Address Your Financial Security With a Defined Contribution Plan
Defined contribution plans provide business owners and employees the opportunity to take charge of their own retirement. They offer flexibility to choose how much to contribute toward retirement and how the money is invested. The final benefit at retirement depends on those accumulated contributions and the investment returns through those years.
These plans differ from defined benefit plans which require annual funding by the employer and specify the benefit in terms of the payment received at retirement based on salary and years of service. Defined contribution plans include SEPs, profit sharing plans and 401(k) plans.
How a Defined Contribution Plan Works
Contributions can be made by either the employer or the employees, or both.
Employees generally choose the amount that they’d like to contribute out of their paychecks, within certain limits, and the employer contribution is based on a formula within the plan document.
The investment decisions for these contributions, and any risk associated with those decisions, could be made by either the employer or the employees, depending on how the plan document is written.
Individual accounts are kept with each employee having their own specified amount of money.
Advantages of a Defined Contribution Plan For Your Business
Tax deductions for the employer
Flexibility in contribution amounts each year depending on business profitability
Can help attract and retain employees
Can be paired with a defined benefit plan to provide more substantial tax deductions
Portable: The employee’s vested balance is paid out at termination or retirement.
Points to Consider About a Defined Contribution Plan
Benefits and deductible limits are relatively lower than a defined benefit plan.
Retirement benefits are not guaranteed and are impacted by investment returns.
Vesting schedules, based on an employee’s service, can be used to grant ownership of employer contributions.
Defined Contribution Plan Options to Meet the Needs of Small Business Owners
The Lafayette Life Insurance Company does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Lafayette Life cannot guarantee that the information herein is accurate, complete, or timely Lafayette Life makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Please consult an attorney or tax professional regarding your specific situation.
The Lafayette Life Insurance Company provides services to pension plans as outlined in a separate Administrative Services Agreement, and issues life insurance and annuity products that may be used as funding options. This material is for informational purposes only. Lafayette Life does not serve as plan administrator or fiduciary, nor does Lafayette Life or its representatives provide ERISA, legal or tax advice. Your personal or legal tax advisors should always be consulted and relied upon for advice.
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