Retirement Planning


Retirement plans by the Federal government are controlled by the Labor Department and monitored by the IRS. Most of the retirement pension plans are covered by the Employee Retirement Income Security Act (ERISA). The EBSA – Employee Benefits Security Administration of the Department of Labor is responsible for enforcing the provisions of ERISA.

The retirement plans mentioned here are qualified plans and are broadly of two types – defined benefit plans and defined contribution plans.Defined benefit plans defines a benefit which is a specified monthly amount at retirement. The plan is based on a specific formula with variables including salary and employment service.  The benefits under these plans are protected by the Federal Insurance. The benefits are paid as Single Life Annuity (SLA) for individuals and as Qualified Joint & Survivor Annuity for couples.

Cash balance plan is a defined benefit plan. Here the employees account is credited every year with an amount from the employer and an interest rate linked to an index. Fluctuations in the investment do not affect the benefits promised as the risk is borne by the employer.

Defined Contribution plan does not pay benefits as specified monthly amount on retirement. It is an employer sponsored plan with an individual account for each participant. Examples include 401(k), 403(b), employee stock ownership plans, Individual retirement account (IRA) and profit-sharing plans. Here, both employee and employer contribute in the account usually at a given rate. This amount in the employees account may go up or down due to gains and losses in the investment. Hence the amount is liable to fluctuate.

Individual retirement account (IRA) are of two types: A simple IRA and a SEP IRA.Simple IRA is provided by the employer and is very similar to plan 401 (k). The only difference here is that it has very simple administration procedures. It is a pre-tax salary reduction plan with lower contribution limits.

SEP IRA, Simplified Employee Pension IRA is for employers for providing benefits to their employees or themselves. All employees receive same benefits under this plan. And there is no salary reduction for employees.

In Stock bonus plans also known as Profit sharing plan employer decide, how much contributions can be made from the profits or other sources annually to the employee account. Each employee is allocated a portion of this contribution based on some formula. 401 (k) can be a part of this plan.

In 401 (k) plans, one of the most popular retirement plans ever, a part of employee salary is contributed towards their retirement benefit before taxes. Here employers may also add a part of contribution from their side.

Other retirement plans include the Keogh or HR10 plans for self employed individuals, ESOP and Money purchase pension plans.


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