Plans described below offer a high level overview of types of plans that may be sponsored by employers. These plans are subject to specific legal requirements and annual contribution limits.
Defined Benefit Plan
Defined benefit plans provide a fixed, pre-established benefit for employees at retirement. Employees often value the fixed benefit provided by this type of plan. On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. However, defined benefit plans are often more complex and, thus, more costly to establish and maintain than other types of plans.
Learn more at https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-defined-benefit-plan
Defined Contribution Plan
Many employers today offer a defined contribution plan such as a 401(k) or a 403(b) plan. Here’s how they work:
- Contributions are deducted from your paycheck, in most cases on a pre-tax basis.
- Employers have the option to contribute to employees’ accounts.
- The money can be invested in stocks, bonds, mutual funds, or other investments.
- Your account is adjusted for earnings and losses.
- Distributions, including earnings, are counted as taxable income at retirement.
- Plan terms determine when withdrawals may be made. Possible withdrawal penalty for withdrawals before age 59 ½ .
Learn more at https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview and https://www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans
This is a relatively new option that plan sponsors may adopt in their defined contribution plans. Under these plans, contributions are made from after-tax dollars and grow tax free. Contribution limits are higher than the Roth Individual Retirement Account (IRA), but cannot exceed the normal 401(k)/403(b) plan contribution limit.
Learn more at https://www.irs.gov/pub/irs-pdf/p4530.pdf
A profit-sharing plan allows for discretionary employer contributions only. There is no set contribution amount and it can vary year to year. Also, your business does not need profits to make contributions to a profit-sharing plan. If contributions are made, a set formula for determining how the contributions are divided must be in place.
Learn more at https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-profit-sharing-plan
Payroll Deduction IRA
Under a Payroll Deduction IRA, employees establish an IRA (either a Traditional or Roth) with a financial institution and authorize a payroll deduction amount for it. A business of any size, even if you’re self-employed, can establish this type of plan. Payroll Deduction IRAs are good starter plans that encourage savings by employees before earnings go toward day-to-day expenses.
Learn more at www.irs.gov/retirement-plans/plan-sponsor/payroll-deduction-ira
A SIMPLE IRA plan provides small employers with a simplified method to contribute toward their employees’ and their own retirement savings. Employees may choose to make salary reduction contributions and the employer is required to make either matching or non-elective contributions. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each employee.
Learn more at www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-simple-ira-plans