Defined Contribution Plans
Often when people think of retirement the term that first comes to mind is “401(k).” Defined contribution plans include other options in addition to the traditional 401(k).
A defined contribution plan is a retirement plan in which the employee and/or the employer contribute to the employee’s individual account under the plan. The vested amount in the account at distribution includes the contributions and investment gains or losses, minus any administrative fees.
Typically, the contributions and earnings are not taxed until distribution. The value of the account will change based on contributions and the value and performance of the investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans and profit-sharing plans.
Cash Balance Retirement Savings Plan
Instead of having a retirement investment based on a formula that takes into account your age, how long you were on the job, and your average salary during your last few years of employment, a cash balance plans allows your employees and your own cash balance plan to be credited with a set percentage of your salary each year, plus a set interest rate that is applied to your balance.
With a cash balance plan you will get a statement each year that illustrates the hypothetical value of your account along with the sort of monthly income payout that will generate when you retire at 65.
Additionally, a value-add to your employees is that if they choose to leave the company before retirement age, they may take the vested portion of their cash-balance plan as a lump sum and roll it into an IRA.
457 Defined Contribution Plans
A 457 Plan can function very similar to a traditional 401(k) plan.
A 457 plan is a type of defined contribution retirement plan available to state and local public organizations, but can also be offered by select nonprofit organizations.
What is a 457 Retirement Plan?
This form of retirement plan works very similar to a traditional 401(k) plan; allowing the employees options to divert part of their salary into the plan where money is automatically deducted from their paycheck before taxes are taken out.
403(b) Defined Contribution Plans
A 403(b) plan is a kind of defined contribution retirement plan. It may be offered to employees of government and tax-exempt groups, such as schools, hospitals and churches.
Employees who are eligible can defer money from their paychecks into their 403(b) accounts, which work the same as way as 401(k) plans. 403(b) plans may also sometimes offer a Roth option.
Owner-Only Defined Benefit Plan
Optimal for business owners with no employees.
An owner-only defined benefit plan is a defined benefit plan that is ideal for business owners with no employees other than their spouses (including self-employed individuals, corporations, and partnerships) who desire to maximize their retirement contributions.
WHAT ADVANTAGES COME WITH AN OWNER-ONLY DEFINED BENEFIT PLAN?
Self-employment brings with it great benefits as well as unique difficulties. TrueNorth Retirement Services is uniquely knowledgeable about those important nuances of ownership and self-employment.
One of the greatest benefits to consider with an owner-only defined benefit plan is that your annual contributions are capable of exceeding the typical maximum of other common types of retirement plans allowing you to save and invest more each year.
WHEN SHOULD I CONSIDER AN OWNER-ONLY PLAN?
An owner-only defined benefit plan should be considered if you fit the following factors:
- You want to contribute more than $53,000 or 25% of your compensation and deduct those investments from your taxes
- You are willing to contribute for a minimum of three years understanding that if business revenue or conditions shift you can contribute more or less each year as necessary.
A retirement savings plan for all types of organizations.
Every organization deserves a retirement savings plan. For tax-exempt organizations, getting a retirement plan in place will help your employees save for the future and create a stronger sense of security in their current employment.
WHICH ORGANIZATIONS QUALIFY FOR A TAX-EXEMPT RETIREMENT PLAN?
Organizations exempt from income tax under Internal Revenue Code Section 501 (can include private foundations and organizations)
Political organizations described in IRC 527
Organizations described in IRC 4947(a)
Prepaid legal plans described in IRC 120
Welfare benefit funds described in IRC 4976
Your Defined-Benefit Retirement Plan
There are many ways for employers to assist long-time employees with their retirement. One of the most common and effective ways is through a defined-benefit retirement plan.
What’s a Defined-Benefit Retirement Plan?
A defined-benefit retirement plan is a fixed, predetermined benefit built out for employees at retirement, generally in the form of a pension. This plan guarantees a specific payout or benefit for employees upon retirement.
How Does a Defined-Benefit Retirement Plan Work?
Employers make regular contributions, generally a percentage of an employee’s pay, into an account. This account grows tax-deferred. While it varies from plan-to-plan, some employees may be able to make contributions to their accounts as well.
A defined-benefit plan is calculated using an advanced formula that accounts for variables such as age, earnings, and years of service. A defined-benefit retirement fund differs from other pensions, in that, when poor returns result in funding shortfalls, employers need to account for the lost funding.
At retirement, the plan may be annuitized to be paid throughout the employee’s lifetime, or it may be delivered as a lump sum.
Advantages of a Defined-Benefit Retirement Plan
Both employees and employers can enjoy the advantages of investing in a defined-benefit retirement plan.
- Contribute more each year
Being able to contribute more allows employers to deduct more from their taxes, saving significant funding year-to-year.
- Offer an uncommon benefit
While providing a defined-benefit retirement plan isn’t unheard of, it certainly isn’t universal. Employees will be attracted to a benefit like this, and for good reason.
Employees enjoy a retirement plan that:
- Requires no investment directly from them
- Has predictable payout
- Delivers a fixed income throughout retirement
While these plans do have many advantages, employers should keep in mind that defined-benefit plans are often more complex and thus, more costly to establish and maintain than other types of plans.
TYPES OF DEFINED BENEFIT PLANS
At TrueNorth Retirement Services, we offer assistance in administering many different defined-benefit retirement plans in Salt Lake County, Utah and Boise, Idaho.