401(k) And Qualified Plans: Introduction
During retirement years, income for retirees usually comes from three primary sources:
- Social Security benefits
- The regular savings account of the retiree
- Retirement-plan savings, such as IRAs and employer-sponsored retirement plans
A qualified plan is established by an employer to provide retirement benefits for its employees and their beneficiaries.
A qualified plan may be a defined-benefit plan or a defined-contribution plan. Qualified plans allow the employer a tax deduction for contributions it makes to the plan, and employees typically do not pay taxes on plan assets until these assets are distributed; furthermore, earnings on qualified plan assets are tax deferred.
Why Establish a Qualified Plan?
For a business, choosing the right retirement plan is one of its most important financial decisions because the plan must suit not only the employer's immediate needs but also its financial and business profile.
A qualified plan offers benefits to both employer and employees:
Benefits for Employers:
- Employers may receive a tax deduction for plan contributions.
- Employers are able to attract and retain high-quality employees. A qualified plan may be the tiebreaker that wins over a skilled person who is offered relatively similar compensation packages from different potential employers.
- Employers may be able to claim a tax credit for part of the ordinary and necessary costs of starting up the plan.. With a maximum of $500 per year for each of the first three years of the plan, the credit equals 50% of the cost to set up the plan, administer it and educate employees about it.
- Employees are provided with some guarantee that their retirement years will be financially secure.
- For plans that provide salary-deferral features, employees are able to defer paying taxes on a portion of their compensation until their retirement years, when their tax bracket may be lower.
- Some plans allow employees to borrow from the plan. The interest paid on the loan amount is credited to the employee's account, unlike interest on loans obtained from financial institutions, which is paid to the financial institution.
401(k) And Qualified Plans: Types Of Plans
A tax-efficient retirement savings account available in Great ...
Senior move managers (SMMs) help seniors downsize and relocate ...
Elder care, sometimes called elderly care, refers to services ...
An IRS-allowed movement of assets into or out of an individual ...
Also known as Social Security Death Index. A list of people whose ...
The use – by a business owner or professional practitioner – ...
Open an IRA through brokerage firms, mutual funds, banks and other major financial institutions, or through large Internet ...
Learn what factors affect your 401(k) performance, and understand what a typical rate of return is for employer-sponsored ...
Learn about the retirement savings plan options for entrepreneurs and small business owners, including administration and ...
Take a deeper look at how a privatized Social Security system would work, including looking at a real example that's existed ...