Retirement plans are designed to accumulate assets through a variety of mechanisms and then provide an income stream to a person after retirement. A pension created by an employer for the benefit of an employee is commonly referred to as an employer pension plan. Personal plans are those chosen by an employee or self-employed individual. Plans can be divided into two broad types:
Defined Benefit Plans
Defined Benefit Plans are generally determined by a formula and contributions are actuarially calculated. They typically pay their benefits as an annuity, so retirees do not bear the investment risk of low returns on contributions, or of out living their retirement income.
Defined Contribution Plans
Defined Contribution Plans are plans providing for an individual account for each participant, and for benefits based solely on the amount contributed to the account plus or minus income, gains, expenses, and losses. Examples of defined contribution plans include IRAs, 401(k), Simple Employee Pension (SEP), and Savings Incentive Match Plans (SIMPLE).
Profit Sharing Plans offer flexibility when it comes to making contributions. Formulas may be written to provide contributions only in profitable years or on a sliding scale for reduced contributions in low or non-profitable years.
412(i) Plans are a solution for those who may have neglected to set up a retirement plan in their younger years. Designed for small business owners with 20 or fewer employees, a 412(i) defined benefit plan allows you to accumulate significant retirement assets in a short period of time. The annual contributions can be as high as $350,000. The plan is fully insured, meaning you cannot lose any money you put in. All contributions are tax-deferred and when you retire you can either draw a monthly income or roll it into an IRA account, which would not incur any taxes until withdrawn.