Retirement plans in the United States

A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Retirement plans in the U.S. are defined in tax terms by the IRS code and are regulated by the Department of Labor's provisions under the Employee Retirement Income Security Act.

Types of retirement plans

Retirement plans are classified as defined benefit or defined contribution according to how benefits are determined. A defined benefit (or pension) plan calculates benefits using a fixed formula that typically factors in final pay and service with an employer, and payments are made from a trust fund specifically dedicated to the plan. In a defined contribution plan, the payout is dependent upon both the amount of money contributed into an individual account and the performance of the investment vehicles utilized.

Some types of retirement plans, such as cash balance plans, combine features of both defined benefit and defined contribution schemes.

Examples of retirement plans:-

•          401(k) plans

•          403(b) plans

•          Money purchase plans

•          Profit-sharing plans

•          Simplified Employee Pension plans (SEPs)

•          Savings Incentive Match Plans for Employees (SIMPLE) IRAs

•          457 plan

Retirement plans provides benefits for both employee and employer as following:-

Benefits for Employers:

• Employers may receive a tax deduction for plan contributions.
• Employers are able to attract and retain high-quality employees. A qualified plan may be the tiebreaker that wins over a skilled person who is offered relatively similar compensation packages from different potential employers.
• Employers may be able to claim a tax credit for part of the ordinary and necessary costs of starting up the plan.. With a maximum of $500 per year for each of the first three years of the plan, the credit equals 50% of the cost to set up the plan, administer it and educate employees about it.

Benefits for Employees

• Employees are provided with some guarantee that their retirement years will be financially secure.
• For plans that provide salary-deferral features, employees are able to defer paying taxes on a portion of their compensation until their retirement years, when their tax bracket may be lower.
• Some plans allow employees to borrow from the plan. The interest paid on the loan amount is credited to the employee's account, unlike interest on loans obtained from financial institutions, which is paid to the financial institution.