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
RetirementThis plan has become one of the most popular retirement options. Find out why.
Financial AdvisorEmployers establish qualified retirement plans to help their employees save money.
RetirementUnderstand the unique benefits that come with a small business offering a retirement savings plan such as a 401(k) to current and future employees.
Financial AdvisorDefined benefit plans offer advantages to both employers and employees. Employers must understand the federal tax rules when establishing these plans.
Financial AdvisorThese plans resemble 401(k) plans in many respects, but are specially designed for nonprofit entities.
Financial Advisor401(k)s, pensions and profit-sharing plans can be a source of cash, but there are consequences to this option.
RetirementIf you're at a small company, you may be offered a SIMPLE IRA retirement plan. Contribution limits are lower, but vesting is instant, with other benefits.
TaxesDetermine whether your business is eligible to claim a tax credit for establishing a retirement plan.
Managing WealthLearn about the two types of deferred compensation plans that nonprofit companies can use to allow high-ranking employees to increase their retirement savings.