A qualified retirement plan is one that receives favorable tax treatment under federal tax laws. These plans are set up by employers for the benefit of their employees. Generally, employers receive tax deductions for these plans while employees receive deferred tax status on the money they save in their qualified retirement accounts. This means that employees are not taxed on their contributions or the interest they earn until they begin taking distributions from their retirement accounts.
At the broadest level, employers can offer a defined contribution plan or a defined benefit plan. In a defined contribution plan, the employer contributes a set amount of money each month to the employee’s retirement account. The employee also may contribute to this account, usually through a pre-tax wage contribution made each pay period. At retirement, the employee gains access to the account, after adjustments are made for any expenses, losses or additional income to the account total. These plans do not offer a fixed level of benefits at retirement, and the employee will not know how much he or she will have from the account until retirement.
The defined benefit plan is defined under the US Tax Code as any type of plan not a defined contribution plan. The distinguishing feature of these plans is that the employee will receive a determinable amount of money each month at retirement. Defined benefit plans are usually pensions or annuities. Some employers also offer a combination of the defined contribution and defined benefit plan to their employees.
Some of the most common types of vehicles used by employers to set up retirement accounts for their employees are the 401(k), 403(b), Keogh or SIMPLE Plan.
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