November 21, 2017
 
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Retirement Basics: Defined Contribution Plans

Planning for retirement is something that everyone needs to do. Gone are the days of counting on a pension from your employer for a comfortable retirement. Today, it’s best to be proactive when it comes to your future. Taking advantage of a defined contribution plan is one way you can build your nest egg.

Defined Contribution Plans
These plans require the employee or the employer (or both) to contribute to the employee’s individual account under the plan. However, it does not promise a specific amount of benefits upon retirement. The contributions are invested on the employees’ behalf. The following are examples of defined contribution plans:

 

·        401 (k) plans—this is a payroll deduction plan that allows you to save a portion of your current salary for retirement. They’re tax deferred because you don’t pay taxes on the money you put into the 401 (k) until you withdraw the money at retirement. Some companies match a portion of the money that the employees contribute.

·        Roth 401 (k) plans—this is similar to a regular 401 (k), but the contributions are made with after tax dollars and the account grows tax-free.

·        403(b) tax-deferred annuities—this is also funded by employee and employer contributions but designed for employees of certain nonprofit organizations, like schools, churches, and hospitals.

·        Keogh plans—these allow self-employed individuals to establish tax-deferred retirement plans for themselves and their employees. Each plan has different limitations on the percentage of your salary that you can contribute each year.

If your employer has these types of benefits available and you’re not taking advantage of them, you need reconsider, especially if you have trouble saving money on your own. You may be surprised at how much you can save before taxes without making a big decrease in your take-home pay.

 

 

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