Qualified Retirement Plans General Purposes of Qualified Plans
Qualified retirement plans are Congressionally approved retirement plans which have several major tax benefits. First, the employer's contributions can be deducted for income tax purposes. Second, the earnings on the plan's investments accumulate on a tax-deferred basis. Third, when the funds are distributed at retirement age, they may be eligible for favorable tax treatment for State of Hawaii income tax purposes. Fourth, taxpayers may be in a lower tax bracket after retirement.
Two Principal Types Of Plans
Qualified retirement plans can generally be classified as either "defined benefit" or "defined contribution" plans.
Defined benefit plans define the benefit amount each participant will receive at retirement age and them estimate how much must be contributed each year to accumulate the necessary future fund. Interest rates, ages of participants, ect., will have an effect on the calculation. The amount of the annual contribution is generally determined by an outside actuary. The investment risk rests on the employer.
Defined contribution plans generally put a percentage of current salaries into the plan each year. The amount at retirement will depend on the investment return and number of years until a participant retires. The investment risk is borne by the plan participant.
There is no "best" type of plan. The choice of what type of plan to use is an individual one. The answer depends on factors such as employer goals and available cash flow.
Click on a link below to view more information on each of the specific plans.
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