Retirement Paper
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Abstract
Each employers retirement benefits are different. Employees need to know exactly what benefits their employer offers and what each type of benefit does for the employee. Employees that understand defined contribution plans, defined benefit plans, 401(k), 403(b), the fiduciary requirements imposed by ERISA, and non-discrimination rules imposed by ERISA will help employees make good decisions regarding their retirement. Each plans has its good points and its bad points and employees need to know what there options are and which will benefit them. Not each plan is offered by employers, but knowing the rules and laws that they have to follow on the plans the do offer will assist the employee in learning how to save for retirement.
Retirement Plans
Each employee wants to receive retirement benefits from there employer. Understanding these benefits can be confusing and difficult unless they know the rules and laws. Employees that understand defined contribution plans, defined benefit plans, 401(k), 403(b), the fiduciary requirements imposed by ERISA, and non-discrimination rules imposed by ERISA will help employees make good decisions regarding their retirement.
Defined Contribution Plans
Defined contribution plans allows employers and employees to make annual contributions in separate accounts established for each participating employee. Employers contribute a certain percentage of each participants compensation annually. Employers invest these funds on behalf of the employee, choosing from a variety of investment such as company stocks, diversified stock market funds, or federal government bond funds. Employees bear the risk of possible investment gain or loss. Benefit amounts depend upon several factors, including the contribution amounts, the performance of investments, and forfeitures transferred to participant accounts. Forfeitures come from the accounts of employees who terminated their employment prior to them earning vesting rights. (Martocchio, 2003)
Defined Benefit Plans
Defined benefit plans guarantee retirement benefits. This benefit are usually expressed in terms of a monthly sum equal to a percentage of a participants pre-retirement pay multiplied by the number of years the employee has worked for the employer. While the benefit in these plans are fixed by a formula, the level of required employer contributions fluctuates from year to year. The level depends on the amount necessary to make certain that benefits promised will be available when participants and beneficiaries are eligible to receive them. (Martocchio, 2003)
401(k) Plans
Section 401(k) plans are retirement plans named after the section of the Internal Revenue Code that created them. These plans, also known as cash or deferred arrangements (CODAs). This plan permits employees to defer part of their compensation to the trust of a qualified defined contribution plan. Only private sector or tax-exempt employers are eligible to sponsor 401(k) plans. (Martocchio, 2003)
Section 401(k) plans offer three noteworthy tax benefits. First, employees do not pay income taxes on their contributions to the plan. Second, employers deduct their contributions to the plan from taxable income. Third, investment gains are not taxed until participants receive payments. 401(k)s are offered through your employer and the contributions you make come out of your paycheck before taxes. That means your taxable income is lower and your tax burden is decreased. Many 401(k) plans give employers the option of matching a portion of the amount you invest. (OppenheimerFunds, 2006)
403(b) Plans
A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations and certain ministers. Generally, retirement income accounts can invest in either annuities or mutual funds. A 403(b) plan is similar to a 401(k) plan in that it is an easy way to save for retirement and receive the savings from having this benefit pre-taxed. (OppenheimerFunds, 2006)
403(b)s plans are retirement savings plans that allow the employee contributions to grow tax deferred until withdrawn at retirement. Tax-deferred annuities or tax-sheltered custodial accounts are offered through the employer and the contributions the employee makes come out of their paycheck before taxes. Because the money is coming out before taxes employees receive more in there pay checks. (OppenheimerFunds, 2006)
The tax law also includes an added savings incentive for participants age 50 or older permitting them to make annual “catch-up” contributions. The catch-up amount is $4,000 in 2005 and then increases by $1,000 per year until reaching $5,000 in 2006 (indexed in $500 increments after 2006). (OppenheimerFunds, 2006)
On top of that, a special rule for 403(b) participants allows certain employees with 15 or more years of service to contribute up to an additional $3,000 from their salary.
Employees are also able to take a loan from some 403(b) plans. Generally, employees may borrow