Retirement Plans

Most workers, business owners and professionals, work all their lives to accumulate a sufficient nestegg to provide a comfortable, independent retirement for themselves and their families. Few investments are more important than the one you have in your retirement plan. Because the average American will rely on savings for 18 years after retirement, it is essential that you understand your rights and responsibilities under your retirement plan.

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Retirement planning is an ongoing process that must begin well before and continue into retirement, to assure coordination with estate planning - both require advance planning and continuous reevaluation. This section discusses the various types of retirement plans available, including the "old-reliable" tax-qualified plans, as well as the increasingly popular nonqualified plans.

Participants in retirement plans have certain rights that are governed by Federal law. They also have responsibilities. Similarly, the people who sponsor your retirement plan also have rights and responsibilities. Most are spelled out by a law called the Employee Retirement Income Security Act of 1974.

Qualified Plans

Qualified plans, or tax-qualified plans, are popular because they provide tax incentives for participation. Although there are many different types of retirement plan options available to businesses, they fall into two general categories: defined benefit plans and defined contribution plans.

Defined Benefit Plans

A defined benefit plan is a plan that promises a determinable "defined" pension benefit at retirement age. In other words, the plan contains a definite formula that provides that it will pay a stated benefit to the employee for life. The formula is usually expressed in terms of a percentage of compensation and years of service.

Defined Contribution Plans

A defined contribution plan is a plan that provides a stated "defined" contribution to the plan each year. The contribution is usually expressed as a percentage of an employee's compensation for the year.