Qualified Retirement Plans

Qualified retirement plans are Congressionally approved retirement plans which have several major tax benefits.

1. The employer's contributions can be deducted for income tax purposes.
2. The earnings on the plan's investments accumulate on a tax deferred basis.
3. When the funds are distributed at retirement age, they may be eligible for favorable tax treatment.
4. Taxpayers may be in a lower income tax bracket after retirement.

Two Principal Types Of Plans

Qualified Retirement Plans can generally be classified as either "defined benefit" or "defined contribution" plans.

1. Defined benefit plans define the benefit amount each participant will receive at retirement age and then estimate how much must be contributed each year to accumulate the necessary future fund. Interest rates, ages of participants, etc., will have an effect on the calculation. The amount of the contribution is generally determined by an actuary. The investment risk rests on the employer.
2. Defined contribution plans generally put a percentage of current salaries into the plan each year. The amount at retirement will depend on the investment return and number of years until a participant retires. The investment risk rests on the participant.

What Is The "Best" Type Of Plan

There is no "best" type of plan. The choice of what type of plan to use is an individual one. The answer depends on factors such as employer goals and available cash flow.

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