Contribution
A contribution is an amount an employer pays into a plan for all those participating in
the plan, or an amount an employee pays into a plan for his or her benefit.
Defined Benefit
A Defined Benefit Plan is designed to provide each participant with a fixed income at
retirement.
401(k)
401(k) Plans are defined contribution plans funded primarily by the pre-tax
contributions of employees. These plans, named for the section of the Internal Revenue
Code that establishes this type of pension plan, allow employees to save part of their
salaries and defer paying taxes until they receive the money. Employers can match the
contributions, which are also tax deferred.
Individual Retirement Account (IRA)
IRAs are special retirement savings arrangements that permit individuals to save up to $2,000
of pre-tax income every year, and defer taxation on that money until they withdraw it.
Keogh
Keogh Plans were created to provide a tax-sheltered retirement option for self-employed
taxpayers.
Money Purchase Plan
A Money Purchase Plan is a plan where employer's contributions are set when the
plan is established (i.e. usually a fixed percentage of compensation). Contributions do
not depend on whether the employer has profits.
Profit Sharing
Profit Sharing Plans depend on contributions from employers, who agree to share a percentage of
profits with employees. These plans may permit contributions from eligible employees as
well.
Savings Incentive Match Plans for
Employees of Small Employers (SIMPLE)
SIMPLE allows employers with no more than 100 employees to sponsor a retirement plan.
Employees who are expected to receive at least $5,000 (and who did so in previous 2 years)
are eligible to contribute through a deduction from their paychecks. They can receive an
employer matching contribution of up to 3 percent of their pay. Employers may reduce that
amount if business conditions vary from year to year. SIMPLE plans require few
administrative burdens since the bank or financial institution receiving the funds does
most of the paperwork.
Self-employed
An individual in business for himself or herself is self-employed. Sole proprietors and
partners are self-employed. Self-employment can include part-time work.
Simplified Employee Pension (SEP)
A SEP allows deductible contributions without getting involved in more
complex retirement plans. Under this type of retirement plan, an employer makes contributions on behalf of its
employees to an individual retirement arrangement called a SEP-IRA.
Vested
An individual becomes vested in a retirement plan when he or she has the years of
service required to receive a pension. Vesting means an individual has the right to
collect a pension at a specific age, even if he or she does not stay with the company or
organization for their entire working career.