Qualified Retirement Plans

401(k)
Known for allowing employees to defer income into a qualified retirement plan for federal income tax purposes, 401(k) plans can also be designed to allow an employer to make matching contributions, or discretionary profit-sharing contributions on behalf of all employees.

Profit Sharing
One of the simplest and most flexible of all qualified retirement plans, profit-sharing plans generally allow the employer to make discretionary annual contributions of up to 15 percent of eligible compensation for all participating employees. Contribution amounts may be varied each year.

Money Purchase
A traditional qualified retirement plan, the money purchase plan offers less flexibility than certain other plans, but higher contribution limits. Generally, the employer may select any percentage contribution up to 25 percent of eligible compensation, but once selected may not change the selection without amending its plan. Contributions must be made on behalf of all eligible employees on a nondiscriminatory basis.

Defined Benefit
A Defined Benefit pension plan is a retirement plan, offered by some employers, that pays a set amount each year during retirement. Also called a DB Plan, it guarantees a specific amount of benefits to employees, calculated using a formula that typically includes your final salary, years of service, and a fixed percentage rate.

Most company DB Plan benefits are paid out in the form of an annuity, a fixed monthly payment for the rest of your life. The formula used to calculate company pension plan benefits typically includes your final salary, years of service, and a fixed percentage rate (often 2%). All else being equal, the “loyal employee” is rewarded and the job-hopper suffers when this type of plan is used.

SIMPLE
The SIMPLE-IRA is a tax-deferred retirement plan provided by sole proprietors or small businesses (fewer than 100 employees) who do not maintain or contribute to any other retirement plan. Contributions are made by both the employee and the employer. In a SIMPLE-IRA, contributions and the investment earnings can grow tax-deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income.

Annually, the maximum employee contribution is $7,000 ($7,500 if age 50 or older), plus your employer’s contribution. With the exception of the higher contribution limits, SIMPLE-IRAs are subject to the same rules as a regular IRA.

SEP-IRA
A SEP-IRA, or Simplified Employee Pension IRA, is a tax-deferred retirement plan provided by sole proprietors or small businesses, most of which do not have any other retirement plan. Contributions are made by the employer, up to 20% of each employee’s total compensation, with a maximum contribution of $40,000. With the exception of the higher contribution limits, they are subject to the same rules as a regular IRA.

KEOGH
Keoghs are designed for workers or partners with self-employment income. Currently, Keoghs are for self-employed individuals or partners, including sole proprietors who file Schedule C or a partnership whose members file Schedule E.

403(b)
Designed only for certain non-profit and educational organizations, this plan allows employees to defer pre-tax income (for federal income tax purposes) into a retirement plan while giving the employer the ability to make certain additional contributions.

457
These plans are similar to 403(b) plans mentioned above, however are designed exclusively for use by governmental entities and quasi-governmental agencies. Often employees contribute to these plans as a supplement to their employer’s regular retirement plan.