Types of Retirement Plans

Types of Retirement Plans

Sorting through retirement plans before you retire.

There are many types of different retirement plans. The secret is to finding the retirement plan that works the best for you.

The Employee Retirement Income Security Act, also known as ERISA has two basic types of retirement plans: the defined benefit amount plan and the defined contribution amount plan. Let's take a look at the options under both types, starting with the defined benefit amount types of retirement plans.

A defined benefit amount is a type of retirement plan that has a set benefit amount collected by the employee upon retirement. This amount may be a specific dollar amount, or it might be an amount that was calculated based on the years of service and salary. A common type of retirement plan under the defined benefit amount is Cash Balance. Cash Balance is a type of retirement plan that is credited every year with salary credit and interest credit. As the balance increases or decreases over the years, the employer is responsible for any gains or losses. At retirement, the employee collects the amount that was promised, leaving the credit or debit balance of the account for the employer.

Another type of retirement plan is the defined contribution amount. Just as it sounds, the defined contribution is a type of retirement plan that uses pre established contribution amounts to build the retirement account. Often times, contributions to these plans are pretax. A classic example of this type of retirement plan is the 401K. Employees contribute to their 401K by having a portion of their salary directly put into their 401K account, thereby avoiding the taxes upfront, and decreasing their present tax liability. In some cases, employers will match the employees contributions up to a set percentage.

Before you invest in any type of retirement plan, take the time to research all the different alternatives. What you consider beneficial for yourself today may not prove to be when you retire.