In the world of retirement planning, there is one option that many are considering in the form of deferred compensation plans. This type of plan will allow an employee to postpone receiving wages and income for a period of time. While this might seem risky, it is the employer’s responsibility to keep and manage this money in a special fund unit where the employee is no longer working with the organization. One of the greatest benefits to deferred compensations plans is that taxes on this money are not paid until it is withdrawn from the plan and not during the period of earning. It is important to remember that employers will use broad tax regulations during the structuring of this type of plan. One aspect of non-qualified retirement plans is that they do not usually include employee contributions, and are solely based on the employee’s gross income. This means that an employee can build their retirement without paying taxes until the money is taken out.
While non-qualified retirement plans are considered painless, there are a number of considerations that an individual needs to be aware of before he or she uses this type of retirement model. The first consideration is that this type of plan is not retroactive. This means that it can only be based on an individual’s current income withholding. Because most plans have very specific maturation dates, it is not possible for an individual to borrow or withdraw money from this type of plan. There are some plans that will require specific events to take place before an individual can receive their funds. The last consideration is that this type of retirement plan is not protected from creditors if an individual owes an outstanding debt.
Qualified retirement plans or structured retirement plans are required to comply with certain government regulations. An individual can establish this type of plan through either an employer, bank, or financial institution. It is important to remember that the IRS has special codes that detail provisions regarding qualified retirement plans. One advantage to qualified retirement plans is that they are eligible for special tax considerations.
There are two main types of qualified plans. The first is employer based in the form of pensions or profit sharing programs and each must comply with certain government regulations that grant the employer certain tax privileges. One advantage for the employer is that they may be able to deduct any contributions to a pension as a business expense. The employee will have an advantage as well in the form of not being liable for taxes until he or she retires and withdraws the funds. It is vital to remember that depending on the tax structure and the employee’s income, he or she, after retirement, will generally be required to pay taxes on any amount withdrawn from his or her plan.
Individual retirement plans better known as IRAs are a popular options for both the self-employed and those who want additional protection during retirement. It has become one of the most popular individual qualified retirement plans, and it allows a person to deposit a portion of his or her income into a plan without being required to pay taxes. As with other retirement plans, the individual will be required to pay taxes once the funds are withdrawn. One aspect of an IRA is that due allow tax-deductible contributions only up to $4000 per year, unless the person is over the age of 50; in this case, the contribution can be higher.