This week, we’ll return and discuss some retirement terms.
What are defined contribution plans? Defined contribution plans are employer-sponsored plans, where the employee contributes to their own individual account, with a possible percent match from the employer. That match may be contingent on the employee remaining at that job for a certain period of time. Examples of defined contribution plans include 401(k)s, 403(b)s, and 457(b)s.
What are defined benefit plans? Defined benefit plans are retirement plans where an employer will pay retired employees a defined amount based on a formula that often uses factors such as highest earning salaries and years of employment. Another term for defined benefit plans are pension plans.
What is portability? Portability is the ability to move funds from one employer-sponsored plan to another employer sponsored plan. Some plans can be kept with your former employer, many plans can be rolled into your new employee sponsored plan, and the majority of plans can be rolled into an IRA, which is an individual retirement contribution plan.
What are tax deferred contributions? Tax deferred contributions are not taxed until you withdraw those funds from that plan. Examples include traditional 401(k), 403(b), and IRA plans. Tax deferred is different than tax deductible – tax deductible lowers your taxable income reported to the IRS. An example of this would be charitable contributions – even if you don’t itemize, you can reduce your taxable income by up to $300 with a $300 donation to a non-profit.
What are tax exempt withdrawals? Tax exempt withdrawals are withdrawals from a retirement plan in which no taxes are due. An example of this would be a Roth 401(k), 403(b), or IRA plan. Roth retirement plans are funded by post-tax contributions, but have tax exempt withdrawals, while traditional retirement plans are funded with tax deferred contributions but have taxable withdrawals.
Next week, we’ll return and discuss the differences between 401(k)s, 403(b)s, 457(b)s and IRA plans.
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