A good retirement plan is becoming an essential part of drawing the interest of top professionals, but it’s important to understand how each one may affect your business. Some plan options that might make sense for a larger company may not be appropriate for a small business.
In the sections below, we’ll explain the basics of some of the more popular group retirement plans, as well some of the benefits and drawbacks of each. Each of the options below falls under the umbrella of qualified plans, which are those that are covered under section 401 of the Tax Code.
If you have any general questions about group retirement options, this resource from the IRS is provides a good explanation of the different types of plans.
There are two major categories of retirement plans: defined benefit plans and defined contribution plans. In this article, we’ll explain how each works and what types of retirement benefits fall under which category. Put simply, a defined benefit plan guarantees a set amount to be paid out, as with a pension. A defined contribution plan does not have a set amount that is paid out at retirement, but offers a more standard investment vehicle such as a 401(k) or IRA.
Defined Benefit Plans (Pension) – Defined benefit plans are pretty uncommon in most industries since employers have transitioned to defined contribution retirement plans. The way a defined benefit plan works is that the employee receives a set amount on a monthly basis during retirement. This amount is generally a percentage of the employee’s full-time pay and the exact percentage is typically contingent on the number of years worked.
401(k) Plans (Defined Contribution) – A defined contribution plan may include any number of different investment options, depending on the type of business you operate. As pension plans have become more rare, 401(k) and other types of defined contribution plans have become the standard for employee retirement plans. Employees appreciate 401(k) plans because of the significant tax savings and the ability for their investments to grow on a pretax basis. For businesses, offering a defined contribution benefit is a great way to reduce payroll taxes and provide employees more choice in their investment options.
IRA’s & SIMPLE Plans – An IRA, or Individual Retirement Account, operates similarly to a 401(k) in terms of tax incentives and growth of investments, but unlike a 401(k), it is not limited to employees. An IRA can be a good benefit to offer if your company is a startup or smaller company that doesn’t yet offer a traditional retirement savings plan. The downside, from the perspective of an employee, is that the annual limit for investing through an IRA is much lower than it is for a 401(k). Under a SIMPLE IRA plan, employers can contribute to employee investments as they would in a 401(k).
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