Qualified retirement plans are Congressionally
approved retirement plans which have several major tax benefits.
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The
employer's contributions can be deducted for income tax purposes. |
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The earnings
on the plan's investments accumulate on a tax-deferred basis. |
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When the
funds are distributed at retirement age, they may be eligible for
favorable tax treatment. 1 |
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Taxpayers
may be in a lower income tax bracket after retirement. |
Two Principal Types of
Plans
Qualified retirement plans can generally be
classified as either defined benefit or defined contribution plans. 2
Defined Benefit Plans define the benefit
amount each participant will receive at retirement age and then estimate
how much must be contributed each year to accumulate the necessary future
fund. Interest rates, ages of participants, etc., will have an effect on
the calculation. The amount of the contribution is generally determined by
an actuary. The investment risk rests on the employer.
Defined Contribution Plans generally put a
percentage of current salaries into the plan each year. The amount at
retirement will depend on the investment return and number of years until
a participant retires. The investment risk rests on the participant.
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Plan
Type
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Contributions
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Retirement
Benefits
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Investment
Risk
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Defined Benefit
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Vary
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Fixed
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Employer
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Defined contribution
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Pension - Fixed
Profit sharing - Vary
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Vary
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Employee
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What Is the Best Type of
Plan?
There is no best type of plan. The choice
of what type of plan to use is an individual one. The answer depends on
factors such as employer goals and available cash flow.
1
Those born before 1936 may be able to elect 10-year averaging or capital
gains treatment; these strategies are not available to those born after
1936.
2
Note that some plans have features of both
types.
Continue for more information:
Qualified
Retirement Plans
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