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
Financial AdvisorEmployers establish qualified retirement plans to help their employees save money.
RetirementThese plans aren't widely used, but they fill a specific niche for employees in certain situations.
RetirementThis plan has become one of the most popular retirement options. Here's why.
Small BusinessDon't hesitate to adopt a smart plan for you and your employees.
RetirementThe more that employees know about their employee 401(k) plans, the better. But what doesn't your administrator know?
Financial Advisor401(k)s, pensions and profit-sharing plans can be a source of cash, but there are consequences to this option.
Financial AdvisorThese plans resemble 401(k) plans in many respects, but are specially designed for nonprofit entities.
RetirementQualified and non-qualified retirement plans are created by employers to benefit their employees.
RetirementMost employers don’t offer any type of retirement plan at all. But there are a few companies that still offer generous retirement benefits.