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Defined Contribution FAQs
Defined contribution is any plan where you make specific contributions, specifically to retirement plans such as a 401(k) . Defined benefit plans such as an IRA are designed to offer a fixed benefit upon withdrawal. Defined contribution plans, however depend on several key elements to determine how much can be withdrawn.
In no special order, the benefits paid to you in retirement after using a defined contribution plan such as a 401(k) depend on the kind of investment you made and the length of time you were able to make contributions to the plan. All investments face taxes these types of plans, with the exception of the Roth generally defer the tax bill until later, inflation which may be the biggest tax of all, and fees those pesky charges that just seem to add up.
Below you will find some of the top questions asked about these types of plans.
How much can I contribute to an IRA or a 401(k)?
These are actually two separate questions. The contribution limit for an IRA in 2008 is $5,000 per individual, $6,000 for an investor over 50. In the following years, increases to the contribution limits will be indexed to inflation. IRAs do not fall into the category of defined contribution plans.
There are numerous other types of contribution rules, all of which can be found at the 2008 for people using traditional IRAs can be found at the IRS website.
401(k) plans, the kind of retirement tool you encounter in the workplace and which is a type of defined contribution plan, has different contribution limits.
The contribution limits for a 401(k) plan are much higher. In 2008, the contribution limit is $15,500 with workers over fifty allowed to contribute $20,500. After 2008, these contributions limits will also increase as inflation increases.
What is a defined contribution plan?
A defined contribution plan is an account that either the employer or the employer and employee can contribute to and the amount of contribution is based a percentage of the employees salary.
What are income limits?
This is a way for the government to limit the amount of money that can be put in these accounts.
Roth Income Limits for 2008:
Single wage earners - $101,000 with the phase out of eligibility to $116,000
Married earners - $159,000 with the phase out of eligibility to $169,000
In 2010, those limits are removed
Defined contribution plans:
In 2008, the maximum that can be contributed to this type of plan is $46,000 and that is based on a maximum considered compensation of $230,000.
In 2009, those figures increase to a maximum pay of $235,000 giving the employer/employee the ability to put as much as $48,000 in the accounts.
By 2009, these accounts can receive a maximum contribution of $50,000 on a salary of $240,000.
SEP-IRAs:
In 2008, the maximum that can be contributed to this type of plan is $46,000 and that is based on a maximum considered compensation of $230,000.
In 2009, those figures increase to a maximum pay of $235,000 giving the employer/employee the ability to put as much as $48,000 in the accounts.
By 2009, these accounts can receive a maximum contribution of $50,000 on a salary of $240,000.
How Do I pick a Mutual Fund for My Plan?
Opening an IRA is generally less expensive than it would be if the account was held in a taxable account outside of a defined contribution plan. Many mutual fund families lower the initial deposit for retirement savers. Many also allow you to make deposits online as well.
Here are some suggestion on what to look for when picking a fund.
Look for a fund that has done better than its peers over a three to five year period. Avoid top ten lists of less time.
Look for a fund manager that has been with the fund at least three to five years
Look for a fund that has low expenses at least a third less than their peer group
Look for lower turnover. This refers to the amount of times a portfolio changes in a given year. Turnover of 100% means the portfolio has changed once in a given year. Too high of a turnover may signal aggressiveness. To low of a turnover, may signal that fund is too conservative. Too much trading usually leads to higher fees.
Look for no-load funds. Loads refer to the money you have to pay up front (front-loaded) or when you sell the fund (closed-end). A no-load fund puts the money you invest right to work.
