Retirement Planning Dreams

Today, there are more options for people who want to set up a retirement plan. This is good news because there are now more choices but this can also be very confusing for people who are choosing a retirement plan. Well, there are two categories of retirement plans, those which are sponsored by the employers and those which the employer himself puts money to. Let us get to know them better.

Employer sponsored plans

• Profit Sharing Plans. This is a plan which the employer makes all the contributions to. The business owner decides what amount of the profit they would like to share with their employees. The profit they share becomes their contributions.
• Defined Contribution Plan (DC). The employer and the employee both make contributions every month. The money can be invested in mutual funds and even in company stock. The returns will depend on the performance of the investments.
• 401K Plan. This is the most popular retirement plan today and this is also the most used employer-sponsored plan. The contributions are pre-tax and employers match the contributions from their employees. The growth of the interest is tax-deferred until the money is withdrawn when the employee is 59 ½ years and more.
• Defined Benefit Plan (DB). This is a plan which gives the employee a fixed amount to be paid out each month during retirement. This plan was very popular in the 60s and 70s.

Plans for Employees

• Roth IRA. This was born in 1998 and this was named after its staunch supporter, Senator William V. Roth Jr. This is very much like the traditional IRA except for the fact that the initial contribution is not tax deductible and the earnings are also not tax deductible. The money can be withdrawn anytime without any penalty.
• Traditional IRA. This is an account which is tax deferred. The money is not taxed but there is a penalty for early withdrawal.

Filed under: Uncategorized on September 10th, 2011