Types of Retirement Plans - Factors affecting contributions or benefits

Employer contributions to a qualified plan are deductible up to certain limits. The contributions, along with any earnings and gains, are generally tax free until distributed.

  1. Deduction limits - The deduction limit depends on the type of qualified plan.
    • Defined contribution plans - Deduction cannot be more than 25% of the employee's compensation.
      • Self-employed - Must reduce this figure to take into account the deduction for one-half of the self-employment tax and the deduction for contributions on the self-employed individual's behalf to the plan. The self-employed individual uses a net earnings figure to calculate the appropriate deduction limit.
    • Defined benefit plans - Deduction is based on actuarial assumptions and computations. An actuary must calculate the deduction limit.
  2. Defined contribution limits - Annual contributions and other additions (excluding earnings) cannot exceed the lesser of the following amounts:
    • 100% of the participant's compensation.
    • $52,000 (for 2014).
    • Excess annual additions - Amounts contributed to a defined contribution plan that exceed contribution limits. A plan can correct excess annual additions caused by the following actions:
      • Reasonable error in estimating participant's compensation.
      • Reasonable error in determining the permitted elective deferrals.
      • Forfeitures allocated to participant's accounts.
    • Correcting excess annual additions - A plan can correct excess annual additions in the following ways:
      • Allocate the excess to other plan participants to the extent of their unused limits.
      • If these limits are exceeded, do one of the following:
        1. Hold the excess in a separate account and allocate to participants in the following year before making any contributions for that year.
        2. Return employee after-tax contributions or elective deferrals.
  3. Defined benefit limits - The maximum contribution is the amount needed to provide an annual benefit no larger than the smaller of $210,000 (for 2014) or 100% of the participant's average compensation for his or her highest three consecutive calendar years.
  4. Annual compensation limit - The maximum compensation that may be considered for qualified plan purposes is $260,000 (2014, indexed for inflation).
  5. Definition of compensation - The IRS defines compensation to include all of the following:
    • Defined contribution plans - Deduction cannot be more than 25% of the employee's compensation.
      • Self-employed - Must reduce this figure to take into account the deduction for one-half of the self-employment tax and the deduction for contributions on the self-employed individual's behalf to the plan. The self-employed individual uses a net earnings figure to calculate the appropriate deduction limit.
Top heavy plans
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  4. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  5. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  6. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  7. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  8. Savings

    What Women Investors Are Doing Right

    Women's risk aversion, penchant for research – and lack of male-style "irrational exuberance" – means their investing strategies often put them ahead.
  9. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  10. Investing Basics

    Calculating the Margin of Safety

    Buying below the margin of safety minimizes the risk to the investor.
RELATED TERMS
  1. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  2. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  3. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  4. Gross Exposure

    The absolute level of a fund's investments.
  5. Priori Loss Estimates

    A technique used by insurance companies to calculate loss reserves.
  6. Value Of Risk (VOR)

    The financial benefit that a risk-taking activity will bring ...
RELATED FAQS
  1. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
  4. How does being overweight in a particular sector increase risk to a portfolio?

    An investor who is overweight in a particular sector risks a loss in value for the portfolio if there is a downturn in that ... Read Full Answer >>
  5. What are the primary risks an investor should consider when investing in the retail ...

    The retail sector consists of companies operating in multiple industries such as specialty retail, general retail, food and ... Read Full Answer >>
  6. What risks do I face when investing in the insurance sector?

    Like all equity investments, insurance companies present investors with market risk. Insurance companies, like banks, also ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!