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Retirement Planning for the Utterly Confused
Paul Petillo
provides you with practical, proven advice on finding the right places to invest, weighing risk versus return, anticipating pitfalls in the market, and maintaining a diversified portfolio.
Investing for the Utterly Confused on sale now!
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Defined Contribution Plans
Defined contribution plans cover a wide range of plan types including the 401(k) . These plans are desirable for two reasons: they cost less to administer and provide the employer and employee far more flexibility than typical pension plans (defined benefit plans). Contributions are based on a percentage of the employee¹s annual earnings.
Small businesses often use profit-sharing plans as a form of compensation. Much like pension plans were used to foster loyalty, these type of plans encourage the employee to create profits for the company which would have an impact on how much was contributed. In 2008, the limit that could be contributed was $46,000 or 25 percent of compensation for each plan participant.
It should also be noted that in any given year, the employer is not obligated to contribute to the plan. If you are self-employed, the limit you can contribute is only 20 percent of your net earnings.
remove some of the flexibility of profit sharing plans obligating the employer to contribute even if the company posted no profits. The contribution limits are the same as a profit sharing plan ($46,000 in 2008) but the compensation percentage limits are much higher (up to 100 percent of each employee's compensation).
Additional Reading
Defined Contribution FAQs
Mutual Funds
Retiring with a Plan
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