Retirement Plans

Money Purchase Pension Plans

A money purchase pension plan is very similar to a profit-sharing plan; however, the key difference revolves around the flexibility of payment from the employer.  As opposed to the profit sharing plan, money purchase pension plans are mandatory; meaning that the employer is guaranteeing that a certain amount of contribution (ie. 7%) will be contributed to the employee’s pension plan every year.

Roth 401k Overview

A Roth 401k is a special form of a traditional 401(k); however, there is one key difference in the tax treatment applied to both. A traditional 401k allows for the contribution of pre tax dollars into a retirement account while the Roth 401k allows employees to contribute after tax dollars to this account. The tax benefits of a Roth 401k are realized when distributions are made at retirement; as long as the rules are followed, no taxes will be withheld from the distributions that are made. This is the opposite of a traditional 401k in which taxes are paid when distributions are made at a retirement age.

401k Overview

The most common and popular type of defined contribution retirement savings account is the 401k, or 401(k). The 401k provision in the tax code allows workers to avoid paying income taxes on the portion of their income which is elected to be moved directly into a 401k account. This retirement plan type allows workers to inject tax free dollars into an environment in which it can grow tax free until withdrawals are made at retirement.

Each 401k plan has a list of investment options available to each plan. This is set at the company level. These investment options tend to find top performing, stable funds that will appreciate steadily over time. They include investment options through the form of mutual funds in stocks, bonds, and commodities to name a few. Check with your plan sponsor or administrator for more information

Profit Sharing Overview

Profit sharing plans are put in place to give employees a sense of ownership, or vested interest, in the company by allowing them to share in the profits of the company and also to help them increase their retirement funds. Even if a corporation decides to take part in a profit sharing, it is not mandatory that they contribute to the plan; it is at the sole discretion of the company. Secondly, conventional thinking would have us believe that profit sharing plans are only paid out when a company makes a profit. This is also not always the case, a company may elect to contribute to the plan even in a loss scenario.

The definition of a qualified plan is one that meets the IRS regulations outlined in section 401 of the tax code.  Qualified plans allow employers to create savings vehicles for their employees which carry special tax rules; one of which allows the employer contribution into the employee account as a tax deductible event.  Employees, on the other hand, will use these plans to accumulate wealth and savings at a tax free rate until retirement.  A great aspect of a qualified plan, for the employee, is that taxes are deferred on contributions and investment gains until the money is withdrawn.