What Is a Defined Contribution Retirement Plan?
Retirement saving for most workers is in the form of a Defined Contribution plan. Best known by their IRS codes, these plans include the 401(k), the 457 plan for government workers and the 403(b) plan for non-profit employees. Unlike a traditional retirement plan where the company sets aside money for future retirees, the employee is responsible for both saving money and picking the proper investments in these accounts.
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History
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The 401(k) plan was formed in 1978 as a way to offer taxpayers a way to defer income. In 1980, Ted Benna, a benefits consultant, helped create the current 401(k) as a tax-deferred way to help employees save for retirement.
Significance
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Defined Contribution plans replaced the old traditional employer-funded plan which paid retirements based on years of service and final average salary. The responsibility for retirement has shifted to the employee from the employer.
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Features
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Employees can save up to $16,500 a year to their plan. Many times, the employer will match up to the first 6 percent of the employee's contribution.
Benefits
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Employee contributions are made pre-tax and funds grow tax deferred until withdrawn.
Warning
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Funds are tax deferred until withdrawn.
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