Types of Retirement Plans You Should Know About
Retirement planning will be difficult. For that reason, it’s crucial to take this moment to see about the various types of retirement programs and their benefits. What are the other alternatives for retirement funds? These other types of retirement accounts are: Personal retirement accounts (IRAs ), business retirement programs, retirement annuities, and Social safety. The retirement account on its own isn’t considered the investment; what gives it the finance is when you choose funds, bonds, shared funds or different types of securities to deposit into your retirement account. What sort of investor/saver represents you and what represent these pros and cons to each choice? There are two choices you may decide when it comes to investing and keeping: Making it on your own or having the business advisor put for you. Opting to spend on your own will save you a lot of money because you are cutting out the fees associated with the business authority. The falling side to putting on your personal is not allocating enough time.There are various types of retirement plans which we will have a look at in this article. Let’s start with the listing of these plans and then view in brief about them:
- Qualified Retirement Plans
- Non Qualified Retirement Plans
- THE ERISA
- Defined Benefit Plans
- Qualified Plans for Small Employers
- Keogh Plans
- Individual Retirement Plans
Qualified Retirement Plans
Qualified Retirement plans are the saving plans for those who are looking into their retirement savings which will benefit all the employees and beneficiaries. Qualified Retirements are helpful in providing the tax benefits and these plans need to be approved by the IRS. The plans must be permanent and in writing communicated to all employees, can be defined contributions or benefits, and cannot favor highly paid employees executives, or stockholders qualified
Features of Qualified Retirement Plans
The qualified retirement plans have the following features:
- The employer contributions are tax deductible as a business expense.
- The employee contributions are made with pre-tax dollars interest earned on contributions is tax deferred until withdrawn upon retirement
Tax Benefits of Qualified Retirement Plans
- Employers’ contributions are tax deductible and not treated as taxable income to the employee.
- The contributions made by the employee are with pre-tax dollars and the interest earned on the is tax deferred for both employee and employer.
- Employees only pay taxes on the amounts withdrawn.
- Withdraws by the employee are treated as taxable income
- Withdrawals by the employee made prior to age 59 and a half are assessed an additional 10% penalty tax .
- Withdrawals are mandatory at age 70 and a half and failure to take the required withdrawal results in a 50% tax penalty on those funds.
Non Qualified Retirement Plans
Non-qualifying Retirement plans have the following features:
- They do not need to be approved by the IRS.
- They can discriminate in favor of certain employees.
- The contributions are non tax-deductible.
- An interest earned on contributions is tax deferred until withdrawn upon retirement.
The Employee Retirement Income Security Act
ERISA was enacted to provide minimum benefit standards for pension and employee benefit plans including fiduciary responsibility reporting and disclosure practices and vesting rules
These are the rules which will determine how the participants in the ERISCA will achieve the ownership of the contributions which were made by the employers. There are two types of vesting:
- Cliff Vesting
- Graded Vesting
Defined Benefit plans
Defined benefit plans pay a specified benefit amount upon the employees retirement. The benefit is based on the employee’s length of service and earnings. The maximum benefit is the employees average annual salary not to exceed one hundred and ninety five. Thousand defined benefit plans are mostly funded by individual and group deferred annuities.Defined contribution plans do not specify the exact benefit amount until distribution begins.The two most popular defined contribution plans are
- Profit sharing
- stock bonus or money purchase plans
Qualified Plans for Small Employers
If you have small company with less number of employees and you have less revenue, there are some retirement plans for these types of employers which are mentioned below:
Simplified Employee Plans
Simplified employee pension plans are qualified plans for small employers. They are a mix of an IRA and profit sharing plan. Each employee has his own IRA. The employer makes contributions into the employee’s IRA. An employer may deduct up to 25% of the total contributions made to all employees
Savings Incentive Match Plan for Employees
This retirement saving plan is also known by the name “SIMPLE” and is handy for the small businesses having the employee count less than 100. The employer makes tax deductible contributions equal to two percent of the eligible employees compensation or matching the employees contribution up to three percent. Contributions are fully vested immediately. Early withdrawals are subject to a 25% penalty.
Keogh plans which are also referred to as HR 10 are for self-employed persons such as doctors, farmers lawyers or other sole proprietors. Defined contributions Keogh’s have a maximum contribution of $49 thousand per year while defined benefit Keogh’s have maximum benefits of a hundred and ninety five thousand dollar per year. Contributions are tax deductible and interest and dividends are tax deferred.
Individual Retirement Plans
Individual Retirement Plans also called IRAs are established by an individual to save for retirement. There are various types of IRA’s which are described below:
Traditional IRAs allow an individual to contribute a limited amount of money per year and the interest earned is tax deferred until withdrawal. Contribution limits are indexed annually. Withdrawals made prior to age 59 and a half are assessed an additional 10% tax penalty. Withdrawals are made mandatory at the age of 70 and a half and failure to take the required withdrawal amount will results in a 50% tax penalty
Roth IRAs are designed so that withdrawals are tax-free. The contribution limit for the Roth IRA is the same as that of the traditional IRA’s but the benefit of ROTH IRA is that they are not tax deductible. Interest on contributions is not taxable as long as the withdrawal is qualified. Qualified distributions must occur after five years in the event of death or disability of the individual, first time home buyers are at the age of 59 and a half. Individuals with higher incomes may not contribute to a Roth IRA.
Taxation of Benefits
Contributions made with tax dollars are not taxed upon withdrawal. However tax deferred interest is taxable upon withdrawal.
Transferring of funds from one IRA or any other qualified plans to another is known as rollover. You are entitled to pay 20% as a tax if the funds are not deposited in another plan within 60 days of release of your funds.
As we have described all the Retirement Saving plans, it’s your time to invest in the best plans and make your future safe and earn a lot of perks during your retiring age with these retirement plans.