Retirement Plans

The best way to save money for your retirement is to participate in various retirement plans. Contributions to the retirement plans and and earnings from the contributions are tax deferred, accmulating excellent income over many years. There are three major types of retirement benefits an employer can provide:

1. Pension Plans -- basically there are two types of pension plans: (1) a "defined benefit" plan -- promises fixed retirement benefit amounts when retired, usually fixed monthly amounts, and (2) a money purchase plan (classified as a "defined contribution" plan) -- an employer promises a specific contribution on behalf of each employee/participant, usually a percentage of compensation. The defined benefit plan also include an annuity plan funded through the direct purchase by the employer of an annuity contract.

2. Profit Sharing Plans -- Employer contributions to a profit-sharing plan are based on profits. The employer is not required to contribute any particular percentage of profits, but contributions, must be substantial and recurring. This plan must have a definite written formula for allocating profits among individual accounts.

3. Stock Bonus Plans -- These plans are a defined contribution plan that provides benefits similar to a profit-sharing plan. When distributions are made, cash can be used as long as the participant is entitled to demand that payment be made in the form of employer securities.

Under a 401 (k) arrangement, an employee's contributions are treated as employer contributions and these contributions are not included in the income of a participant because the participant has the option of taking the contribution in cash or having it paid to the plan (an elective contribution).

A SIMPLE plan -- for the tax years beginning in 1997, an employer can establish a new type of retirement plan called Savings Incentive Match Plan for Employees (SIMPLE). Employer with 100 or fewer employees earning at least $5,000 and who do not maintain another employer-sponsored retirement plan are eligible to se up SIMPLE plans, which are not subject to some of the complicated rules that apply to other types of retirement plans. The employere generally must either match elective employee contributions dollar-for-dollar up to 3% of compensation (up to $6,000) or make a "nonelective" contribution of 2% of compensation of each eligible employee.

A Simplified Employee Pension (SEP) is a written plan that allows an employer to make contributions toward an emloyee's retirement without becoming involved in more complex retirement plan. If you are self-employed, you can contribute to your own SEP. Annual contributions of an employer under SEP should not exceed the lesser of 15% of the participant's compensation (earnings for self-employed) or $30,000. Employees are also allowed to contribute to the plan.

Keogh Plans -- If you are self-employed and own your business, you may set up a retirement plan called a Keogh Plan. You must have earned income from the trade of business. A Keogh plan may be either a "defined benefit plan" or a "defined contribution plan". Under a defined contribution plan, such as a profit-sharing plan or a money purchase pension plan, the benefit you eventually receive is based solely on the contributions credited to your account and the earning from contributions. Generally, contributions to a profit-sharing plan are made out of a company's profits, and therefore contributions can vary from year to year. Contributions to a money purchase pension plan are usually calculated as a percentage of self-employed income and must be made whether a company had a profit or loss for the year. Under a defined benefit plan, you are promised a fixed benefit and the annual contributions are based on the amount that is actuarially needed to provide you that benefit at a normal retirement age.