Susan Hajek, recognized qualified retirement plan educator and workshop trainer introduces Qualified Retirement Plan design, operation and investments, the basics everyone should know.
What is a qualified retirement plan? Technically a qualified retirement plan is a plan that satisfies the requirements of Internal Revenue Code (IRC) 401(a). By practice a qualified retirement plan is a vehicle to save tax-deferred or the perfect place to save with tax benefits for your client.
There are two categories of plan types, Defined Contribution and Defined Benefit Defined and various plan types under each category. Although legislation regarding the creation, operation and funding of qualified retirement plans is passed constantly , major Acts that profoundly shaped how plans operate today include The Economic Recovery and Income Security Act of 1974 (ERISA), The Tax Reform Act of 1986 (TRA 86) and the Pension Protection Act of 2006 (PPA 06). With each passage of major legislation the operation of these plans becomes more understandable to the employers who establish the plans and the participants for which they benefit. For example PPA 06 increased deductibility limits for Defined Benefit Plans, clarified the status of Cash Balance Plans, introduced new guidance on investment advice and fee disclosure and provided for Qualified Default Investment Alternatives (QDIA).
But who should establish a plan and why? Ideally it is any client of yours who has earned income and would like to defer that income and allow its earnings to grow tax deferred as well. As a business owner, a secondary benefit is employee recruitment and retention.
The most common types of plans are Defined Contribution (DC) plans. Common DC plan types are SIMPLE, Profit Sharing, 401(k), 403(b), 457 and ESOP or stock purchase plans. The most popular of which is the 401(k) plan. These plans are set up so that the value of the benefit is based on the contributions made to the plan by the employer and employer plus earnings. The risk in this type of plan is born by the employee as the value at retirement is the value of their individual account. In a traditional Defined Benefit (DB) plan, the contribution is based on the future benefit to be provided and the plan is funded for such. The risk is born by the employer to ensure funds are available in the plan to pay the defined benefit at retirement. Cash Balance plans are a fast growing and popular form of a DB plan as are traditional DB plans commonly known as pension plans.
There are plan provisions and contributions limits to all plan types that are adjusted annually. Those limits range from $16,500 individually in a 401(k) plan to $49,000+ depending upon plan type and are much higher than those received through an Individual Retirement Account (IRA). This factor alone makes these vehicles for tax deferred savings so popular.
Every business owner should have a qualified retirement plan as a vehicle for tax deferred savings. Determining the correct type and provisions will lead to a successful plan for retirement.
Susan Hajek offers securities through Resource Horizons Group, L.L.C., Member FINRA/SIPC.
1350 Church Street Ext. NE, 3rd Floor, Marietta, GA 30060. Telephone 770-319-1970.
Resource Horizons Group, L.L.C. and Brokers Alliance, Inc. are not affiliated.