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Glossary: Types of Retirement Plans

If you're planning your retirement, you're likely wondering about the major types of retirement plans. Even if you're not close to retiring, preparing for the future is important. Continue reading to learn more about the major retirement plans and common terms associated with these plans. Knowing these terms will help you understand your retirement options and which plan is right for you.

For more information on retirement plans, visit FindLaw's section on "Retirement Planning."

Retirement Plan Glossary

401(k) PlanThis is a retirement plan where an employee defers part of their income into a tax shelter. This means it grows tax-free until the employee withdraws it. The employer can match the employee's contributions.

After-tax: Contributions made with income that has already been taxed.

Account balance: The total money or assets in a retirement account. This balance includes contributions made by the participant and the employer. It also includes any investment gains or losses accrued over time.

Annual contributions: The amount of money a person or employer contributes to the retirement account within a calendar year.

AnnuityA financial product that provides income payments over a specified period. This period is typically during retirement. A person can buy an annuity with a lump sum or through periodic contributions in a retirement plan. It provides a steady income to the person once they retire.

Benefit accrual: The accumulation of retirement benefits over time. It represents the growth of retirement savings. It is based on factors such as the person's years of service, salary level, and participation in the plan.

Deferral: The act of postponing or delaying a part of one's income to be contributed to a retirement plan.

Defined Benefit Pension Plan: A traditional pension plan that pays workers a specific monthly benefit at retirement. To be eligible, the employee must have worked at the company offering the pension for a set period. These plans either state the promised benefit as an exact dollar amount or specify a formula for calculating the benefit.

Eligible employee: A person who meets the criteria set forth by the plan to take part in the retirement benefits offered.

Eligibility requirements: Requirements may vary depending on the specific retirement plan. They often include age, length of service with the employer, and employment status.

Employee benefits: The perks or advantages employers offer employees to support their financial security during retirement.

Employee Retirement Income Security Act of 1974 (ERISA)ERISA is a federal law enacted to protect private employers' retirement and health benefit plans.

Employee Stock Ownership Plan (ESOP): A type of retirement plan that enables employees to become partial owners of the company they work for by acquiring shares of company stock. In an ESOP, the company contributes shares of its stock to a trust fund. This fund holds the shares on behalf of the employees. Over time, employees accumulate shares in their accounts as part of their retirement benefits.

Employer contributions: The contributions made by an employer on behalf of their employees toward their retirement savings.

Employer plan: A retirement savings plan established by an employer to provide employee retirement benefits.

Enrollment: The process by which employees sign up to take part in the employer-sponsored retirement plan.

FiduciaryA person or entity legally obligated to act in the best interests of the plan beneficiary. This includes making decisions about investments, administration, and compliance with relevant laws and regulations.

Keogh plan: This is a qualified retirement plan for self-employed people. Contributions to this plan are tax-deferred. Employees can contribute 25% of their pretax income. A Keough Plan operates like a traditional pension. You'll get an annual retirement benefit based on your previous salary. This is typically the average compensation of your three highest-paid consecutive calendar years. The annual benefit — your pension — has a cap that usually increases yearly. You can contribute 100% of your pretax income if it is your only retirement plan.

Lump sum: A single payment a person gets from their account upon retirement or termination of employment.

Matching contributions: When the employer agrees to match a certain percentage of the employee's contributions up to a specified limit.

Money purchase plan: A plan where the employer contributes on behalf of the employee. The employer makes fixed contributions to each employee's retirement account in a money purchase plan. This is usually based on a percentage of the employee's salary.

Normal retirement: It's the age at which a person expects to retire based on the terms of the retirement plan or the Social Security system. Normal retirement age may vary, but it's often age 65.

Pension Benefit Guaranty Corporation: A federal agency that protects the retirement incomes of workers and retirees in private-sector defined benefit pension plans. It provides pension insurance for participants in covered plans. It also ensures they get their promised benefits even if their employer's pension plan becomes insolvent.

Plan administrator: The person or entity responsible for overseeing and managing the day-to-day operations of the retirement plan. The plan document typically designates the plan administrator.

Plan assets: The funds and investments held within the retirement plan.

Plan benefits: The financial rewards or payments from participants' retirement accounts upon meeting certain criteria. These criteria are usually met on retirement or termination of employment. Benefits may include contributions made by the employee and employer. It also consists of any investment gains or earnings accumulated over the years.

Plan participants: People eligible to participate in the employer-sponsored retirement plan. These are typically employees of the company. But, some plans may also allow former employees, beneficiaries, or other eligible people to take part.

Profit-sharing plans: A type of retirement savings plan established by an employer to share a portion of the company's profits with its employees. In a profit-sharing plan, the employer makes discretionary contributions to the retirement accounts of eligible employees. These contributions are based on the company's profitability and performance. They are often given to employees based on salary or years of service.

Plan sponsor: The employer or organization that establishes and maintains a retirement plan to benefit its employees or members. The plan sponsor handles creating and administering the retirement plan. This includes determining the plan's features, eligibility requirements, contribution limits, and investment options.

Plan year: The 12-month period during which the plan operates. The plan year is typically defined in the plan document and may or may not coincide with the calendar year.

Qualified retirement plan: A business establishes a qualified retirement plan. The most common types of plans are:

  • Defined benefit plans
  • Defined contribution plans

Your contributions to a qualified plan do not get taxed until you withdraw the money. Any contributions made to the plan on your behalf by your employer are tax deductible.

Retirement age: The age at which a person stops working and transitions from the workforce into retirement. It's the age at which a person typically begins to rely on retirement savings, pensions, and Social Security benefits as a primary source of income.

Rollover: Transferring funds from one retirement account to another without triggering taxes or penalties.

Roth Individual Retirement AccountThis is like a traditional IRA. But contributions to a Roth IRA are nondeductible. When you withdraw money from a Roth IRA in retirement, it will be tax-free. You can withdraw them tax-free and penalty-free after age 59 1/2. The account must also be open for five years.

Safe harbor: A provision that allows employers to meet certain requirements set by the IRS for their retirement plans.

Salary reduction: When an employee's salary gets redirected or withheld from their paycheck. This amount is then contributed directly to their retirement account. This contribution is often made on a pretax basis.

Summary plan description: A document given to participants and beneficiaries that summarizes key information about the plan's rules and benefits.

Traditional Individual Retirement Account (IRA): A person, not a company, establishes an IRA. Under this plan, a person can contribute the following

  • If you're under 50, the total that you can contribute is $7,000.
  • If you're over 50, the total that you can contribute is $8,000.

Contributions to the IRA are deductible irrespective of the person's income. If the person has a company retirement plan, their rights to the IRA deduction may be limited. Traditional IRA earnings get taxed when the person withdraws them.

Vesting: When an employee earns the right to the employer's contributions or benefits over time. It signifies the degree of ownership an employee has in their employer's contributions. Vesting schedules vary depending on the retirement plan. They typically specify a certain number of years of service required for full ownership of the employer's contributions. Once an employee becomes fully vested, they can get the full value of the employer's contributions.

Speak to a Lawyer About Your Retirement Plan

Getting help from a lawyer with your retirement plan can make things easier. They can explain things in simple terms and answer your questions. A lawyer can help you understand who can join the plan and how much you can contribute each year. They can also help you figure out how to take money out of your plan when you retire and what taxes you might have to pay. If you ever have a problem with your retirement plan, a lawyer can help you solve it. Talking to a lawyer can give you peace of mind and help you make smart decisions about your future. Reach out to an employment lawyer near you today.

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