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Types of defined contribution retirement plans

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Retirement is often included in employee benefits in companies in Montgomery, Pennsylvania. While a defined benefit plan is fairly straightforward, promising a certain amount each month after retirement, defined contribution plans may seem more confusing. In this type of plan, the employer and employee each contribute to the individual account, and that amount is typically a percentage of the employee’s pre-taxed earnings. These may be matched by the employer, depending on the type of plan. This money is then invested, and the success of the investments determines the size of the retirement benefits.

The U.S. Department of Labor provides descriptions of a number of employee pensions that are considered defined contribution plans. If the employer offers a 401(k) plan, the employee’s contributions are matched up to a pre-determined percentage, and the employee is typically able to choose what investments to make. All the money that the employee contributes to the account automatically belongs to the employee. However, the money contributed by the employer is not owned by the employee until he or she has worked at the company for a set number of years.

According to CNN Money, an individual retirement account, or IRA, is an account that contributions are placed in, and the primary benefit of this type of account is the big tax breaks. In addition to financial contributions by the employee and the employer, stocks, bonds and mutual funds may also be deposited. They may be an excellent retirement option for those who are self-employed or those who have small businesses. While an IRA may be set up by the company, they do not have to be employment based, and anyone can set up a personal account.