This lesson is based off Chapter 28 of the text for Finance 418. Professor Bryan Sudweeks of Brigham Young University teaches this lesson.

All lesson materials are available online at:

Objectives:

A. Explain Employer-Qualified Retirement Plans
B. Explain Defined-Benefit Plans
C. Explain Defined-Contribution Plans…(read more)

LEARN MORE ABOUT: Qualified Retirement Plans

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retirement planning is an essential aspect of financial management. It is a process of setting financial goals and creating a plan to achieve them during the retirement years. One of the ways to prepare for retirement is through employer-qualified plans.

Employer-qualified plans are retirement plans that are set up by employers for the benefit of their employees. These plans are designed to provide employees with a source of income during their retirement years. There are several types of employer-qualified plans, including 401(k), 403(b), and 457(b) plans.

401(k) plans are the most popular type of employer-qualified plan. These plans allow employees to set aside a portion of their salary into a retirement account on a pre-tax basis. Employers may also offer a matching contribution up to a certain amount, which helps employees save more for retirement. The investment earnings on the contributions made to a 401(k) plan are tax-deferred until they are withdrawn during retirement.

403(b) plans are similar to 401(k) plans but are designed for employees of nonprofit organizations, educational institutions, and certain other tax-exempt organizations. Contributions made to a 403(b) plan are also tax-deferred.

457(b) plans are designed for employees of state and local governments and certain tax-exempt organizations. These plans also allow employees to defer taxes on their contributions until they withdraw the funds during retirement.

All three types of employer-qualified plans have contribution limits to prevent high-income earners from taking advantage of these plans. Employees can contribute up to $19,500 in 2021 to a 401(k) or 403(b) plan, while the limit for 457(b) plans is $19,500 for employees aged 50 and below. For employees aged 50 or older, the limit increases to $26,000 for 401(k), 403(b), and 457(b) plans.

Employer-qualified plans offer numerous benefits for employees, such as tax-deferred growth, employer contributions, and automatic payroll deductions. They are also portable, which means employees can roll over their plans to a new employer’s plan or an individual retirement account when they change jobs.

In summary, employer-qualified plans are essential tools for retirement planning. They enable employees to save for retirement through automatic payroll deductions and offer tax-deferred growth and employer contributions. Employees should take advantage of these plans and contribute the maximum amount allowed to ensure a comfortable retirement.