News Guide to Retirement Plans

Guide to Retirement Plans

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Guide to Retirement Plans

There are several fundamental types of retirement programs available to employees in Office Automation system.

Defined-benefit plans

These are the traditional type of pension plans that pay a fixed retirement benefit, such as 50% of your final salary, determined by a formula. The advantage here is that you know what your final pension will be.

Defined-contribution plans

Popularly called profit-sharing plans. The company decides how much it wants to contribute each year. Amounts are contributed to individual employee accounts. The employee’s final benefit is not determined in advance, but depends upon the amount of money accumulated in his or her account prior to leaving the company. In a self-directed plan, you, the employee, assume responsibility for whether the money is invested in stocks, bonds, or money market accounts.

Money-purchase plans

The company contributes a fixed percentage of your salary into an individual benefit account. You decide how it should be invested.

401(k) plans

You voluntarily contribute part of your own salary into individual accounts. The tax advantages are explained below. The company often supplements your contribution by matching a percentage of employee contributions.

Combination plans

Your company may set up more than one plan, say, for example, a pension plan and a profit-sharing plan. The most common combination is a money-purchase plan to which the company makes an annual contribution equal to, say, 10% of salary, combined with a profit-sharing plan to which the company has the option of contributing up to another 15% .

Medical benefit plans

Many companies pay medical benefits to retirees.

RETIREMENT PLANS

4. The maximum you could contribute in 1997 was $9.500. There is a 10% penalty for withdrawing funds before age 59 1/2. The maximum contribution is adjusted annually for inflation.

5. If you change jobs or take out the balance in a lump sum after age 59 1/2, you can take advantage of 5-year averaging, another tax break. (You treat the total payout as though you received it in 5 annual installments. Entire tax calculated under 5-year averaging is payable in one year.

6. You can withdraw money without paying a penalty:

-When you reach 59 1/2.

-If you separate from service and you are age 55 when the distribution occurs.

– If you are disabled.

-If you need money for medical expenses that are greater than 7.5% of your adjusted gross income.

What to invest in

As with any investment portfolio, make it a point to diversify. If your plan does not offer many choices, you can diversify in your IRA or regular brokerage account.

Don’t overinvest in your company’s stock. You’ve seen what has happened to even the bluest of the blue chips stocks of IBM, General Motors, and other major companies. It is a serious mistake to have more than 40% of your assets in your company’s stock, since your job is also dependent upon the company.

Many 401(k) plans offer the same mutual funds that are sold to the public, in which case getting information on their performance is not difficult. But some plans put money into funds run by banks, insurers or private money managers. In this case you must turn to your benefits director for information. Ask for each vehicle’s investment objective, largest holdings, fund manager’s name and long-term and year-to-year performance records. If you can’t get adequate answers, don’t invest in that particular fund.

HINT: There are about 600 private-label mutual funds sold only through insurance companies and pension plans. Some of them have names that sound like those of banks or other funds. Yet you will not find their performance figures listed in most financial publications. Taking money out of your 401(k)

Even if you meet the so-called hardship qualifications, you must have no other sources of income reasonably available, and you will still have to pay the 10% early withdrawal penalty unless the money is going for medical expenses that exceed 7.5% of your adjusted gross income.

Hardship reasons that will satisfy the IRS are:

-Medical expenses for you, your spouse, or dependents

– Down payment on your principal home

– Post-secondary tuition for you, your spouse, or dependents

-Prevention of foreclosure on or eviction from principal residence

-Funeral costs for a member of the family

Guide to Retirement Plans
General Contributor
Janice is a writer from Chicago, IL. She created the "simple living as told by me" newsletter with more than 12,000 subscribers about Living Better and is a founder of Seekyt.

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