Contribution retirement plans
In the field of banking and economics, contribution retirement plans are such types of retirement benefits for the retired employees of a company in which the annual contribution made by their employers towards the retirement fund is already specified and fixed. In the case of contribution retirement plans, a firm creates an individual account for each retired employee and the retirement benefit is based upon the amount contributed by the firm in this account. The contribution benefit plans include monetary contributions made by the employer of the retired person and also the employee himself. In addition it also includes the amount earned through investment of the money that is already present in the contribution retirement account. One type of retirement plan which can be classified under the contribution retirement planning tool is the savings and thrift option. Using this retirement tool, an employee saves one part of his total earnings from the company in a separate account. Added to this is the contribution made by the employer. Usually it is the pretax earnings of an employee that makes its way into the savings and thrift account.
Synopsis of Various Aspects of Contribution Retirement Plans:
Here are a few points to be kept in mind before understanding the concept of contribution retirement plans:
- A contribution retirement plan is such an account in which the employer donates a certain percentage of amount annually to benefit an employee post retirement. But this does not mean that the employee can withdraw money from this account according to his own will. Penalties are charged if the funds in the contribution retirement fund are accessed by an employee at improper times.
- An important point to remember in the case of this type of retirement plan is the fact that the percentage contributed by the employer towards the retirement benefits is fixed but the benefits reaped by the employees from this contribution is not fixed, which means that the employee is not aware of how much money he will receive upon retiring from these contribution benefit plans until and unless he has calculated the amount from before. So the benefit in the case of contribution retirement plan is described as unknown.
- The contribution made by the employer and the employee in the contribution retirement planning tool are often used for investments to be made in the market in the form of shares in stock markets. The return that you receive from the investments made by you is also added to the total amount already present in your contribution retirement account.
- One often has the question as to how to use the funds that are a part of retirement account. In the case of the contribution retirement plan option you can purchase an annuity to reap retirement benefits from your account. In this case you will have a flow of money in the form of a regular income.
- The defined contribution retirement plan is in most cases followed by firms in the private sector. With the rise in the use of a defined contribution plan after retirement, the use of benefit plans in the form of pensions is steadily declining.
- Pensions are not so much in use as the contribution retirement plan in present times because of the advantage of portability in the latter. Though both types of benefit plans are legally equally portable, the administration costs and the methods of determining the liability of a plan sponsor is easier in the contribution retirement program.
- Investment risks and returns from the contribution retirement plan option are directly dependent upon the actions of the retired employee rather than his employer or his sponsor.
Types of Contribution Retirement Plans:
There are two types of contribution retirement plans. They are:
- Individual Retirement Accounts – These are individual trust or custodial accounts, the savings of which grant tax advantages in accordance with the total amount of money saved in the account after retirement.
- 401(k) Plans – The 401(k) retirement savings account is a type of account which is named after the 401(k) subsection of the Internal Revenue Code of the United States of America. A person who has an account that is equipped with the 401(k) plan can begin to withdraw money saved in this account from the age of 59 ½ years.
Retirement Plan Contribution Limits
The amount donated by the employer towards the contribution retirement plan is subject to a limit. The limit of money to be invested in this account may change each year and is specified from before. According to the limit set by the government authorities deciding upon the maximum amount that can be saved in your 401(k) account is $16,500. An employee who has reached or surpassed the age of fifty can contribute an additional amount of $5,500. This figure though fixed for the current fiscal year, can go up or low in the coming year and has been different in the years before. Again, the total of the $16,500 in your 401(k) account is not your employer’s contribution. Contribution by employers varies according to your pay package; it is usually a 50 cent contribution for every dollar earned by you, with the maximum contribution going up to 6% of your total pay structure. However, it may be noted that over the years the contribution made by the employees towards the employees’ 401(k) fund is gradually diminishing, this has especially been the scenario after the USA in particular and the world in general was hit by a financial obstacle termed the recession. This makes it clear that you must contribute more towards your own retirement fund so that you may use the money post retirement, when your savings become your regular flow of income.
The Internal Revenue Service (IRS) of the US recently made an announcement that the contribution retirement plan limit of people aged over 50 and falling under sections 401(k),457(b) or 403(b) will be fixed at $16,500 this fiscal year.