Company Sponsored Retirement PlansCompany-Sponsored Retirement Savings PlansYour company, large or small, may be your primary source of retirement savings.
In these types of plans, technically known as defined-contribution plans, the responsibility for making investments for your future retirement income shifts from the employer to you. Annual contributions to your defined-contribution retirement account are made by either you, the employer, or both of you. Your contributions grow based on investment performance, and you receive the accumulated amount when you leave the company (the employer’s contribution is subject to the company’s vesting schedule, if any). Depending on how the plan is set up, you may be responsible for directing part or all of the investments. Generally, these plans fall into two major categories: money purchase plans and profit-sharing plans. - Money purchase plans require the company, every year, to contribute a fixed percentage of your salary. The company has to make the contribution even if they are unprofitable.
- Profit-sharing plans provide an annual contribution, which may vary, based on the company’s profitability. In a year of no or low profits, there may be no contribution to this type of plan. Contributions may or may not be paid out of the company’s past or current profits.
The most popular type of defined-contribution plan is a 401(k) plan. Other types of defined-contribution plans include thrift plans, stock bonus plans and simplified employee pensions (SEPs). If you have a defined-contribution plan, there are a few important things you should know: The plan is probably portable which means you can take the money with you when you leave. Just how much you can take with you depends on the vesting schedule. Plans vest 100% of your contribution immediately. The money the company puts in may take some time to vest. Make sure you know when you are eligible to receive 100% of your accumulated benefits in your account. If you are switching jobs, and accept a direct distribution from your plan, the employer is required to withhold 20% for federal income taxes. Your actual tax will be determined when you file your tax return; you may also be subject to a possible 10 percent penalty tax in addition to the regular income tax. To avoid this, complete a direct transfer either to a new company’s plan, another qualified retirement plan, or an IRA. Annual contributions under all the employer’s defined contribution plans in 2007 for an employee may not exceed $45,000 or 100% of the employee’s compensation, whichever is less.
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