. They provide
either a lump-sum payment or periodic withdrawals upon retirement. There
are two basic types of IRAs: traditional and Roth. Contributions to
traditional IRAs may be tax deductible and are taxed upon withdrawal,
whereas contributions to Roth IRAs are not tax deductible but qualified
withdrawals are tax-free. |
| Keogh plans were
specifically designed for self-employed people. They are funded
completely by wage-earner contributions and provide either a lump-sum
payment or periodic withdrawals upon retirement. Keogh plans have the
same investment opportunities as IRAs. Contributions to Keogh plans are
tax deductible within certain generous limitations. |
| Simplified employee
pensions, or SEPs, were designed for small businesses. Like IRAs,
they can provide either a lump-sum payment or periodic withdrawals upon
retirement. Unlike an IRA, the employer primarily funds them, although
some simplified employee pensions do allow employee contributions. SEPs
are usually held in the same types of accounts that hold IRAs. Employee
contributions — in those SEPs that allow them — may be tax
deductible.
Savings Incentive Match Plans for Employees,
or SIMPLE plans, were designed for small businesses. They can be set up
either as IRAs or as deferred arrangements — 401(k)s. The employee
funds them on a pre-tax basis, and employers are required to make
matching contributions. Principal and interest grow tax deferred.
Strictly speaking, annuity
contracts are not qualified retirement plans. But they do provide
tax-deferred growth like qualified retirement plans. They are also
subject to withdrawal conditions very similar to qualified retirement
plans, but there are no contribution limits. They can be used very
effectively to supplement your employer-provided retirement plan.
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