|

Pension Plan Basics

In This Article:

Page 2

Money Purchase Plan

Money Morsel

An employer's annual contribution to a money purchase plan is required. He can't take a year off because business is slow and profits are down.

A money purchase plan is a qualified employer retirement plan in which each employee has an individual account. The employer must make annual contributions to each employee's account. The amount of contribution is determined by a pre-set formula, based on a fixed percentage, or a flat monetary amount.

The formula requires an employer to contribute a specified percentage (up to 25 percent) of each employee's compensation. Money purchase plans are expensive for the employer, and are not as common as other plans. If the employer can't make his required annual contributions, he is penalized.

Some money purchase plans may allow employees to add to the employer's contribution, but the employee would have to pay taxes up front on the money he contributed.

Profit Sharing Plans

A profit sharing plan is a qualified, defined contribution plan in which an employer contributes money to employees' accounts, based on the amount of profit the company has realized that year.

The employer gets to decide how much to contribute, and is not obligated to contribute anything if the company has not been profitable. Although an employer can contribute up to 15 percent of each employee's salary into his or her account, the average contribution usually is between 2 and 5 percent.

A profit sharing plan can be done in conjunction with another retirement savings plan, but sometimes it is the only type of plan available within a company. Employees may add to their employer's contribution, either with pre-tax or post-tax money.

Target Benefit Plan

A target benefit plan is an age-weighted plan that's normally used by a company that wishes to have a specified sum available for an older employee (usually an owner) at the time of retirement.

These plans are expensive, and usually employed by companies in which the owners have been unable to contribute to retirement funds while they were building up the company. Once the company starts to be profitable and retirement money is available, the owners try to compensate for their previous lack of retirement saving.



<< Previous: Page 1

More on: Family Finances

|

Excerpted from The Complete Idiot's Guide to Personal Finance in Your 40s and 50s © 2002 by Sarah Young Fisher and Susan Shelly. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit the Idiot's Guide web site or call 1-800-253-6476.


stay connected

Sign up for our free email newsletters and receive the latest advice and information on all things parenting.

Enter your email address to sign up or manage your account.

Facebook icon Twitter icon Follow Us on Pinterest

editor’s picks

get ready for school!

We’ve got your
shopping list,
lunch menu,
and more.

GO

highlights

Join BIC on our mission to save handwriting and Fight For Your Write! Writing helps kids become better readers, boosts their confidence and sparks their creativity. Visit BICFightForYourWrite.com to sign our petition to save handwriting!

7 Tips for Reading Aloud to Babies & Toddlers
The AAP advises reading aloud to babies and toddlers because it boosts brain power and has many other benefits. Get some tips for making the most of story time with your tot!

Kindergarten Readiness App Wins Gold
Our Kindergarten Readiness app won the Gold Award of Excellence in the educational category at the 2014 Communicator Awards. This valuable checklist comes with games and activities to help your child practice the essential skills she needs for kindergarten. Download the Kindergarten Readiness app today!

How to Survive Summer Boredom
When the kids are home all day, every day, summer boredom strikes hard and fast. Learn the best summer boredom busters and tips for surviving until September.

12 Birthday Party Favors that Won't Get Thrown Away
The next time you're planning a birthday, forgo the penny candy and cheap toys. Send your guests home with one of these fun and creative party favor ideas!