Money Purchase Plan Explained in Easy Everyday English: MPP vs 401k Decoded. Learn retirement planning with money purchase plans – and how they work in reality. Watch now & see below.
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The world of retirement savings can often feel overwhelming and confusing, filled with complex terms and acronyms that leave many everyday individuals scratching their heads in confusion. One such term that often pops up is the Money Purchase Plan (MPP). In this article, we will break down the concept of MPP and decode its comparison with the more commonly known 401k plan.

To put it simply, a Money Purchase Plan is a retirement savings account that is offered by certain employers. It is designed to help employees save for their retirement by contributing a portion of their salary into the plan. These contributions are often made on a pre-tax basis, which means that the amount contributed is deducted from the employee’s taxable income, consequently lowering their overall tax burden for the year.

The money that is contributed to a Money Purchase Plan is then invested in a variety of assets such as stocks, bonds, or mutual funds. The investments are made with the goal of generating a return and growing the account balance over time. The account balance includes both the contributions made by the employee and any investment gains or losses.

Now, let’s compare the Money Purchase Plan to the more well-known 401k plan. Both plans are employer-sponsored retirement savings vehicles, but there are a few key differences between them. While both plans allow employees to contribute a portion of their salary towards retirement savings, the contribution limits for Money Purchase Plans are generally higher than those for 401ks. This means that employees can save more money towards their retirement each year using the MPP.

Another difference lies in the way the employer contributes to the plan. In a Money Purchase Plan, the employer is typically required to contribute a set percentage of the employee’s salary into the plan every year. This means that employees can count on receiving a consistent employer contribution, regardless of their own contribution amount. In contrast, a 401k plan often includes employer matching contributions, where the employer matches a percentage of the employee’s own contributions, up to a certain limit.

Furthermore, the investments within a Money Purchase Plan are often managed by the employer or a financial institution chosen by the employer. This means that employees have limited control over the investment options available to them. In contrast, 401k plans typically offer a range of investment options, allowing employees to choose the funds that align with their risk tolerance and retirement goals.

Lastly, it is worth noting that Money Purchase Plans are subject to different rules and regulations compared to 401k plans. For instance, withdrawals from a Money Purchase Plan before the age of 59 ½ may be subject to penalties, just like with a 401k. However, Money Purchase Plans require mandatory withdrawals starting at the age of 72, while for a 401k, the required minimum distribution starts at the age of 72 or upon retirement, whichever is later.

In summary, a Money Purchase Plan is an employer-sponsored retirement savings account that allows employees to contribute a portion of their salary towards their future. It offers higher contribution limits, provides consistent employer contributions, and generally has limited investment options compared to a 401k plan. Deciding between the two ultimately depends on an individual’s specific financial goals and circumstances. It is crucial to carefully consider the advantages and disadvantages of each plan before making a decision that aligns with one’s retirement objectives.