What are the Main Types of Retirement Plans?

23
September

Preparing for retirement is very important especially if you want to have a constant income when you stop working. It is desirable to continue with the same standard of living after you retire as you had while you were still working. There are different types of retirement plans and all of them vary greatly in terms of the benefits that they provide. Therefore, you need to learn more about each and decide which type of retirement plan best suits your needs.

The most popular type of retirement plan is the pension plan. Traditional pension plans pay a fixed benefit to retirees every month. The amount is calculated based on an employee’s years of service, salary, and a fixed percentage rate. Two of the most popular pension plans are the Defined Contribution Plan and the Defined Benefit Plan.

Defined contribution plans allow the employee or the employer (or both) to make contributions. These contributions are invested, so that the size of your retirement account is determined by the investment performance of the funds invested. The main types of defined contribution plans include 403(b) plans, Section 457 plans, federal thrift savings plans, Keogh plans, Simplified Employee Pensions (SEPs), and SIMPLE Savings Incentive Match Plan for Employees) plans.

A defined benefit plan is based on a formula that includes the employee’s age of retirement, years of employment, and other factors. If you opt for this type of retirement plan then you will receive a specific monthly benefit at retirement. Hybrid plans are available too.

An Individual Retirement Account is also known as an IRA. This retirement plan is suitable for individuals whose employer has not chosen to offer a retirement planning option. One of the main benefits of Individual Retirement Accounts is the tax break. You can opt for Roth IRA, Traditional IRA, SEP IRA, Educational IRA, and Simple IRA. Educational IRA’s are designed for college planning, while SEP IRA’s and Simple IRA’s are employer sponsored. In case you choose a Roth IRA, then you won’t have to pay taxes on your investment. On the other hand, those who opt for a Traditional IRA will only pay taxes on their investment gains. Traditional IRAs are usually held at brokerage firms and banks.

The most common types of retirement plans used today are the IRC 401(k) plans. The 401(k) is a qualified employer sponsored plan, which offers tax benefits to participants. It is usually funded with your before-tax salary contributions. Most employers match those contributions with smaller amounts of the employee’s salary. The contribution is ‘defined’, so you need to invest accordingly your own retirement goals. This type of plan can be combined with private plans. It is important to understand that investments can only be made in the areas mentioned in a list given by the company you work for.

For those individuals who have not been offered a 401k retirement plan from their employer, there are many other options available. Money purchase pension plans offer fixed-percentage compensations, while Stock bonus plans include contributions that are made in the form of company stock. Keep in mind that the availability of an employer sponsored plan depends on your employer. If the company you work for does not provide any type of plan, then you should consider personal pr private retirement plans.

There are lots of options when it comes to choosing a retirement plan. In addition to the research you will do on your own, it is highly recommended to contact an accountant or financial planner to evaluate your current financial situation. Keep in mind that there are many tax advantages associated with retirement plans. With the broad variety of plans out there, each with its own pros and cons, it is crucial that you define your objectives on long term. Saving for retirement and making smart financial decisions will allow you to enjoy the golden years without having to worry about money.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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