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Employers establish qualified retirement plans to help their employees save money.

Qualified retirement plans are an integral part of retirement savings. Employers receive tax breaks from contributions they make for their employees, and in some, employees can defer part of their salaries to make contributions, which reduce their taxable incomes.

There are two types of qualified retirement plans: defined benefit and defined contribution.

A defined benefit plan is funded and managed by a company for its employees. Employees receive a guaranteed payout when they retire or begin taking withdrawals. Pensions are a good example, though fewer and fewer firms are offering them.

Defined contribution plans are more prevalent today. They are funded by a portion of the employees’ salaries, and many employers match these contributions. Note, however, that the employees bear the investment risk. Payouts depend on investment performance, but again, employee contributions reduce taxable income. A 401(k) is a common example.

Tax considerations are important. Employees usually earn higher incomes before they retire. Tax rates are also lower once they retire and begin taking withdrawals, so their contributions are taxed in a lower bracket.

Qualified retirement plans include publicly traded securities, real estate, mutual funds and money market funds among their investment offerings. Withdrawals begin at retirement age, if an employee becomes disabled, or when the plan is terminated. Early withdrawals are usually subject to fees.

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